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Under the Guidance of Garima Mam & Divya Mam
Presented By :Group 7 (Section A)
Inflation is the rise in the
general level of prices of
goods and services in an
economy over a period of
Inflation is a general rise in prices of goods and services. Inflation results in loss of
value of money. If some commodity demands a price of 10 rupees 10 years ago, it
now demands Rs. 50. This means there is loss in value of rupee by about five times
w.r.t. to that commodity. So in general all commodities appreciate over time.
Inflation can be defined as a sharp increase in the rate of change of a price index
above an acceptable level that lasts over a time period long enough to create
expectations of its future persistence.
Deflation – a fall in the general price level. Deflation occurs
when the inflation rate falls below 0% (a negative
inflation rate )
Disinflation – a decrease in the rate of inflation
Hyperinflation – an out-of-control inflationary spiral
Stagflation – a combination of inflation, slow economic
growth and high unemployment; and
Wholesale Price Index (WPI)
WPI is the index that is used to measure the change in the
average price level of goods traded in wholesale market.
INDIA uses WPI for calculating inflation.
Consumer Price Index (CPI)
CPI is a statistical time-series measure of a weighted
average of prices of a specified set of goods and services
purchased by consumers
Most of the developed nation use CPI for calculating
Over-expansion of money supply i.e. excess liquidity in the
economy leads to inflation because “too many money would
be chasing too few goods”.
Expansion of Bank Credit Rapid is also responsible for the
inflationary trend in a country.
Deficit Financing: The high doses of deficit financing which
may cause reckless spending, may also contribute to the
growth of the inflationary spiral in a country.
A high population growth leads to increase in demand and
money income and cause a high price rise.
Excessive increase in the price of fuel or food products due
to political, economic or natural reasons will lead to
inflation for short- as well as long-term.
An increase in the general level of prices implies a
decrease in the purchasing power of the currency .
Inflation adds inefficiencies in the market, and make it
difficult for companies to budget or plan long-term.
Higher Income tax rates.
Inflation can lead to massive demonstrations and
revolutions. For example, inflation and in particular
food inflation is considered as one of the main reasons
that caused the 2010–2011 Tunisian revolution and
the 2011 Egyptian revolution,
Economic Impacts The impact of Inflation on the economic
system may be classified into 3 kinds –
1) Effects on production (that is changes in the routine of
2) Effects on income distribution (that is , re-distribution of
income and wealth)
3) Effects on the consumption and welfare .
The foremost effect of inflation in
the world economy is seen in
prices of fuel . The rising prices of
Crude Oil & LPG affects a common
man from all sides.
Food Price Hike
In times of rising inflation, this
means that increased cost of living
for the population. Commodity
prices increases significantly.
Right from the beginning, inflation adds to inequalities of
income and wealth.
Inflation leads to a shift in the asset preference of wealth
Inflation leads to balance of payments problems.
Inflation distorts the financial system of the country.
The Government said that liberalization of imports, banning exports
and a cut in excise and customs duties are among the steps taken by
the Government to control inflation in the country.
The Government has directed the Reserve Bank of India (RBI) to take
monetary measures and to put down interest rates to control Inflation.
The Central Government of India has directed the Chief Ministers of all
the states in India to take preventive measures to control Inflation like
cutting down of sales tax , custom and excise duties .
Some of the state Governments have taken up the initiative to provide
lower priced ration goods for the Below Poverty Line (BPL)
masses because they are the ones who are the mostly effected .
Very few know that there are some positive impacts
of inflation as well. However, the beneficial effects
of inflation are limited to only its initial phase when
the price rise is sufficiently mild. During that period,
there is a favourable impact upon both output and
Is Inflation Unjust ?
Inflation is unjust because it affects different classes
of people in the society in different ways and in
different degrees. If inflation were to affect everyone
in the society in exactly the same manner and to the
same the degree, it would not alter the economic and
social relationships in the community. But inflation
takes away wealth from some people and transfers it
to others on a random basis without taking into
consideration the sound maxim of social equality.
The Zimbabwean dollar bank note holds the record for the
greatest number of zeros shown (100,000,000,000,000).
Hungary holds the record for the largest banknote ever issued,
but its bank note did not depict all the zeros—the amount was
spelled out .
The post-WWII hyperinflation of Hungary holds the record for
the most rapid monthly inflation increase ever:
41,900,000,000,000,000% for July 1946, which means prices
were .doubled every 14th hour.
* Ref.: Zimbabwe Inflation Hits 11,200,000 Percent CNN. August 19, 2008.
Accessed: Aug 28 , 2012. every 13.5 hours .
A dollar from 1950 is now worth only $0.12.
Current inflation rate in India , as per July 2012, is 6.87%.
Period Inflation(in India)
june 2012 - 10.053 %
june 2011 - 8.621 %
june 2010 - 13.725 %
A Recession is the contraction phase of the business cycle.
A general definition of recession is “Gradual Decline in Economic
activity lasting over for at least two successive quarters “
National Bureau of Economic Research (NBER) is an non-profit
organization that defines the economy ‘s state of recession.
They define recession as :
“significant decline in economic activity lasting more than a few
months, which is normally visible in real GDP, real income,
employment, industrial production, and wholesale-retail sales”.
GDP is a good indicator of economy and it can be used to
predict whether economy is in recession or not.
Other indicators could be;
Actual Personal Income
The main causes of recession are :
1) Over Production
2) Low Confidence Level
A situation in which the supply
exceeds the nation’s ability to
consume what has been produced;
Supply > Demand
Word of mouth
Word Of Mouth
Low Confidence Level
of Millions of
producers after they
hear many job cuts,
Demand comes down,
Problems of Companies’
bankruptcy , etc
Consumers are fearing that they may
lose their jobs; So, they have less
confidence to spend money and buy
goods. This will result in reduction
in demand in the market . Consumers
start saving money instead of
money ,& this is a downward spiral in
the economy .
Natural Calamities , Terrorist Attacks etc.
Impacts of Recession can be of following two types :
1) Positive Impacts:
Positive Impacts which are visible are :
a) Lower Inflation Rate.
b) Decrease In Import.
c) Decrease In Crude Oil Rate.
2) Negative Impacts :
Negative Impacts of Recession are :
a) Decline in Export.
c) Decrease in GDP.
d) Decrease in Foreign Investments.
How to overcome recession?
It is unhealthy for any nation to be in Recession,
So, Government need to take certain countermeasures
to eliminate or reduce the Effect of recession for turnaround.
Today, it is a market Economy
Can produce and
sell at their prices
Can decide to
buy or not
Both Producers and Consumers are free to act; Not a forced action
Hence, Government does not have direct control on Producers’ & the
Consumers’ behavior .But, they can influence millions of Producers &
Consumers with Government’s policies .
Government has 2 plans
Government influences the
economy by changing how
it (Government) spends
and collects money
the available supply of
money in the country
To conclude it can be said that both inflation and recession
are part of business cycle which we can not fully control ,
we can only take preventive measures and monitor their
impacts and invest wisely.