Definitions Generally It means Rising PricesA well known Author Coulborn DefinedInflation Beautifully as To Much Money Chasing Too Few Goods
3 Main Features1. There is Continuous Rise In Price level.2. It started when it becomes impossible to satisfy the whole demand for goods at existing Prices.3. Inflation feed on it self, after initial rise in price, the buyers anticipate further rise in prices and buy more quantity in hurry and hence, inflation is Propagated
There are three major types of inflationcategorized by the causes:1. Demand-pull inflation2. Cost-push inflation3. Built-in inflation
inflation caused by increases in aggregatedemand due to increased private andgovernment spending, etc.Demand inflation is constructive to a faster rateof economic growth since the excess demandand favorable market conditions will stimulateinvestment and expansion. Greater part of inflation in Pakistan is Demand Pull Type.
Originate from Rise in production cost.When the firm pass on their increased costto the customers in the form of higherprices, Inflation takes place. Important source of rise in cost includes: 1. Workers demand for higher wages 2. Increasing Profits 3. Increase in tax 4. Higher prices of Imports
Included by Adaptive ExpectationsWorkers tries to keep their wages up,Pass higher cost to the consumers in theform of higher Prices
The “revenue” raised from printing moneyis called seigniorage (pronounced SEEN-your-ige)To spend more without raising taxes orselling bonds, the govt can print money.Higher the money supply, higher theinflation.
Increase in Cost of living: The working class are hard hit. Wages do not rise at therate pricing are rising. Those sections of society who havefixed incomes, find difficulty in buying their daily needs.Income inequalities increases: When prices rises, businessmen and big landlords makes huge money, the distribution of income among various classes of society become more unequal
Decrease in Saving: During rising prices the saving of common people are adversely affected. They use their saving to buy consumable goods. Less exports and more imports: Local goods become costly for the buyers, so they start buying from other countries. So balance of payments is adversely effected.
Healthy effects of inflation on the economy are felt onlywhen the inflation is of mild nature ( say 2% per annum)
Increase in production: When prices are rising slowly, the profits of the businessmen and industrialists are increasing slowly. They try to produce more goods.Increase in Employment:Because of high prices of production, firms try to increase their Production and employ more labors.
Increase in investment: With the improvement of profits, investment activity is boosted. The investors readily put their capital in BusinessesIncrease in Economic Development: Low inflation is helpful for Economic Development. TheGovernment Increases resources by increasing money supply. Innovations and Research are encouraged When industry is expanded, business activities accelerates The producers allocate funds to research and innovations
Modern economists believe that inflation is inversely related tounemployment.As inflation decreases, unemployment is expected to rise andvice-versa.
Inflation is measured by calculating the percentage rate ofchange of a price index, which is called the inflation rate.This rate is calculated by mainly two different priceindices: 1. Wholesale price index 2. Consumer price index
WPI is the index that is used to measure the change inthe average price level of goods traded in wholesalemarket.India uses the WPI to calculate and then decide theinflation rate in the economy.WPI does not properly measure the exact price rise anend-consumer will experience because, as the namesuggests, it is at the wholesale level.
CPI is a measure of a weighted average of prices of aspecified set of goods and services purchased byconsumers.It is a price index that tracks the prices of a specifiedbasket of consumer goods and services, providing ameasure of inflation.Most developed countries uses this index
DISINFLATION – the reduction of rate ofinflation . HYPER INFLATION-an out of controlinflationary spiral .STAGFLATION – high inflation combined witheconomic stagnation and unemployment.
DEFLATON- A situation in Economy in which, theenough of Aggregate demand for goods is not comingand as a result, Prices Falls.Reflation- A fiscal or monetary policy, designed toexpand a countrys output and curb the effects ofdeflation.Reflation policies can include reducing taxes, changingthe money supply and lowering interest rates.
High interest rates and slow growth of moneysupply are traditional ways through which, centralbank controls Inflation.
It Majorly pertains to taxation and interestpolicies . Increase taxes so less disposable income Reduce government spending to reduce demand. Changing the import and export duties. Encourage Savings
By strengthening local currency against dollar will boost imports while discouraging exporters. Other Measures 1. Increase in production 2. Wages Control 3. Revaluation
Zimbabwe: 355,000%!The inflation in Zimbabwe for the month of March 2008 rose to 355,000%.It was 165,000% in February. Almost 80% of the nation is unemployed. A sausage sandwich sells for Zimbabwean $50 million. A 15-kg bag of potatoes cost Zimbabwean $260 million. But then, Zimbabwean $50 million is roughly equal to US$ 1
From various monetary , fiscal and othermeasures it becomes clear that to controlinflation government should adopt allmeasures simultaneously.Inflation is like a hydra-headed monsterwhich should be fought by using all theweapons at the command of thegovernment.