Introduction of Inflation and Deflation

1. ENGINEERING ECONOMICS &
OPTIMIZATION
PROJECT PRESENTATION
Presented by:
Muhammad Waqas Hanif
UW-14-ME-BSc-089
2/3/2019 1Department of Mechanical Engineering ,WEC

2. Title:
•Inflation & Deflation
2/3/2019 2Department of Mechanical Engineering,WEC

3. List of Contents:
• Inflation
– Definition
– Types
– Causes
– Effects
• Deflation
– Definition
– Types
– Causes
– Effects
2/3/2019 3Department of Mechanical Engineering,WEC

4. Inflation & Deflation
• Definition of Inflation
 In economics, 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.
 Consequently, inflation also reflects an erosion in the purchasing
power of money .
 A chief measure of price inflation is the inflation rate, the
annualized percentage change in a general price index (normally
the Consumer Price Index) over time.
2/3/2019 4Department of Mechanical Engineering,WEC

5. How to calculate inflection rate???
• The formula for calculating the Inflation Rate looks like this:-
((B-A)/A)*100
Where “A’’ is the previous year CPI and “B” is the present year CPI
• If exactly one year ago the Consumer Price Index was 178 and today
the CPI is 185, then the calculations would look like this
= ((185-178)/178)*100
=3.93%
So, inflation over the sample year is 3.93%
2/3/2019 Department of Mechanical Engineering,WEC 5

6. Inflation & Deflation
• Effects of Inflation
 Inflation's effects on an economy are various and can be
simultaneously positive and negative.
 Negative effects of inflation include a decrease in the real value of
money and other items over time, high inflation may lead to
shortages of goods if consumers begin hoarding out of concern that
prices will increase in the future.
 Positive effects include ensuring central banks can adjust nominal
interest rates (intended to mitigate recessions),and encouraging
investment in non-monetary capital projects.
2/3/2019 6Department of Mechanical Engineering,WEC

7. Categorization of Inflation
• High Inflation: Economists generally agree that high rates of inflation and
hyperinflation are caused by an excessive growth of the money supply.
• Low or Moderate Inflation: may be attributed to fluctuations in real
demand for goods and services, or changes in available supplies such as during
scarcities, as well as to growth in the money supply.
• Long period of Sustained Inflation: is caused by money supply growing
faster than the rate of economic growth.
2/3/2019 7Department of Mechanical Engineering,WEC

8. Inflation & Deflation
• Types of Inflation
There are four main types of inflation.
Wage Inflation:
Wage inflation is also called as demand-pull or excess demand inflation. This type of
inflation occurs when total demand for goods and services in an economy exceeds the
supply of the same. When the supply is less, the prices of these goods and services would
rise. This type of inflation affects the market economy adversely during the wartime.
Cost-push Inflation:
If there is increase in the cost of production of goods and services, there is likely to be a
forceful increase in the prices of finished goods and services. For instance, a rise in the
wages of laborers would raise the unit costs of production and this would lead to rise in
prices for the related end product.
2/3/2019 8Department of Mechanical Engineering,WEC

9. Inflation & Deflation
Pricing Power Inflation:
Pricing power inflation is more often called as administered price
inflation. This type of inflation occurs when the business houses
and industries decide to increase the price of their respective goods
and services to increase their profit margins.
Sectorial Inflation:
The sectorial inflation takes place when there is an increase in the
price of the goods and services produced by a certain sector of
industries. For instance, an increase in the cost of crude oil would
directly affect all the other sectors, which are directly related to the
oil industry.
2/3/2019 9Department of Mechanical Engineering,WEC

10. Inflation & Deflation
• Causes of Inflation
 The two main categories of inflation are
 Cost push and Demand Pull
Things that cause production costs to go up and force firms to raise
their prices to maintain profit margins
 A rise in costs of imported raw materials
 Rising labour costs
 Higher indirect taxes
 Wage price spirals
2/3/2019 10Department of Mechanical Engineering,WEC

11. Inflation & Deflation
• Measures to Control Inflation: Given that inflation shows the imbalance
between supply and demand of goods at current prices so that measures be taken to
reduce demand or increase supply of goods and services.
The supply side Measure
• Increased Production: The supply of goods and services can be increased by
increasing agricultural and industrial production. Agricultural production can be
increased by providing an adequate supply of agricultural inputs at low prices, the
modernization of agriculture and scientific farm management, adequate water supply
for irrigation, industrial production etc similarly can be increased by increased foreign
direct investment, industrial credit growth, fiscal concessions, etc.
2/3/2019 11Department of Mechanical Engineering,WEC

12. Inflation & Deflation
• Control of illegal Activities: There are some illegal activities that cause
significant inflation in a country. It is hoarding, smuggling, profiteering,
black markets, etc. In the case of smuggling of large quantities of staples
like sugar, butter, wheat, rice, etc are exported abroad illegally in order to
obtain higher prices. Similarly, the shortage in most cases artificial
staples to create higher profits. All activities of this evil must be
controlled through advertising, as well as punishment.
• Peace and Security: Production and distribution of goods and services
can be effected due to the existence of disturbances and insecurity in
society. In such circumstances, investors hesitant to invest for fear of
potential loss. Similarly, the production of industrial products is affected
due to several unpleasant events such as strikes ,therefore peace and
security must be ensured to maintain the supply of goods and avoid the
danger of famine.
2/3/2019 12Department of Mechanical Engineering,WEC

13. Inflation & Deflation
Deflation:
In economics, deflation is a decrease in the general price level of
goods and services.
It refers to continuous fall in price level. This happens in recession period. If it
last for longer period, it harms the growth & development of the economy.
The Government should adopt policies which are similar to the situation of
recession. Eg.
• Increase income by reducing taxes
• Generate employment
• Adopt policies which enhance production
2/3/2019 13Department of Mechanical Engineering,WEC

14. Pakistan Inflation rate
2/3/2019 Department of Mechanical Engineering,WEC 14

15. Inflation & Deflation
In mainstream economics, deflation may be caused by a
combination of the supply and demand for goods and the
supply and demand for money, specifically the supply of
money going down and the supply of goods going up.
• Change in structure of capital market
• Increased productivity
Causes of deflation
2/3/2019 15Department of Mechanical Engineering,WEC

16. Effects of Deflation
• Reduced business revenues
• Wage cut backs and layoffs
• Change in customer spending
2/3/2019 16Department of Mechanical Engineering,WEC

17. Inflation & Deflation
ANY QUESTIONS ???
2/3/2019 17Department of Mechanical Engineering,WEC

18. References
www.tradeeconomics.com
www.inflactiondata.com
2/3/2019 Department of Mechanical Engineering,WEC 18