With reference to Brazil
5th of March 2002
THE EFFECT OF INDEXATION
Brazil is known all over the world as a third world country that has a very large population where the greater part of the people live in a poor state of live and have no fixed income. Brazil became very famous for its inflation rates. Inflation is the persistent general rise in prices over a certain amount of time. Before I can continue and explain the current situation in Brazil and the inflation in Brazil I must explain the following term: Indexation. Indexation are the variables in an economy, so things that can change at any time, such as wages and interest rates are increased by the same amount as inflation increases. If this were to happen it would mean that the real purchasing power workers would have would stay the same instead of decreasing because of inflation.
Also sometimes the real purchasing power of workers can increase if the pay rise that they are given is greater than the inflation yet this can lead to more inflation as there will be more spending. Indexation is used with one of two types of inflation, it is can be utilised when dealing with anticipated inflation. Anticipated inflation is inflation that was expected and that it was no higher or lower than what the people or government thought, it is hard to anticipate inflation accurately yet sometimes it is constant for a certain amount of years. For instance it could have been at a constant rate of 4% for the previous five years and if it were so the government would use this information to make sure that it was in their plans. The other type of inflation is unanticipated...