Inflation and Extensive Way of Economic Growth

Abstract

This paper presents the process that Extensive Expanded Reproduction of Society (another method of express, extensive way of economic growth) makes Inflation with input-output table. Moreover I calculate the positive correlationship coefficients between EERS and inflation.

【Keywords】:  Extensive Way of Economic Growth; Inflation; Extensive Expanded Reproduction of Society; Intensive Expanded Reproduction of Society

Section one

The process that extensive expanded reproduction of society makes prices rise

Premises

*

1.  The value law is universal in the market economic system.   .

2.  Economic development is a unity of both equilibrium and disequilibrium

. Any economic system is in a relatively balance situation and it ill towards new balance through making an exchange with others or adjusting itself, even if it far deviates from balance by being lashed. Equilibrium is relative and disequilibrium is absolute.

Ⅰ  In the closed economic system

Social production is the unity of production, distribution, exchange and consumption. In the process of production, the state revenue which is created by all departments of the national economy would be allotted to residents  and the government for its expenses through its  distribution time and time again, that is Final goods. In this process all department in the economic system are interdepartment.That is each department consumes the products of others while it provides others departments with its products. Let us suppose that there A, B and C three departments in a economic system and each department produce A, B and C respectively.Assume that they are at the same starting point: the organic structure of capital is the same, the rate of surplus value is the same (100%).The interdependent relationship is show in the following table (a concise table of input and output):

In the process of simple reproduction of society, the economic system ought to in a balanced state. If it is not temporarily, it would tend to, as long as the simple reproduction of society continues. When the balance has been formed completed, in this economic system:

The relationship of technology is stable and the product consumption coefficient of each department is unvaried.

The relationship of economy is stable. The supply and demand are maintained in a state of balance for both aggregate social products and its internal structure. In this case, the prices of all tally with their values completely.

Therefore, within the process of simple and sustained reproduction of society, both technology and economy relationship are stable, meanwhile the prices are unvaried and inflation would not take place. 

The society however, always marches forward, in the field of production the social production would not stay at simple reproduction stage but develop on an expanded scale. In the unified process of production, distribution, exchange and consumption, the extension of the production scale equals to the increase of demand, otherwise the expanded reproduction would not come true. The purpose of production is that the society aggregate demand for final goods increase and to be satisfied constantly in means and culture. In fact in the process of society development, the categories and quantities of subsistence means for people are restricted by the economic and cultural development level under certain historical condition. It is also restricted by the national customs and habits. Along with the development of social and economic culture, the categories and quantities of subsistence means for people would increase. And its quality and composition are also to change. Thus, the process of society expanded reproduction is the just the process that the demand increase and to be satisfied constantly. Base on the reasons we mentioned above, expanded reproduction does not equal to supplement the investment to each department simply, but supplement more capital and labors to the departments which need more in-process goods from other departments and supplement less to the departments which need less in-process goods from other departments. When a new product appears, we should also put money on this department, In this way, the supply and demand composition is changed structurally, the supply and demand balance based on the simple reproduction is destroyed.

The society aggregate demand for final goods always equals its supply for final goods within the period of one reproduction because the purpose of production is that the society aggregate demand for final goods increase and to be satisfied. Any product can not be consumed before it has not been produced. At the beginning of expanded reproduction of society, there is neither enlarged supply nor enlarged demand for final goods in the economic system, there is only enlarged demand for in-process goods in the economic system.

Suppose that the society aggregate demand for final goods increased by 150.Among them,200 product A is increased and 50 product B is decreased and there is no demand changing for product C. In this case, the government expanded the reproduction scale in department A in the process of adjusting and controlling the society production. We also suppose that only the extensive expanded reproduction( extensive way of economic growth) exists in the system, which means that the productivity and the capital organic structure of each department are unvaried.Through technological connection among departments we get the result that 44.44 product A ,66.67 product B and 111.11 product C should  be used up when we produce 200 final goods A. Correspondingly, 16.67 product A ,20 product B and 30 product C should  not be used because of 50 final goods B be not needed. Now the supply and demand and the price situation are like this:

          Supply  And  Demand(S and D)      Price

PRODUCT A     SPRODUCT B     SPRODUCT C     SIn the process of society development, the productive demand increased for in-process goods can be satisfied by the higher price because it is easier to be compensated than that of consumptive demand for final good. When economy system expands its scale, the balance of supply and demand of aggregate social products and its internal structure is destroyed. That is, supply less demand. The prices rise. The consumptive demand for final good can decease for higher price. The new balance of supply and demand of aggregate social products is formed.

   Because every department must expend other departments in-process goods in its production process, the price rising of A, B and C would lead to costs increase for product A,B and C. The demand for product A, B and C would increase 27.78,46.67 and 81.11 individually because of the extensive expanded reproduction. In this case, not only the expanded reproduction would happen in department A,but also in department B and C once again. As the process of production goes on, the aggregate social product and the structural supply and demand would tend to be in a state of balance, the price would tend to stability and the final equilibrium would be formed completely.  Here is the input-output table after the equilibrium.

If there are more departments (3) in a economic system, the situation also like this. When the extensive expanded reproduction starts in a single product department( including investment in a new product department)                   the structural equilibrium of supply and demand which based on simple reproduction of society is destroyed ,that make demand exceeds supply in all departmants.Therefore,the prices and the whole price level would go up. Every single product department supplies its in-process goods to the others; meanwhile it uses the products from other departments as its in-process goods. In this way, the price changing is affected by the following factors:

Demand pull   During the imitative time of extensive expanded reproduction of society, the prices would go up in all departments. But the kind of prices would fall after a rise when the equilibrium of supply and demand is formed. 

Cost push   The product price rising for one department would cause the cost push in all departments. But this factor would lose its effectives gradually along with the productivity rising.

    In fact, besides the extensive expanded reproduction of society( extensive way of economic growth), there is also intensive expanded reproduction of society( intensive way of economic growth), which means the productivity rises continuously in each department. In the process of society development, since the science and technology progress and application or the velocity of productivity rising is always in a disequilibrium state, within a certain period of time in some departments the extensive expanded reproduction is the main part but in others may be the intensive one is the main part. Under the push of cost action, the product price rises fast in the department where the productivity rises slowly. While in the department where the productivity raises fast the product price raises slowly or maybe the price is unvaried even comes down. But the mean level of the product prices would rise in the system as a whole. So the extensive expanded reproduction of society causes most product prices to go up.  Furthermore, for the reasons of government policy guidance and science development, in the whole national economy, whether the extensive or the intensive expanded reproduction of society plays an important role always has an obvious historical phase characteristic. Under the condition of certain economic growing speed, when the extensive expanded reproduction of society is the part in the system, the price level would go up and reach to a new higher point than it would do when the intensive one is the main part. Under the condition of certain economic growing speed, the price level would go up and reach to a new higher point in developing countries than it would do in the developed countries.

According to the Fisher exchange equation, we have

          MV=PQ=GNP

Where M is defined as the stock of money in the economy; V indicates how fast money moves in an economy; P is price level of goods; Q is the physical output

A widespread price rising causes PQ to increase, in this case one way keep the balance of the equation is to increase V.Another way is increase the supplement the money stock in the field of circulation. For example, the central bank decreases the required reserve ratio or saving and loaning interest rate for commercial banks. Otherwise the extensive expanded reproduction of society won’t go on regularly. Along with the production going on, the supply and demand of the aggregate social products and its internal structure tend to be in a state of balance, the prices and values of all commodities tend to identity. Next time, when the extensive expanded reproduction of society takes place again, the situation is also like this. So the process of extensive expanded reproduction of society is precisely the process that old balance is broken and the new one is rebuilt constantly. This balance is is just the balance of supply and demand of aggregate social products and its internal structure .In the process, the money which is correlative with the aggregate social product would increase or decrease