Using the data and your economic knowledge, evaluate different ways in which the government of a country which imports large quantities of wheat can try to stabilise wheat prices within the country. (25 marks)
Price stability is when prices in the economy don’t change or don’t change much over time. This means that an economy would not experience inflation or deflation. One of the ways in which the government could stabilise wheat princes is through a buffer stock intervention. This is an intervention system that aims to limit the fluctuations of the price of a commodity. Another way in which they could stabilise the price of wheat could be through imposing a price ceiling. A price ceiling is the price level in which the price of a good or service is not allowed to increase past.
Wheat is unstable predominantly due to the situation regarding it in Russia. This is because ...view middle of the document...
Through this the market has reacted to the subtraction of the Russian wheat crop and in reaction has increased supply which stabilises the price of wheat. Yet this is only a short term solution as there could be other weather events in the coming years which will interrupt this equilibrium. This is where government intervention is needed to reassure and reaffirm the price of wheat for years to come. Through government intervention, they could attempt to stabilise the way-ward pricing that wheat has experienced.
The government could intervene in this, in my opinion, in two ways. Firstly through a buffer stuck intervention system, this would mean that the government would limit the fluctuations of the price of wheat. This would remove the instability as it would sure up and make a more consistent market. This would be beneficial to not only the country individually but the international markets as if there was a limitation put in place then the struggling countries would be able to afford the wheat and thus replace the missing supply which went during the Russian shut down in 2010. This would particularly benefit the emerging countries of India and China as they would now not have to spend more money on wheat and could reallocate their spending on other aspects, in directly improving the world market. Similarly the government could apply a price ceiling scheme to the wheat market. Through this the government will place a maximum price in which the price of wheat cannot exceed. This would stabilise prices as it would make sure that nations would be not be over competing and thus pushing the price higher for the wheat. Through this prices will become stabilised as the governments wouldn’t be paying excess for a commodity which should be a much lower price, this also helps poorer nations who do not have the economic capabilities to match those who are more developed. Although through this system there could also be flaws, for instance the price ceiling could be put too low and therefore remove the chance of creating a more profitable market.