3. Definition
Inflation is a situation in which there is a persistent and
appreciable increase in the general price level in the
country.
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4. Introduction
Persistent inflation is perhaps as serious macroeconomic
problem confronting the world economy.
We discuss:
Meaning , causes & effects
Types of inflation
Measures of inflation
Relationship between inflation and unemployment
Control measures
Impact on Indian Economy
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5. Causes of Inflation5
1. Demand- Pull Inflation Theory
2. Cost- Pull Inflation Theory
3. Structural Inflation Theory
7. Causes of demand pull Inflation
Increase in Public Expenditure
Increase in Investment
Increase in Disposable income & MPC (marginal
propensity to consume)
Increasing Exports
Deficit Financing
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8. Cost Push Inflation Theory
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9. Causes of Cost Push Inflation
Cost push inflation may be caused by
Increase in wages
Increase in profits
Shortage in supply ( due to natural calamities or artificial
scarcity)
Shortage of Factors of Production
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10. Measuring through PIN
Rate of Inflation= PINt –PIN(t-1)/PIN(t -1)x100
Where PINt and PIN t-1 are the Price index numbers in the
current and the preceding years, respectively.
The WPI (1981-82=100) for all commodities increased from
182.7 in 1990-91 to 207.8 in 1991-92. The rate of inflation
between 1990-91 and 1991-92 can be obtained by
Rate of Inflation = 207.8-182.7/182.7 x100=13.73%
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Price Index:
• Laspeyres
• Paasche
• Fischer
11. WPI & CPI
Wholesale Price Index (WPI) and Consumer Price Index (CPI)
WPI is used to measure the general rate of Inflation and CPI
is used to measure the rise in cost of living.
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12. WPI (676 items)(base year – 2004)
[Economic Adviser, Dept of Industrial Policy and Promotion]
Primary articles (20%)
1. Food
2. Non-Food
3. Mineral
Fuel (15%)
1. Mineral Oil
2. Electricity Coal
3. Coal
Manufacturing (65%)
1. Chemicals
2. Metal
3. Food – processed
4. Textiles
5. Machine tools
6. Wood paper
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Core Inflation = Headline WPI – (food -fuel)
13. CPI (base year – 2012)
[Central Statistical Organisation, Ministry of Statistics and Program
Implementation]
1. Food and Beverage
2. Misc – health, Education and recreation
3. Housing – N/A in rural
4. Fuel and Light
5. Clothing and Footwear
6. Tobacco and Intoxicants
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14. CPI reforms (Feb 2015)
Change in base year
Assignment of Weights
CPI –rural and urban and revision in number of items under
each
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15. Inflation good or bad????15
https://www.youtube.com/watch?v=-
pwincsv4E0
16. What is considerable rate of
Inflation?
Depends on the desirability of inflation
A moderate rate of inflation is considered to be desirable
and acceptable for at least three reasons:
It keeps economic outlook optimistic, promotes economic
activity and prevents economic stagnation
It is helpful in the mobilization of resources by increasing the
savings and investment
Some rate of inflation is inevitable in a dynamic and
progressive economy.
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17. Effects of Inflation
Inflation and distribution of Income : The effects of inflation
on distribution of income depends on how it effects the price
received and price paid
Price received is the income earned
Price paid is the expenditure
Inflation creates a divergence between total price received and
total prices paid by different sections of the society
When wages increase proportionately to the rise in profit
incomes, the income distribution remains generally unaffected.
When profits rise faster than wage incomes, income gets
redistributed in favour of the profit earners.
This creates gap between rich and poor.
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18. Fixed Income Class
Fixed income people are the badly effected by inflation.
Their income do not increase and the purchasing power
continues to decline.
Suppose that a person earns a fixed annual income of Rs.
100,000 and that the rate inflation is 10 %. It means that if
he spends his total income, he can buy goods and services
worth only Rs. 90,000 at the price in the current year.
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19. Borrowers and Lenders
Borrowers gain and lenders lose during inflation
Suppose a person borrows Rs. 5 million at 12 percent
simple rate of interest for a period of five years to buy a
house. Suppose that escalation in property prices is such
that property prices double every 5 years . After 5 years, the
borrowers would pay a total sum of Rs 8 million whereas
the price of house rises to Rs 10 million. The borrower gains
by Rs. 2 million. The lender loses by the same amount in
sense that had he bought the house himself, his money
would have risen to Rs 10 million
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20. Effects of Inflation on
Producers
Whether producers gain or lose during inflation depends on
the rate of increase in prices they receive and the prices
they pay.
In general, product prices rise faster than the cost of
production.
Profit margins thus increase and producers gain.
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21. Effects of Inflation on the
Government
Net gainer during the time of inflation
Inflation increases tax revenue of the government
Revenue from direct tax and corporate income tax
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22. Effects of Inflation on the
economic Growth
Inflation has positive effect on the economic growth
Rate of growth depends on the rate of savings and
investment.
Whether inflation affects economic growth positively or
negatively depends on whether it affects savings and
investment positively or negatively.
Most of economists agree that a moderate rate of inflation
is conducive to economic growth and that, in the short run,
there is a positive relationship between moderate rate of
Inflation and economic growth.
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23. Effects of Inflation on
Employment
If inflation affects growth variables like savings, investment
and profits favorably then it affects employment favorably
too.
Greater the rate of investment, greater is the rate of
employment.
4/3/2018
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24. Decline in inflation
Decline in world prices of crude oil, edible oil and coal
Abundant production (FAO)
FCI open sale of grains
Potato and Onion under Essential Commodities Act
Minimum Export prices for potato and Onion
RBI monetary policy
Wage growth moderate
Price Stabilisation Fund
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25. Measures to Control Inflation
Monetary Measures:Traditional Monetary Measures
Bank Rate Policy
CRR
Open Market Operations
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26. Non- Tradition Measures
• Statutory Liquidity Ratio: Statutory Liquidity Requirement:
the proportion of total deposits which commercial banks
are statutorily required to maintain in the form of liquid
assets i.e., cash reserve, gold and government bonds in
addition to CRR. To prevent the commercial banks from
liquidating their assets when CRR is raised.
• Moral Suasion
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27. • Credit Authorization Scheme: Introduced in 1965, is used by
the RBI to allow banks to give large public and private
sector borrowers
• Under this scheme, the commercial banks are required to
seek prior authorization of the RBI and to report later to RBI
with regard to large credit facilities given to large public
and private sector units
• This includes export credit, credit for fertilizer distribution
and defense related credit
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28. Fiscal Measures
Taxation Policy
Public Expenditure Policy
Deficit Financing Public Debt
Fiscal or Monetary Policy?
If inflation originates in the monetary sector due to excess
money supply, then monetary policy should be more
effective and if it arises due to increase in public
expenditure then fiscal policy is more effective
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30. India Inflation Rate 2012-2014
The inflation rate in India was recorded at 4.38 percent in
November of 2014.
Inflation Rate in India averaged 9.09 percent from 2012 until
2014, reaching an all time high of 11.16 percent in
November of 2013 and a record low of 4.38 percent in
November of 2014.
Inflation Rate in India is reported by the Ministry of
Statistics and Programme Implementation (MOSPI), India.
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