Q. In the context of Imported Inflation, which of the following statement(s) is/are correct?
1.Imported inflation is caused by excessive government spending on domestic infrastructure projects, leading to higher demand for imported goods.
2.A decline in the value of a country’s currency is also a factor behind imported inflation.
Select the correct answer using the codes given below:
Explanation –
Statement 1 is incorrect. Excessive government spending on domestic infrastructure projects may lead to increased demand for domestic goods and services rather than imported goods. This could result in higher domestic inflation but not necessarily imported inflation. Imported inflation occurs when the cost of imported goods and services increases, leading to a rise in the overall price level within a country. Imported inflation is a type of cost-push inflation that occurs when rising costs of imported inputs lead to higher production costs for businesses, resulting in inflation in the prices of final goods and services.
Statement 2 is correct. When a country’s currency loses value against other currencies, imports become more expensive because the same amount of domestic currency now buys fewer foreign goods and services. This can lead to higher domestic prices for imported products, contributing to imported inflation. Increases in interest rates in Western countries can lead to depreciation of developing countries’ currencies against Western currencies, raising import costs.
Source: The Hindu
