Theory of Inflation Presented by: Dr. Kavita Srivastava ITS, Ghaziabad
Inflation is defined as the persistent or sustained rise of the general price level in an economy.
Two types of Inflation are identified by Keynes
Demand pull Inflation : Such inflation occurs when aggregate demand exceeds the aggregate supply i.e., economy’s productive potential.
Causes of Demand Pull Inflation :
*mounting government expenditure
*Deficit Financing and increase in money supply
*Increase in the disposable income.
*Role of black money
*Uncontrolled growth of population
COSTS PUSH INFLATION
Cost push inflation occurs when the price of commodity increases as a result of the increase in cost of production.
Cost of production increases due to :
Increase in the wage level
Rise in prices of imports
Rise in taxes
Rise in administered prices
Rise in oil prices and global inflation
Consequences of Inflation
Adverse effect on production : Inflation leads to the economic recession in many sectors of the economy. For Example: Prices of certain important article of consumption such as cotton textile increased to very high level resulting in the reduction of its demand. With the decline in demand production too declines .
Inflation and labour productivity : One of the major consequences of inflation is that it is marked with the labour unrest.
The private corporate sector especially the capital intensive ones,worry about the effects of strikes on their profit record and their ability to raise capital in the future
Inflation and marketing
Inflation affects all the aspects of the production activities but marketing which operates as the interface between suppliers and customers is under the sharpest pressure of all.
Due to inflation, the Indian corporate sector faces distortion of existing relationship between the buyers and the sellers and creates uncertainty over the current and future trade practices. Inflation also affects wage and salary levels, transport costs, packing, printing and communication charges. Thus inflation for companies would result in :
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An increased sensitivity on the part of customers to the price.
A tendency to substitute for the quality product those which, although of a lower quality, are regarded as adequate.
A reduced rate of growth in the real demand of the product.
A shift in expenditure away from the demand of non essential goods and services.
Inflation and Investment Decisions
Progressive income tax and other corporate taxes levied on nominal profits and stock gains affects the profitability of capital investment.
Adverse effect on the distribution of income :
Producers, traders, and speculators have gained enormously through ever rising inflationary prices and increased profit margins. On the other hand, people living on past savings, fixed incomes and pensioners have been literally ruined due to inflation .
Control of Inflation
In spite of the consequences of inflation a mild inflation is important for the economy to grow: