Question

Essay 4 - Chaps 19(6) & 21(8) - GDP & Prices

Above, a Zimbabwean woman holds a loaf of bread costing 45,000 Zimbabwe dollars in February, 2006, equivalent to about 45 cents in US dollars. Zimbabwe's annual inflation jumped to 3,700 percent a few months later.

1. How is it possible that a simple loaf of bread costs Z$45,000 when it's really worth only 45 cents?

2. What problems does this phenomenon cause for Zimbabwean citizens? (Name five).

Answer 1

1. it is possible because of hyper inflation in Zimbabwe. Since prices are soaring high as inflation jumped to 3700% few months later, one can imagine the price of a loaf of bread whose real value is as low as 45 cents is sold at 45000 zimbabwe dollars because of very low value of zimbabwe dollar as a consequence of inflation

2. As prices were increasing at a very fast rate, dollar way losing its value at a rapid pace, citizens had to carry a larger weight of money

It led to increase in shoe leather and menu costs as people had to go to banks so often

People could not plan their financial savings for future as the prices were increasing and it was difficult to estimate the true real value of savings and their returns

Distortion in allocation of resources by firms at prices were not giving market signals