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INFLATION
 

INFLATION

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INFLATION

INFLATION

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    INFLATION INFLATION Presentation Transcript

    • INFLATION PRESENTATION BY PRAVEEN SURESH I MBA ST ALOYSIUS INSTITUTE OF MANAGEMENT & INFORMATION TECHNOLOGY – AIMIT, MANGALORE
    • Topics Covered • • • • • • • • • Introduction – Origin, Definition & Meaning Effects of inflation Causes of inflation Types of inflation Major Inflations in History Measures to curb inflation How is Inflation calculated? Inflation in India Issues with the inflation in India
    • Introduction Origin • The term “inflation” is from the Latin term inflare, meaning to “blow up or inflate”. Meaning • Situation where the prices of goods and services increase. • It is an indication in rise of general level of prices.
    • Introduction Definitions • Crowther defines inflation as “a state in which the value of money is falling, ie., prices are rising”. • Professor Samuelson defines “Inflation occurs when the general level of prices and costs is rising”. • “Too many dollars chasing too few goods,” Herb Stein.
    • Effects of inflation What happens during Inflation • OIL/PETROL PRICES RISE • CNG PRICES RISE • PADDY/WHEAT PRICES RISE • SALARY NOT SUFFICIENT TO MEET HOUSEHOLD EXPENSES
    • Effects of inflation Inflation can create major problems • Rise in prices will force people to spend only on essential/few items which will force manufacturers to cut down production. • Producers cant control prices because since prices go up, raw materials also will cost more inturn pushing up the cost of the goods. • This could result in loss which could force them out of business. • People would also save less and thus banks will have lesser money to lend to manufacturers. • Increase in prices could worsen the poverty affecting low income household • Manufacturers will not spend on research and new technology thus resulting in job loss/unemployment. • Govt will increase TAX • Decrease in production will result in lesser exports and more imports thus adversly affecting BALANCE OF PAYMENTS position of the country.
    • Causes of inflation Demand & Supply • PRICES rise when there is either more DEMAND for goods or when there is a shortage of SUPPLY of goods. • Thus either increase in DEMAND or decrease in SUPPLY will cause inflation. • So, lets check factors affecting both DEMAND and SUPPLY which cause inflation.
    • Causes of inflation Factors affecting Demand • • • • • • • • Increase in disposable income with the people Increase in customer spending Cheap monetary policies Expansion of private sector Increase in exports Repayment of public debts Deficit financing (borrowing from public) Black Money
    • Causes of inflation Factors affecting Supply • • • • • • Natural Calamities Artificial Scarcities Industrial Dispute Fall in industrial growth Rise in exports Focus on non essential items by manufacturers/producers • Agriculture price policy • Increase in administered prices • International Factors
    • Types of inflation • DEMAND PULL •COST PUSH
    • Types of inflation Demand Pull • Occurs, when people’s ability to spend rises more rapidly than the availability of goods and services. Cost Push • Occurs, when rising costs result in increased prices .
    • Major inflations in history • ZIMBABWE – 2009 •GERMANY– 1923-25 (WWII) •HUNGARY–1922-24;1944-46 (WWII) •JAPAN – 1944-48 (WWII) •BRAZIL – 1986-84 •ARGENTINA –1975-1991 (Budget deficit) •RUSSIA –1921-22;1992-94 (Bolshevik revolution & Post soviet revolution)
    • Major inflations in history Highest Inflation rates • HUNGARY (1946) – 1.295 X 10^16 •ZIMBABWE (2008) –79,600,000,000% •YUGOSLAVIA(1994) – 313,000,000% •GERMANY(1923) – 29500% •GREECE (1944) – 11300% •CHINA (1949) – 4210%
    • Major inflations in history Occurances during such inflati •Germany - Notes were used as fuel instead of firewood •Zimbabwe issued notes worth 10 trillion •Zimbabwe – During inflation prices rose every 12 hours •Hungary issued the largest denomination notes in history i.e with a face value of 100 quintillion PENGO •In Germany people used WHEEL BARRONS to buy bread
    • Methods to control inflation •MONETORY MEASURES •FISCAL MEASURES •OTHERS
    • Methods to control inflation MONETORY MEASURES • CREDIT CONTROL •ISSUE OF NEW CURRENCY NOTES •DEMONITIZATION OF CURRENCY (reduce/put out of circulation high value notes)
    • Methods to control inflation FISCAL MEASURES • INCREASE TAXES •INDUCE SAVINGS •UNNECCESSARY EXPENDITURE (govt to reduce) •PUBLIC DEBIT (stop payment/post pone) •Surplus Budgets
    • Methods to control inflation OTHER MEASURES • INCREASE PRODUCTION • WAGE POLICY •PRICE CONTROL •RATIONING
    • How is inflation measured? •Consumer Price Index •Wholesale Price Index
    • How is inflation measured? • Consumer Price • Statistical estimate of prices of goods & Index for consumption by services bought households • Measures price change for constant market basket of goods & services from one period to another. • Price index determined by measuring the price of the standard group of goods meant to represent the typical market basket of a consumer.
    • How is inflation measured? • Wholesale Price • First published in 1902 but replaced in 1970 Index use it, India is one among them • Very few countries • Encompasses 2400 commodities • Is the index used to measure change in any price level of goods and services traded in WHOLESALE market. • Focuses on prices of goods traded between corporations. • Has 5 groups – Agriculture, Mining, Quarry, Manufacturing & Import & Export
    • Inflation in India • • • • • India follows Whole Sale Price Index (WPI ) Highest inflation in India was 53.8% in 200 years In 2008 it went upto 11% which was highest in 13 yrs Average inflation since 1997 is 7% However FOOD prices have raised and Food index is presently close to 20% •This is how food prices have risen since 2007: Food articles: 7.02% (in 2007) to 17.41% in January 2010. Food products: 3.43% (in 2007) to 22.55% in January 2010. Food commodities: 5.60% (in 2007) to 19.42% in January 2010. Foodgrains: 6.27% (in 2007) to 17.89% in January 2010. Cereals: 6.27% (in 2007) to 13.69% in January 2010. Pulses: 2.14% (in 2007) to 45.62% in 2007 in January 2010. Rice: 6.05% (in 2007) to 12.02% in January 2010. Wheat: 6.77% (in 2007) to 14.86% in January 2010. Dairy products: 6.08% (in 2007) to 12.87% in January 2010. Eggs, fish and meat: 6.38% (in 2007) to 30.71% in January 2010. Sugar: (-)14.69% (in 2007) to 58.94% in January 2010.
    • Inflation in India Measures undertaken to curb inflation • Step up domestic supply • Bridge the gap by imports. • Given duty concessions. • Allowed duty-free imports by putting items under OGL (open general licence).' •Subsidised articles like edible oil •Increase in rates (CRR, REPO etc)
    • Inflation in India Problems with adopting WPI index to measure inflation of our economy • WPI only , captures price movement of only wholesale goods and doesn’t take into account retail margins and doesn’t give the accurate picture of inflation •WPI also doesn’t encompass some important service industries which the retails consumer invest in heavily v.i.z., health, education. •WPI measure change in prices of wholesale goods which doesn’t impact the consumer at large. •Many commodities taken into WPI doesn’t enter into the consumers basket.
    • Questions?
    • Thank You