Question

There are many situations that may contribute to the inflation of an economy where the volatility and uncertainty can lead to lower levels of investments. With regards to the current situation that is taking place around the world, many stores and businesses in the Kingdom of Bahrain and around the world were faced to close their doors to customers for at least two weeks. Explain in your own words, how these businesses and financial institutions will make up for the losses they are or may face. Will these businesses and financial institutions cause inflation within the economy? Explain. (300 words)

Answer 1

Inflation can be termed as rise in general price level or reduction in purchasing power of the general public. It can be happened due to both demand pull (from the customer side) and cost push (supplier side) factors. With inflation investments may suffer. In the current pandemic supply chain management getting collapsed and demand might increase (in a skewed) nature. At the same time many would starve.

As the law of nature necessity is the mother of invention, this situation would also go to the shadows. New models of business would emerge. One of the models that getting evolved is decentralized yet connected with all people. As the digital divide is getting narrow and cost is also decreasing area for stores would decrease. To help this logistics sector would expand, so companies can use many variants of JUST IN TIME method. As the business models get more decentralized the pace of urbanization would start to decline and ‘village’ would come to the business community. Why? Because the current pandemic created many hindrances for mobility. So people would try to get job near to their homes. In that situation medium-small enterprises would emerge. Here it may be independent or controlled by big businesses.

Another thing is, every firm would begin to use big data for analysis. By this improved customized decision can be taken with identification of prospective customers also become simpler. As new areas like Artificial Intelligence and Machine Learning emerge which is necessary for big data analysis, focus of education would change. And these areas definitely give high paid salaries jobs which essentially increase savings. Higher savings would also create better investments, credit mechanisms would again fill with adequate resources.

To streamline credit mechanism formal and informal institutions would coordinate and cooperate each other (banking and non-banking). So micro level credit capacity would increase. By this purchasing power would increase, so producers tempted to produce more products. Encouraged by this process intermediaries like stores would do more businesses.

So this pandemic is going to be an opportunity and all animal spirits would vanish. Trust as good would reemerge and omens of prosperity would again arise.