4. Meaning of Inflation
β’ Inflation is the rate at which the general level of
prices for goods and services is rising and,
consequently, the purchasing power of currency is
falling.
In other words we can say that inflation is a
sustained increase in the general price level of goods
and services in an economy over a period of time.
6. Cost push inflation
β’ When the cost of a business rises over the period of time
and it is passed on to the prices charged from customer is
known as cost push inflation.
Increase in:
β’ Raw material
β’ Fuel
β’ Labor
β’ Other resource
7. Demand pull inflation
β’ When the economy noticed a hike in demand from
people in certain period of time may be because of
increase in purchasing power of people and it result
as price high and known as a demand pull inflation.
8. Money supply
β’ When money circulation in the market is increased
by some of the reasons may be because of excess
money printing or increase in govt. debts results as
decrease in value of money and it caused inflation.
9. Formula to calculate inflation
Inflation rate=πππππ ππ πππππ’ππ‘ ππ π πππππ ππππππβπππππ ππ πππππ’ππ‘ ππ ππππ π‘ ππππππ
πππππ ππ πππππ’ππ‘ ππ ππππ π‘ ππππππ
β 100
For example: price of harpreetβs mobile increase from βΉ10,000 to
βΉ10,500 in one year in that case inflation =
πππππ ππ πππππ’ππ‘ ππ π πππππ ππππππ β πππππ ππ πππππ’ππ‘ ππ ππππ π‘ ππππππ
πππππ ππ πππππ’ππ‘ ππ ππππ π‘ ππππππ
β 100
ie:
10,500β10,000
10,000
β 100 = 5%
10. Deflation
β’ Deflation is a decrease in the general price level of goods
and services.
Deflation occurs when the inflation rate falls below 0% (a
negative inflation rate).
* Deflation is distinct from disinflation, a slow-down in the inflation rate, i.e.
when inflation declines to a lower rate but is still positive.
11. Types of deflation
β’ Debt deflation
β’ Money supply side deflation
β’ Credit deflation
β’ Deflation caused by lower costs βgood deflationβ
12. Debt deflation
β’ A situation in which the collateral used to secure
a loan decreases in value.
13. Money supply side deflation
β’ deflation is caused primarily by a reduction in
the velocity of money* and/or the amount of money
supply per person.
* The term "velocity of money" (also "The velocity of circulation of
money") refers to how fast money passes from one holder to the next.
14. Credit deflation
β’ In modern credit-based economies, deflation may be
caused by the central bank initiating higher interest
rates (i.e., to 'control' inflation)
15. Deflation caused by lower costs
βgood deflationβ
β’ If the cost of production decreases which may result
as decrease in the price of goods and it can be
considered as GOOD DEFLATION
