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# INFLATION : NATURE,EFFECT AND CONTROL

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IT IS POWERPOINT SLIDE OF INFLATION : NATURE , EFFECT AND CONTROL IN AGRICULTURAL ECONOMICS

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### INFLATION : NATURE,EFFECT AND CONTROL

1. 1. *INFLATION
2. 2. • INFLATION is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. MEANING OF INFLATION
3. 3. INTRODUCTION Inflation is defined as a sustained increase in the price level or a fall in the value of money. It is measured as a rate percentage per unit time, say a year or month. When the level of currency of a country exceeds the level of production, inflation occurs. Value of money depreciates with the occurrence of inflation.
4. 4. VARIATIONS ON INFLATION  Deflation is when the general level of prices is falling. This is the opposite of inflation. Hyper inflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system. Stagflation is the combination of high unemployment and economic stagnation with inflation..
5. 5. RATE OF INFLATION Rate of inflation is the rate of change of the general price level. It is measured by simple formula: Rate of inflation t=Pt-Pt-1 Pt-1 Where, Pt=price level in the year t Pt-1=price level in the year t-1,the base year If there is a decline in the rate of inflation such a situation is called DISINFLATION.
6. 6. EFFECTS OF INFLATION Investment Interest rates Exchange rates Unemployment Stocks Decrease in the purchasing power Change the allocation of income
7. 7. CAUSES OF INFLATION FACTORS ON DEMAND SIDE: Increase in money supply Increase in disposable income Deficit financing Foreign exchange reserves FACTORS ON SUPPLY SIDE oRise in administered prices oErratic agriculture growth oAgricultural price policy oInadequate industrial growth
8. 8. CAUSES OF INFLATION Demand-Pull Inflation This theory can be summarized as "too much money chasing too few goods". This usually occurs in growing economies. The demand for goods and services increases and production remains the same or does not increase as fast. the excess demand results in prices being “pulled up”. Demand pull inflation occurs when total demand for goods and services exceeds the total supply. This type of inflation happens when there is an inflationary gap
9. 9. Demand Pull Inflation P2 P1 Q2Q1 Aggregate Supply Aggregate Demand 2 Aggregate Demand 1 Price Real GDP
10. 10. COST-PUSH INFLATION  When companies' costs go up, they need to increase prices to maintain their profit margins. Caused by an increase in the cost of production. Increased costs “push up” the price level. Cost push inflation can result from change in aggregate supply. The two main sources of change in aggregate supply are increase in wage rate and price of raw material.
11. 11. 12 Cost Push Inflation P2 P1 Q2 Q1 Aggregate Supply 2 Aggregate Demand Price \$ Real GDP (\$) Aggregate Supply 1
12. 12. HOW TO CONTROL INFLATION Monetary Measures Other Measures Fiscal Measures
13. 13. MONETARY MEASURES Credit Control central bank should pursue credit control policy. In order to control cash reserve ratio etc. it can also issue notice to other banks in order to control credit. • Deficit Financing It means printing of new currency notes by Reserve Bank of India .If more new notes are printed it will increase the supply of money thereby increasing demand and prices. Issue of New Currency During Inflation the RBI will issue new currency notes replacing many old notes. This will reduce the supply of money in the economy.
14. 14. Fiscal Measures Reduction in Unnecessary Expenditure Increase in Taxes Increase in Savings Public Debt Imposition of new Taxes Wage Control Rationing Maintaining Surplus Budget
15. 15. OTHER MEASURES  To Increase Production  Rational Wage Policy  Price Control Increase in Imports of Raw materials 2. Decrease in Exports 4. Provision of Subsidies 5. Use of Latest Technology 6. Rational Industrial Policy
16. 16. HOW IS IT MEASURED Consumer Price Index Wholesale Price Index
17. 17. CONSUMER PRICE INDEX  CPI is a measure estimating the average price of consumer goods and services purchased by households. CPI measures a price change for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation). It is a price index determined by measuring the price of a standard group of goods meant to represent the typical market basket of a typical urban consumer. The percent change in the CPI is a measure estimating inflation.
18. 18. WHOLESALE PRICE INDEX  WPI was published in 1902,and was one of the economic indicators available to policy makers until it was replaced by most developed countries by the CPI market. index in the 1970.  WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market.  Some countries (like India and The Philippines) use WPI changes as a central measure of inflation. However, India and the United States now report a producer price index instead.
19. 19. PROBLEMS WITH WPI In present day service sector plays a key role in Indian economy. Consumers are spending loads of money on services like education and health. And these services are not incorpated in calculation of WPI. WPI measures general level of price changes either at level of wholesaler or at the producer and does not take into account the retail margins. WPI is supposed to measure impact of prices on business. “But we use it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the index.
20. 20. INFLATION - KEYNESIAN VIEW Keynesian economics proposes that changes in money supply do not directly affect prices, and that visible inflation is the result of pressures in the economy expressing themselves in prices. Demand-pull inflation is caused by increases in aggregate demand due to increased private and government spending.
21. 21.  Cost-push inflation, also called "supply shock inflation," is caused by a drop in aggregate supply (potential output).  This may be due to natural disasters, or increased prices of inputs.  For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation.
22. 22. MONETARIST VIEW Consider fiscal policy, or government spending and taxation, as ineffective in controlling inflation. The quantity theory of money, simply stated, says that any change in the amount of money in a system will change the price level. MV = PQ where M is the nominal quantity of money. V is the velocity of money in final expenditures; P is the general price level; Q is an index of the real value of final expenditures;
23. 23. THE PHILLIPS CURVE Wage growth % (Inflation) Unemployment (%) The Phillips Curve shows an inverse relationship between inflation and unemployment. It suggested that if governments wanted to reduce unemployment it had to accept higher inflation as a trade-off. Money illusion – wage rates rising but individuals not factoring in inflation on real wage rates. 1.5% 6%4% 2.5% PC1
24. 24. INDIA INFLATION RATE The inflation rate in India was recorded at 8.59 percent in April of 2014. Inflation Rate in India averaged 9.67 Percent from 2012 until 2014, reaching an all time high of 11.16 Percent in November of 2013 and a record low of 7.55 Percent in January of 2012. Inflation Rate in India is reported by the Ministry of Commerce and Industry, India. The inflation rate in India was last reported at 8.8 percent in February of 2012.  From 1969 until 2010, the average inflation rate in India was 7.99 percent reaching an historical high of 34.68 percent in September of 1974 and a record low of -11.31 percent in May of 1976.