Inflation & Deflation
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The document discusses inflation and deflation. It defines inflation as a general rise in prices over time which reduces purchasing power. The document outlines different types of inflation including wage, cost-push, pricing power, and sectoral inflation. It also discusses causes of inflation from both demand and supply sides. Deflation is defined as a general decline in prices over time. The document notes deflation can be caused by a reduction in the money supply, increased demand for money, increased supply of goods, or reduced demand for goods. Measures to control inflation include increasing production and controlling money supply, while deflation generally occurs when the supply of goods rises faster than the supply of money.
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Inflation & Deflation
- 1. Inflation & Deflation Z I L U R R E H M A N Q U R E S H I U W - 1 4 - M E - B S C - 0 4 1
- 2. Layout • Inflation – Introduction – Inflation rate – Types – Effects on economy – Measures to control – Economic Impact – Causes • Deflation – Introduction – Causes Monday, May 29, 2017 Mechanical Engineering Department, WEC 2
- 3. Inflation Monday, May 29, 2017 Mechanical Engineering Department, WEC 3
- 4. Introduction • In economics, Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. • Inflation can also be described as a decline in the real value of money— a loss of purchasing power. [1] Monday, May 29, 2017 Mechanical Engineering Department, WEC 4
- 5. Inflation Rate • A chief measure of price inflation is the inflation rate, which is the percentage change in a price index over time. • When the general price level rises, each unit of currency buys fewer goods and services. [1] Monday, May 29, 2017 Mechanical Engineering Department, WEC 5
- 6. Pakistan Inflation Rate Inflation Rate in Pakistan averaged 7.84 percent from 1957 until 2017, reaching an all time high of 37.81 percent in December of 1973 and a record low of -10.32 percent in February of 1959.[2] Monday, May 29, 2017 Mechanical Engineering Department, WEC 6
- 7. Types 1. 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, leading to a situation called as demand-pull inflation. This type of inflation affects the market economy adversely during the wartime. Monday, May 29, 2017 Mechanical Engineering Department, WEC 7
- 8. Types 2. Cost-push Inflation As the name suggests, 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. This type of inflation may or may not occur in conjunction with demand-pull inflation. Monday, May 29, 2017 Mechanical Engineering Department, WEC 8
- 9. Types 3. 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. A point noteworthy is pricing power inflation does not occur at the time of financial crises and economic depression, or when there is a downturn in the economy. This type of inflation is also called as oligopolistic inflation because oligopolies have the power of pricing their goods and services. Monday, May 29, 2017 Mechanical Engineering Department, WEC 9
- 10. Types 4. Sectoral Inflation This is the fourth major type of inflation. The sectoral 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. Thus, the ever-increasing price of fuel has become an important issue related to the economy all over the world. Take the example of aviation industry. When the price of oil increases, the ticket fares would also go up. This would lead to a widespread inflation throughout the economy, even though it had originated in one basic sector. If this situation occurs when there is a recession in the economy, there would be layoffs and it would adversely affect the work force and the economy in turn. Monday, May 29, 2017 Mechanical Engineering Department, WEC 10
- 11. Effects on Economy • Inflation can cause adverse effects on the economy. • For example, uncertainty about future inflation may discourage investment and saving. • Inflation may widen an income gap between those with fixed incomes and those with variable incomes. • High inflation may lead to shortages of goods as consumers begin hoarding them out of concern their prices will increase in the future. Monday, May 29, 2017 Mechanical Engineering Department, WEC 11
- 12. Measures to Control Inflation 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. Monday, May 29, 2017 Mechanical Engineering Department, WEC 12 • Supply Increased Production Control of illegal Activities Security Energy Sources • Demand Control of money supply Population Control Fiscal Policy No Deficit Financing
- 13. Economic Impact • Inflation affects the distribution of income & wealth because of differences in the assets & liabilities. • When prices rise for energy, food, commodities, and other goods and services, the entire economy is affected. • Inflation is a decrease in the purchasing power of currency due to a rise in prices across the economy. Monday, May 29, 2017 Mechanical Engineering Department, WEC 13
- 14. Causes • Inflations occur for many reasons. • Some inflations come from demand side (Demand-pull). • Other, from supply side (Cost-push). Monday, May 29, 2017 Mechanical Engineering Department, WEC 14
- 15. Deflation Monday, May 29, 2017 Mechanical Engineering Department, WEC 15
- 16. Introduction • Deflation occurs "when prices are declining over time”. • This is the opposite of inflation; when the inflation rate (by some measure) is negative, the economy is in a deflationary period." • Deflation is "a decline in general price levels, often caused by a reduction in the supply of money or credit. • Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. [3] Monday, May 29, 2017 Mechanical Engineering Department, WEC 16
- 17. Causes Deflation generally occurs when the supply of goods rises faster than the supply of money. Deflation can occur because of a combination of four factors: • The supply of money goes down. • Demand for money goes up. • The supply of other goods goes up. • Demand for other goods goes down. Monday, May 29, 2017 Mechanical Engineering Department, WEC 17
- 18. References 1. https://www.slideshare.net/AminHanif/inflationdeflation-stagfltion 2. http://www.tradingeconomics.com/pakistan/inflation-cpi 3. http://www.investopedia.com/terms/d/deflation.asp Monday, May 29, 2017 Mechanical Engineering Department, WEC 18
- 19. Thank you Monday, May 29, 2017 Mechanical Engineering Department, WEC 19
Editor's Notes
- Consumer prices in Pakistan increased 4.78 percent year-on-year in April of 2017, easing from a 4.94 percent gain in the previous month. Prices rose at a slower pace for food (3.9 percent vs. 4.6 percent in March) and transport (4.1 percent vs. 4.4 percent). On a monthly basis, prices rose by 1.4 percent, due to higher prices of food items such as peas, carrots, lemons and oranges. Inflation Rate in Pakistan averaged 7.84 percent from 1957 until 2017, reaching an all time high of 37.81 percent in December of 1973 and a record low of -10.32 percent in February of 1959
- 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. 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. Main Energy Sources The supply of agricultural and industrial products is highly dependent on energy availability. If the energy source is expensive, the cost of production of goods and services will be expensive too. Increased production costs raise prices and cause inflation. Therefore all necessary measures be taken to provide major sources of energy in industrial and agricultural sectors of the economy Control of Money Supply The money supply has a great influence on the rising inflation that is, inflation with increasing the money supply and vice versa. Therefore, to control inflation, measures must be taken to control the money supply. The money supply can be controlled with the help of monetary policy in which the central bank uses various methods, such as bank rate policy, open market operations, changes in reserve requirements, credit rationing , direct action etc. All these methods are useful to control the rate of inflation in a country. Population Control In most developing countries, the population is increasing very quickly that the production of goods and services does not increase at the same pace. Because the imbalance between supply and demand of goods and services are produced and cause inflation. Therefore, to control inflation, appropriate measures should be taken to control the population. Fiscal Policy Fiscal policy refers to government policy of public spending and taxes. The main fiscal policy objective is to maintain only the slight change in the general price level. During inflation, the government tries to reduce its expenditure on unproductive activities and the direct tax rate increases so that the purchasing power of the population is reduced. Due to the reduction in the purchase of the population, demand for goods and services will be reduced and controlled inflation. There should be no Deficit Financing Deficit financing shows that public spending beyond their income. The purpose of deficit financing is to meet the additional costs that the budget deficit. Because the money supply increases in the country and causes inflation. Therefore the deficit financing should be discouraged and all development costs must be met through taxes and debt.
- Demand–pull inflation occurs when aggregate demand (AD) rises more rapidly than the economy’s productive potential, pulling prices up to equilibrate aggregate supply & demand. One important factor behind demand-pull inflation is rapid money-supply growth. Increases in the money supply increases AD, which in turn increases price level. Inflation resulting from rising costs during periods of high unemployment and slack resources utilization is called Cost-push inflation.