1.1. What two features of the Indian economy meant that an increase in rice prices was likely to spread through the economy and influence the overall inflation rate? In 2012, the Indian monsoons came with less rain than normal. For the rice crop, this was a large and adverse shock.

Rice is grown in water-laden paddies, and domestic production fell dramatically with the weather shock. The result for India, which is a large consumer of rice, was a substantial increase in the price of rice. Nearby countries also growing rice, like Thailand, were not able to make up for India’s production deficiencies, and rice prices rose throughout much of Southeast Asia.

For a country like the United States, a rise in rice prices would likely have little effect on overall prices. There are many substitutes for rice in the United States and rice plays a small role in the average household budget. The same is not true for India, which is both poorer (meaning that food in general is a larger part of the budget) and much more dependent on rice. For India, the weather shock on rice threatened to increase the overall inflation rate, which at 10 percent was already high by U.S. standards, and the Indian government struggled to try to manage this (supply)

shock.