Chapter 2 Review of Related Literature and Studies

This chapter presents the related literature, related studies which the

researchers perused to shed light on the topic of the study, this chapter also

includes theoretical, conceptual framework and definition of terms.

Related literature

(Bortis, 2004) States that Inflation’s effects on an economy are various and

can be simultaneously positive and negative. Negative effects of inflation include an

increase in the opportunity cost of holding money, uncertainty over future inflation

which may discourage investment and savings, and if inflation is rapid enough,

shortages of goods as consumer begin hoarding out of concern that prices will

increase in future

(Henning Weber, 2012)Inflation affects profits by reacting on sales volume, through

influencing the level of costs and by changing the relationship between cost and

prices. Since manufacturing companies generally determine prices by reference to

cost, pricing policy becomes particularly important in inflation and the level of profits

differs according to whether prices are determined on basis of original cost or

current replacement cost although the effects of inflation are not recognized in the

nominal financial statements, but such effects will have economic consequences,

even during a period in which inflation is relatively low.Although the effects of

inflation are not recognized in the nominal financial statements, but such effects will

have economic consequences, even during a period in which inflation is relatively

low.
 Many authors have found a negative correlation between growth and inflation.

The following paragraphs sum up the most significant features of several of these

studies. Kormendi and Meguire (1985) estimate a growth equation with cross-

section data and find that the effect of inflation on the growth rate is negative,

although it loses explanatory power when the rate of investment is also included in

the regression. This would indicate that the effect of inflation mainly manifests itself

in a reduction in investment but not in the productivity of capital.

Impact of Inflation

(John Lucas 2012) Inflation affects the growth of the economy in many ways,

its burden has been shifted on retired people whose income is fixed. For example,

when prices for goods and services increases, these pensioners would not get the

same amount of goods they could buy previously. This discourages savings and

reduces economic growth because the economy needs a certain level of savings to

finance investment which boosts economy growth. Besides its burden on investment

makes it to plan for what to produce, where to produce and for whom to produce in

future because business cannot predict the demand for their product due to the

higher prices they will have to charge so as to cover their cost. It also causes

uncertainty about future prices, interest rate, and exchange rates, and this in turn

increases the risks among potential trade partners as well as discourages trade.

The effect of inflation on investment occurs directly and indirectly. It increases

transaction and information which directly inhibits economic development. For

instance, when inflation makes nominal value uncertain, investment planning

becomes difficult. Individual may be reluctant to enter into contracts when inflation
cannot be predicted making relative prices uncertain. This reluctance to enter into

contracts over time will inhibit investment which will affect economic growth. In this

case inflation will inhibit investment and could result in financial recession (Case and

Fair, 2014).

Traditional economic theory predicted that under competitive pressures, with

inflation expected to continues, the firm’s prices, required rate of return and, for an

unlevered company, costs, profits, dividends and stock prices would rise at the same

rate as prices generally. Such theory would have led one to anticipate an extremely

high positive correlation between the profit of a company and at least expected

inflation. Inflation affects profits by reacting on sales volume, by influencing the level

of costs and by changing the relationship between costs and prices (Mankiw, 2014).

Effects of inflation on firms

Inflation has a corrosive effect on business. It discourages productivity

growth, leads to inefficient allocation of resources, depresses company valuations,

and carries the seeds of future recession. To protect the adverse effects of inflation,

companies must assess the risk of inflation to their businesses, develop an in-depth

understanding of their real costs and prices and create strategies to protect their

gross margins and safeguard their investment programs (Ulrich Pidun, Daniel

Stelter, and Katrin Van Dyken, 2010).

In general, inflation has both the positive and negative impacts on firms.

However, firms prefer inflation to be low and stable. High inflation rate may increase

the cost of production. Some of the costs of inflation for firms are menu costs, wage
inflation, uncertainty and confusion, and international competitiveness (Pettinger,

2016).

(Donovan, 2014) inflation can also be beneficial to firms in a way that it

reduces the real value of the firms’ debt. On the other hand, moderate inflation

resulted from strong economic growth is a stimulus to demand-pull inflation. Rising

inflation allows firms to increase the price level and hence increase in profitability of

the firms.

(Patrick, 2007) Not all businesses are equally affected by inflation. When

customers rely on a business and, by choice or circumstance, are less willing to

shop around, price hikes won’t alter demand as much as they would for an optional

good. Therefore, many businesses, like grocery stores, healthcare providers,

childcare and tax professionals, are considered recession-proof. But with

discretionary goods, a purchase that can be put off until next month — or longer —

probably will be.

(Galhad, 2014) Inflation as an economic phenomenon will certainly have an

impact on economic activities, which often have a negative impact on public

finances, the purchasing power of money will be lower, and to get something, more

money is needed and can ultimately affect builders of quality of life

(community/population).

ICAR-National Institute of Agricultural Economics and Policy Research

Conducted an Onion Price analysis in Indian Markets. There was a substantial

increase In onion production until 2008-09, resulting in a rise in Market arrivals.

However, due to unseasonal rains, the production of onions declined by about 20%

in the three major growing states during 2009-10 and 2010-11. The recent sharp rise

in the prices of onions can be attributed to a decline in kharif production on account

of unseasonal rains at harvest time in the major onion producing states, a reduction

in the minimum export price and consequent increase in exports during November

2010 and a holding back of stocks by traders. A time series analysis of trends in

area and production of onions revealed that there is significant increase in onion

production resulting in a rise in market arrivals. However, due to unseasonal rains,

the production of onions declined by about 20% in three major growing states during

2009-10 and 2010-11. To some extent, this reduction in production was offset by

mar- ginally higher production in other states like Rajasthan and MP. The magnitude

of decline in production did not affect arrivals in the market very much.
 (Ruka, 2012) The astronomical Increase in the prices of onions was a result

of hoarding of the stocks in anticipation of a rise in the price and higher retailers

markup. The rise in prices was also partly due to the reduction in MEP and

consequent increase in exports during November 2010. Moreover, the crop situation

was not predicted accurately and thus the information on loss in production was not

anticipated by market intelligence. Staggered planting of onions with suit- able

varieties can address the supply gap.During the slack period, thereby stabilising

prices during the year. As part of market reforms, minimum support prices for onions

and the implementation of market intelligence systems can help in discover-

discovering the right prices for producers as well as consumers

(Dalmar, Naafi 2013) One cause of inflation is the constraint of seasonal

harvest that has an impact on the domestic stock supply and geographical factor

that hinders the process of distribution. In the Strategic Plan of the Directorate

General of Horticulture for 2015–2019, it is stated that red onion are types of

horticulture commodities that will become the strategic issues and receive special

attention from the government and business actors, thus contributing to the growth

of the national economy.

A Study Have been Conducted an Inflation Analysis of Red Onion in West

Sumater.Base on Indonesia Report On average in the three years, the contribution

of each component to inflation in West Sumatra was also the red onion West

Sumatra inflation reached its highest level during the observation period of 10.87%.

In 2013 The high inflation in West Sumatra supply side is estimated by the increase

in chili prices, rice prices, onion prices and household fuel prices. Instead of Onion
People Intead to use Shallots Partially changes in onion prices also have a positive

and significant effect on changes in inflation in West Sumatra. Obtained the

probability value of changes in the price of shallots, Shallots are also included as the

main component of West Sumatra cuisine. Many dishes of West Sumatra people

use shallots as a component of cooking because West Sumatra people love making

dishes called Goulash. One famous curry that has a long cooking process and uses

shallots as its component is Rendang. Rendang is a favorite food of West Sumatra

people who are already famous throughout the world. Thus, onion as its component

will certainly increase the price of red onions will have an impact on rising inflation in

West Sumatra because onion is a favorite component of West Sumatra cuisine.

(John,2022) States that There are many sources of high inflation, and they

are not unique to the United States. In fact, nearly all economies across the globe

are experiencing unusually high rates of prices of globally traded commodities-such

as lumber, steel, grains, and oil. When the global economy rebounded from the

pandemic recession, there was a surge in demand for these critical goods, leading

to sizable imbalances between supply and demand and large price increases. Then,

energy and many commodity prices soared again as a result of Russia’s war on

Ukraine and consequent actions. Skyrocketing commodity prices led to higher costs

for producers, which in turn got passed on as higher prices for consumers.

(Jamal,2022) The middle layer of the Inflation onion is made up of products-

especially durable goods like appliances, furniture, and cars-that have experienced

both strong demand and severe supply-chain disruptions. There were not enough

inputs to manufacture products, which meant not enough products to sell-all at a

increase. If we continue paring the onion, we’ll reach the innermost layer: underlying

inflation. This layer is the most challenging of the three, reflecting the overall balance

between supply and demand in the economy and the labor market. Prices for

services have been rising at a fast clip. Measures of the cost of shelter, in particular,

have increased briskly, as an earlier surge of rents for new leases filtered through

the market. And widespread labor shortages have led to higher labor costs. And this

is not limited to a few sectors-inflation pressures have become broad-based.

(Akansha, Joshi, 2020) Understanding causes of volatility in onion prices in

India, Onions comprise an important component of the Indian diet. Their demand

has increased considerably in the recent past, and the growing demand has been

met from the domestic production. Yet, the onion prices have risen and become

more volatile, shooting up periodically there is a strong element of uncertainty in

market arrivals of onions. Demand for onions is price inelastic, and even a small

shortfall in their production seems to create an opportunity for supply chain

participants to resort to anti-competitive practices, such as hoardings for an

expected price rise, that exacerbates the price effects of reduced supplies, onion

markets are spatially integrated, that is there is a co-movement in onion prices

across markets. However, market power downstream of the production in major

markets creates ripples in other markets. Three, the policies such as raising ceiling

on minimum export price and banning of exports also do not seem to have any

immediate cooling effect on the price volatility.

explanation for any evidence of asymmetries in price transmission or for the inflation

of onion , but it may not be the only causal factor. Hence, there is a need for further

investigation on the role of market power in price volatility.

(De Guzman, 2023) The business sector blames the agriculture

department for failing to make accurate supply projections despite warnings

last year. Agriculture officials forecast possible shortages of onion and garlic

as early as August, when the local red onion variety only cost at most 140

pesos ($2.54). However, the department resisted importations, insisting that

existing supply would be sufficient, even as Philippine farmers warned

consumption was expected to rise during the holidays. Agriculture officials

suspect other local crises, such as internal price manipulation, share

responsibility for the skyrocketing onion prices, too. Restoperez said on Dec.

13 that the agriculture department believes a criminal syndicate hoarded onion

supply, and an investigation is underway.

This theoretical Framework serve as the basis for concluding the basis of the

current study

Inflation Onion
Causes Shortage

Eateries

Gross-Profit
 Figure 1 Theoretical Framework

Inflation Causes – there are many factors that creates inflation on any products,

Philippines has been affected since the end of pandemic by this three factors

Demand-Pull inflation usually occurs when the consumer demand for goods and

services exceeds their production capacity. So, when people use too much money

to spend on goods, it also pulls higher prices. Thus, it creates a demand-supply

gap, which means higher demand with lesser supply.

Cost-push inflation, a result wherein the prices increase while in the process of

production inputs. The costs for all kinds of intermediate goods rise when the supply of

money and credit are added and channeled into a commodity or other asset market.

Hence, it can lead to higher finished products and services. One lead example of this is

the oil and energy prices increase.

Built-in inflation occurs when the prices rise and wages increase to maintain the living

costs. Since the prices of goods and services rise, workers demand higher wages to

sustain themselves

Onion Shortage - One of the hottest issue until now is the sky rocketing price of red-

onions as a result it affects many agricultural sectors including the farmers, traders

buyer, sellers and also businesses because of this Inflation in the Philippines hit a
record 14-year-high in December, with onion making up 0.3 percentage points of

the 8.1% uptick in consumer prices and until now it is a problem on the Filipino people

Eateries- As a result of negative impact due to inflation it can give business owners,

farmers a loss situation, Inflation affects food businesses not only via sales but also in

costs. Higher prices will increase the total food cost of a recipe (Randell, 2018)

Gross Profit- Traditional economic theory predicted that under competitive pressures,

with inflation expected to continues, the firm’s prices, required rate of return and, for an

unlevered company, costs, profits, dividends and stock prices would rise at the same

rate as prices generally. Inflation affects profits by reacting on sales volume, by

influencing the level of costs and by changing the relationship between costs and prices

(Mankiw, 2014). Since manufacturing companies generally determine prices by

reference to cost, pricing policy becomes particularly important in inflation. The level of

profits differs according to whether prices are determined on the basis of original cost or

current replacement cost (Chirinko, Fazzari 2004).

Analysis of Data
Demographic Profile of through
Respondents According
to A. Administering
Questionnaires
A .Name The impact of inflation
(Likert Scale)
rate of onions to a
B. Age B. Organization of
small eatery owners in
Respondents
C. Sex Tigaon.
answers
Current Business due to C. Statistical
Red-onion inflation Analysis of
Data

INPUT PROCESS OUTPUT

Conceptual framework

The conceptual framework of this research has the input in which the content are

the demographic profile of the respondents and the experience of their business during

the inflation. It has also a process which contains the process of collecting data by the

use of Survey questionnaires and the instrument will be use are Likert scale

Questionnaire and lastly it has the output which will be the impact of inflation rate of

onions to a small eatery owners in Tigaon.

The researcher’s will provide definition of terms to help the readers better to

understand the study

Conceptual Definition

Cause- Something that brings about a result especially a person or thing that is the

agent of bringing something about

Eatery -a restaurant or other place where people can be served food

Firm- A firm is a business organization such as a corporation that produces and sells

goods and services with the aim of generating revenue and making a profile

Inflation- Inflation is the rate of increase in prices over a given period of time. Inflation is

typically a broad measure, such as the overall increase in prices or the increase in the

cost of living in a country

Red Onions- Red Onions-Red onions are cultivars of the onion, and have purplish-red

skin and white flesh tinged with red. They are most commonly used in cooking, but the

skin has also been used as a dye, in this study red-onions is the foundation of our

research
Shortage- In economic terms, shortages occur when the quantity demanded exceeds

the quantity supplied. To be at market equilibrium, the quantity supplied.

Operational Definition

Impact- having an effect, benefit, or contribution to economic, social, cultural, and other

aspects of the lives of citizens and society beyond contributions to academic research