Causes effect controls and examples. completely

1. Causes, Effects and Controls

2. Meaning

3. Definitions
Generally It means Rising Prices
A well known Author Coulborn Defined
Inflation Beautifully as
To Much Money Chasing Too Few Goods

4. 3 Main Features
1. There is Continuous Rise In Price level.
2. It started when it becomes impossible to satisfy the whole demand
for goods at existing Prices.
3. Inflation feed on it self, after initial rise in price, the buyers anticipate
further rise in prices and buy more quantity in hurry and hence,
inflation is Propagated

5. There are three major types of inflation
categorized by the causes:
1. Demand-pull inflation
2. Cost-push inflation
3. Built-in inflation

6. inflation caused by increases in aggregate
demand due to increased private and
government spending, etc.
Demand inflation is constructive to a faster rate
of economic growth since the excess demand
and favorable market conditions will stimulate
investment and expansion.
Greater part of inflation in Pakistan is
Demand Pull Type.

7. Originate from Rise in production cost.
When the firm pass on their increased cost
to the customers in the form of higher
prices, Inflation takes place.
Important source of rise in cost includes:
1. Workers demand for higher wages
2. Increasing Profits
3. Increase in tax
4. Higher prices of Imports

8. Included by Adaptive Expectations
Workers tries to keep their wages up,
Pass higher cost to the consumers in the
form of higher Prices

9. The “revenue” raised from printing money
is called seigniorage (pronounced SEEN-
your-ige)
To spend more without raising taxes or
selling bonds, the govt can print money.
Higher the money supply, higher the
inflation.

11. Increase in Cost of living:
The working class are hard hit. Wages do not rise at the
rate pricing are rising. Those sections of society who have
fixed incomes, find difficulty in buying their daily needs.
Income inequalities increases:
When prices rises, businessmen and big landlords makes huge
money, the distribution of income among various classes of
society become more unequal

12. Decrease in Saving:
During rising prices the saving of common
people are adversely affected. They use their
saving to buy consumable goods.
Less exports and more imports:
Local goods become costly for the buyers, so they
start buying from other countries. So balance of
payments is adversely effected.

13. Healthy effects of inflation on the economy are felt only
when the inflation is of mild nature ( say 2% per annum)

14. Increase in production:
When prices are rising slowly, the profits of the
businessmen and industrialists are increasing slowly. They
try to produce more goods.
Increase in Employment:
Because of high prices of production, firms try to increase their
Production and employ more labors.

15. Increase in investment:
With the improvement of profits, investment activity is
boosted. The investors readily put their capital in
Businesses
Increase in Economic Development:
Low inflation is helpful for Economic Development. The
Government Increases resources by increasing money supply.
Innovations and Research are encouraged
When industry is expanded, business activities accelerates
The producers allocate funds to research and innovations

16. Modern economists believe that inflation is inversely related to
unemployment.
As inflation decreases, unemployment is expected to rise and
vice-versa.

17. Inflation is measured by calculating the percentage rate of
change of a price index, which is called the inflation rate.
This rate is calculated by mainly two different price
indices:
1. Wholesale price index
2. Consumer price index

18. WPI is the index that is used to measure the change in
the average price level of goods traded in wholesale
market.
India uses the WPI to calculate and then decide the
inflation rate in the economy.
WPI does not properly measure the exact price rise an
end-consumer will experience because, as the name
suggests, it is at the wholesale level.

19. CPI is a measure of a weighted average of prices of a
specified set of goods and services purchased by
consumers.
It is a price index that tracks the prices of a specified
basket of consumer goods and services, providing a
measure of inflation.
Most developed countries uses this index

20. DISINFLATION – the reduction of rate of
inflation .
HYPER INFLATION-an out of control
inflationary spiral .
STAGFLATION – high inflation combined with
economic stagnation and unemployment.

21. DEFLATON- A situation in Economy in which, the
enough of Aggregate demand for goods is not coming
and as a result, Prices Falls.
Reflation- A fiscal or monetary policy, designed to
expand a country's output and curb the effects of
deflation.
Reflation policies can include reducing taxes, changing
the money supply and lowering interest rates.

23. High interest rates and slow growth of money
supply are traditional ways through which, central
bank controls Inflation.

24. It Majorly pertains to taxation and interest
policies .
Increase taxes so less disposable income
Reduce government spending to reduce demand.
Changing the import and export duties.
Encourage Savings

25. By strengthening local currency against dollar will boost
imports while discouraging exporters.
Other Measures
1. Increase in production
2. Wages Control
3. Revaluation

27. Zimbabwe: 355,000%!
The inflation in Zimbabwe for the month of March 2008
rose to 355,000%.
It was 165,000% in February. Almost 80% of the nation is unemployed.
A sausage sandwich sells for Zimbabwean $50 million.
A 15-kg bag of potatoes cost Zimbabwean $260 million.
But then, Zimbabwean $50 million is roughly equal to US$ 1

28. From various monetary , fiscal and other
measures it becomes clear that to control
inflation government should adopt all
measures simultaneously.
Inflation is like a hydra-headed monster
which should be fought by using all the
weapons at the command of the
government.

29. Shehroz Saleem Qureshi