Ethiopia’s+Inflation+Rate+Hits+Nearly+15+Percent+in+December+-+JT+Bang

Ethiopia’s Inflation Rate Hits Nearly 15 Percent in December Voice of America http://www.voanews.com/english/news/africa/Ethiopias-Inflation-Rate-Hits-Nearly-15-in-December-113612449.html

14 Jan 2011

Explanation This article is about the Ethiopian government’s imposition of price controls on certain goods in order to control high inflation rates. The inflation has soared rapidly to 15% when the government devalued its currency in order to deal with its sever trade imbalance. In order to subdue the inflation, the government has imposed price ceilings on various consumer goods such as bread, meat, sugar, beverages, and other goods. There is a great controversy going on in Ethiopia with this economic measure. Retail sellers are protesting that this will severely damage their income, saying they will have to sell some goods below their purchasing prices. Formal Ethiopian World Bank director Bulcha said that price controls -as shown by past examples- cannot work in a free market economy. On the other hand, many consumers are welcoming this measure because most Ethiopians, with their low per capita income, had to cut back on their food consumption. They think price controls are necessary because sellers will cause to price to increase. Economic concepts hiding behind this article are price controls, inflation, competition, basic goods, and the classic debate about the extent of government intervention in a market economy.

Vocabulary Price control – fixing of prices at a certain value, usually by government agencies Price ceiling – a maximum possible price fixed by a non-market force Goods – articles of commerce Currency – money in circulation used to trade goods Consumer – individuals and households that use goods and services generated by firms Inflation – a sustained rise over time in the general level of prices Seller – someone who exchanges goods and services for money Per Capita income – numerical quotient of national production over population; what an individual would actually receive if periodic income were divided in the entire population Competition - individuals and firms striving for a greater share of a market to sell or buy goods and services Basic goods – goods essential or necessary for surviva; for example, food, shelter, and clothing

Graph

Market for Bread in Ethiopia 2011

After price control is imposed, the equilibrium price will fall below the upper price limit (yellow). The supply curve will shift to the right so that the new equilibrium price / quantity supplied will be below the price ceiling. As a result of the price control, more people will be able to afford bread at a lower price than before.

Evaluation I think this measure is a sound decision. With the devaluation of the birr currency, the prices of goods necessary for people’s basic needs skyrocketed, greatly threatening economic stability as well as political stability, as people became dissatisfied. In a utilitarian view, a good economic policy should benefit the majority, not the minority. Thus, we need to take Ethiopia’s economic structure into consideration. Being a poor country, a large majority of its population lives under $400 of annual income. When a price control for basic goods is imposed, the lowered prices will benefit the majority with its low income. Ethiopia is a market where Gibben goods can really exist, showing the dejected economic conditions. Price control will certainly hurt the incomes of the sellers, but they constitute a minority in Ethiopia. Moreover, in such a poor economy, sellers are usually middle or upper-middle class of society, whose will receive less damage from this economic measure than consumers will from not implementing it. Bulcha’s warning about the impracticality of price controls in a market economy is not very reliable. His previous position as the President of the World Bank denotes his bent towards a laissez-faire economic system. I think his bias is affecting his opinion in this case.