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# Inflation math

## on Feb 25, 2011

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## Inflation mathPresentation Transcript

• How to calculate Inflation
• 6.23%       Inflation Rate ( item13/ item 16)*100 17 57075 Total domestic products(xii+xiii) xiv 884835 Benchmark for Inflation ( 3+14) 16 8367 Outstanding devaluation (8-6) xiii 112189 Increment in WC ( 13+14) 15 48708 Domestic Production(v-xi) xii 57075 Total Domestic Product (xiv) 14 40812 Total deflation xi 55114 Inflation = 11+12 13 0 Amount contra to item No. 12 x 0 Forex in Production (i) 12 0 RBI surplus if negative ix 55114 Forex used in inventory(7-10) 11 0 Bank deposit if positive viii 26312 Total deflation (8+9) 10 2128 Business surplus if negative vii 0 Bank surplus refunded to foreign 9 38684 Foreign Exchange purchased vi 26312 Credit craeted by dvaluation 8   Deflation against item v     Deflation against item 7   89520 Total v       48708 Cost of Slaes iv 81426 Total (4+5+6) 7 6212 RBI surplus if positive iii 17945 Indian Bank bond sold abroad 6 34600 Bank surplus if positive ii 8340 Bank deposit of Business if negative 5 0 Business surplus if positive i 55141 Foreign Credit utilised 4   Domestic Products     Foreign Credit Utilised   827760       Money supply at start of year 3 26312 Increase in Rs. Equivalent to USD at closing @42.43 against 39.51 2 55141       Foreign Credit in Bank for 98-99 1
• Why deficit budget always leads to higher inflation rate
• Mathematically
• Pt (Gt - Tt) = dMt + dBt,
• or
• Gt - Tt = dMt / Pt + dBt / Pt
• Gt – Tt – Government Deficit
• Pt – Price Level
• dMt - New Money
• dBt – New interest bearing debt
• Now go back to the table of answer 1 and it is very clear that dMt - New Money, dBt – New interest bearing debt increases naturally the inflation will increase.
• Theoretically
• A government with budget deficit can finance it either by printing money or issuing public debt. Inflation might be a monetary phenomenon but the money is a reflection of bad fiscal policy , not monetary policy. And so the inflation is a fiscal phenomenon.
• Therefore , while the proximate cause of inflation is always monetary as inflation is associated with high rates of growth of money, the true structural cause of persistent inflation is a fiscal deficit that can not be eliminated with cuts in spending and/ or increase in non-seigniorage taxes.
• Why RBI need to print new currency notes every year. Is it to control the inflation rate ?
• In the last decade, Argentina, Bolivia, Brazil, and Israel have experienced very large inflation rates, all over one hundred percent a year and some over a thousand also.
• If the relation between money growth and inflation is so clear, why don't these countries simply print less money? If only it were so easy! The real problem most of these countries had was a large fiscal deficit. Let's think how that influences monetary policy. If a government is running a deficit, then it must issue iou's of some sort to pay for it. Roughly, speaking, they may issue money or interest-bearing debt (treasury bills and notes) denoted with the variable dB.
• Mathematically we can express this as
• where the two terms on the right are issues of new money (dM) and new interest-bearing debt (dB), respectively. This is an example of a government budget constraint: it tells us that what the government doesn't pay for with tax revenues, it must finance by issuing debt of some sort.
• Therefore there are certain other factors that influence to print new currency. Again you can refer to chart of Ans 1.
• . What is Capital Deficit, Revenue Deficit and Fiscal Deficit.
• -10.50% 81.50% 82.60% 91.00% Interest as % of Fisc. Def   129.90% -230 -46 -100 Primary Deficit 10(9-4a) 11.70% -1243 -426 -1113 Fiscal deficit 9(7+8) 9.00% -369 -163 -339 Capital deficit 8(2-5) 12.90% -874 -263 -774 Revenue deficit 7(1-4) -0.10% 3382 1301 3385 Total Expenditure   6(4+5) -1.90% 351 151 358 Plan   -16.70% 180 59 216 Non-plan   -7.50% 531 209 574 Capital expenditure   5 0.00% 523 207 523 Plan expenditure   0.00% 1013 380 1013 Interest payments   4a 3.20% 1315 505 1275 Non-plan excluding interest   1.40% 2851 1092 2811 Revenue Expenditure   4 -5.80% 2139 875 2272 Total Receipts 3 (1+2) -65.00% 35 2 100 Other receipts   -6.20% 127 44 135 Recoveries of loans   -31.20% 162 46 235 Non-Debt Capital Receipts 2 4.40% 600 288 575 Non-Tax revenue   -9.30% 821    905 Indirect Taxes    -0.10% 556   557 Direct Taxes   -5.80% 1377 541 1462 Net tax revenue   -2.90% 1977 829 2037 Revenue Receipts 1 Rs.bn Rs.bn Rs.bn Rs.bn        Budgeted   2000   from 2000-01 Sept. 2000-01 Variation Estimated Upto Budgeted             Government of India