1. EFFECT OF INFLATION ON THE GROWTH OF PAKISTAN’SEFFECT OF INFLATION ON THE GROWTH OF PAKISTAN’S
ECONOMYECONOMY
A Project Work Submitted To (Faculty of Management Science) In PartA Project Work Submitted To (Faculty of Management Science) In Part
Fulfilment of The Requirement For The MBA DegreeFulfilment of The Requirement For The MBA Degree
Sadaf Shahid (BM-25575)Sadaf Shahid (BM-25575)
Moazam Hussain Abro (BM-25498)Moazam Hussain Abro (BM-25498)
Nabeel Ahmed Siddiqui (BM-25508)Nabeel Ahmed Siddiqui (BM-25508)
SPRING, 2013SPRING, 2013
Institute of Business & Technology (IBT), KarachiInstitute of Business & Technology (IBT), Karachi
2. IntroductionIntroduction
Inflation:Inflation:
The rate at which the general level of prices forThe rate at which the general level of prices for
goods and services is rising, and, subsequently,goods and services is rising, and, subsequently,
purchasing power is falling.purchasing power is falling.
3. Statement of Research ProblemStatement of Research Problem
It’s a general and progressive increase in prices.”It’s a general and progressive increase in prices.”
It occurs when the value of goods rises faster thanIt occurs when the value of goods rises faster than
the value of money.the value of money.
The usual approximate measure of this is the CPI,The usual approximate measure of this is the CPI,
which weigh the prices of different goods according towhich weigh the prices of different goods according to
importance in a typical budget and then shows howimportance in a typical budget and then shows how
much the prices of these goods havemuch the prices of these goods have
increased(Webster’s)increased(Webster’s)
4. Research Aim and ObjectiveResearch Aim and Objective
To identify the trends of food inflation and growth inTo identify the trends of food inflation and growth in
Pakistan.Pakistan.
To investigate the consumer price index (CPI) trends.To investigate the consumer price index (CPI) trends.
To assess the impact of food inflation on consumersTo assess the impact of food inflation on consumers
Expansion (recovery) is when output is increasing,Expansion (recovery) is when output is increasing,
unemployment begins to fall and later inflation begins tounemployment begins to fall and later inflation begins to
rise.rise.
5. Types of InflationTypes of Inflation
InflationInflation
Cost PushCost Push
Demand
Pull
Demand
Pull
6. Cost Push InflationCost Push Inflation
Cost-push inflation occurs when businessesCost-push inflation occurs when businesses
respond to rising production costs, by raisingrespond to rising production costs, by raising
prices in order to maintain their profitprices in order to maintain their profit
margins.margins.
8. Demand Pull InflationDemand Pull Inflation
Inflation which arises due to various factors like risingInflation which arises due to various factors like rising
income, exploding population, etc., leads to aggregateincome, exploding population, etc., leads to aggregate
demand and exceeds aggregate supply, and tends todemand and exceeds aggregate supply, and tends to
raise prices of goods and services. This is known asraise prices of goods and services. This is known as
Demand-Pull or Excess Demand InflationsDemand-Pull or Excess Demand Inflations
10. Hyper InflationHyper Inflation
Hyperinflation refers to a situation where the prices rise at anHyperinflation refers to a situation where the prices rise at an
alarming high rate. The prices rise so fast that it becomesalarming high rate. The prices rise so fast that it becomes
very difficult to measure its magnitudevery difficult to measure its magnitude
Tax InflationTax Inflation::
Due to rise in indirect taxes, sellers charge high priceDue to rise in indirect taxes, sellers charge high price
to the consumersto the consumers
Wage InflationWage Inflation::
If the rise in wages in not accompanied by a rise inIf the rise in wages in not accompanied by a rise in
output, prices rise.output, prices rise.
11. Factors of InflationFactors of Inflation
Natural CalamitiesNatural Calamities
Indirect TaxesIndirect Taxes
Increase in ExportsIncrease in Exports
Shortage of Factors of ProductionShortage of Factors of Production
Rising Import PricesRising Import Prices
12. Calculation of CPICalculation of CPI
We first need to determine the base year.We first need to determine the base year.
Suppose we choose the base-year to be 2010Suppose we choose the base-year to be 2010
The quantities purchased in 2011 and 2012 areThe quantities purchased in 2011 and 2012 are
irrelevant, because we are assuming theirrelevant, because we are assuming the
household buys the same market basket ofhousehold buys the same market basket of
goods each month.goods each month.
13. Calculate Expenditures on Base-YearCalculate Expenditures on Base-Year
Quantities (2010)Quantities (2010)
For the CPI we use “Current Prices” and “ConstantFor the CPI we use “Current Prices” and “Constant
Quantities”.Quantities”.
P2010 x Q2010=P2010 x Q2010=
(12 x $8.00) Movie Tickets(12 x $8.00) Movie Tickets
(6 x $4.00) Popcorn(6 x $4.00) Popcorn
(10 x $2.50) Cola(10 x $2.50) Cola
= $145.00= $145.00
14. To calculate the CPI we use the followingTo calculate the CPI we use the following
formulaformula
100
____
____
×=
YearBasetheinesExpenditur
YearCurrenttheinesExpenditur
CPI
100
_____
_____
×=
YearBaseinBasketofCost
YearCurrentinBasketofCost
CPI
15. Calculate the CPI for 2011 and 2012Calculate the CPI for 2011 and 2012
CPI 2011 = (Cost of Basket 2011/Cost of Basket 2010) x 100CPI 2011 = (Cost of Basket 2011/Cost of Basket 2010) x 100
CPI 2011 = (180/145) x 100 = 124.14CPI 2011 = (180/145) x 100 = 124.14
CPI 2012 = (Cost of Basket 2012/Cost of Basket 2010) x 100CPI 2012 = (Cost of Basket 2012/Cost of Basket 2010) x 100
CPI 2012 = (212/145) x 100 = 146.21CPI 2012 = (212/145) x 100 = 146.21
16. Calculate the inflation rate from 2010 toCalculate the inflation rate from 2010 to
2011 and from 2011 to 20122011 and from 2011 to 2012
Inflation10-11 = [(CPI 2011 – CPI 2010)/CPI 2010] x 100Inflation10-11 = [(CPI 2011 – CPI 2010)/CPI 2010] x 100
Inflation10-11 = [(124.14 – 100)/100] x 100Inflation10-11 = [(124.14 – 100)/100] x 100
Inflation10-11 = 24.14%Inflation10-11 = 24.14%
Inflation11-12 = [(CPI 2012 – CPI 2011)/CPI 2011] x 100Inflation11-12 = [(CPI 2012 – CPI 2011)/CPI 2011] x 100
Inflation11-12 = [(146.21 – 124.14)/124.14] x 100Inflation11-12 = [(146.21 – 124.14)/124.14] x 100
Inflation11-12 = 17.78%Inflation11-12 = 17.78%
17. Reasons of InflationReasons of Inflation
Expansionary Fiscal PolicyExpansionary Fiscal Policy
Expansionary Monetary PolicyExpansionary Monetary Policy
Increased Domestic DemandIncreased Domestic Demand
Hoarding (when traders hoard goods withHoarding (when traders hoard goods with
intention to sell later at high prices)intention to sell later at high prices)
18. Ways to control InflationWays to control Inflation
Adopt tight monetary policy undertaken by Central BankAdopt tight monetary policy undertaken by Central Bank
(SBP)(SBP)
Contractionary fiscal policy that deals with reducingContractionary fiscal policy that deals with reducing
government expenditures and increasing taxgovernment expenditures and increasing tax
Government fixed the floor and ceiling prices , so thatGovernment fixed the floor and ceiling prices , so that
prices will not increase rapidlyprices will not increase rapidly
Producers will not be able to increase prices accordingProducers will not be able to increase prices according
to their own wishesto their own wishes
19. ConclusionConclusion
In conclusion, we conclude that:In conclusion, we conclude that:
Govt. borrowings from SBP to deal with a crisisGovt. borrowings from SBP to deal with a crisis
Rise in production costRise in production cost
Federal taxes on consumer productsFederal taxes on consumer products
Rise in price of oilRise in price of oil
Imports are more than exportsImports are more than exports
20. RecommendationsRecommendations
The following recommendations may be put forward in policyThe following recommendations may be put forward in policy
making.making.
Vigilance of State Bank of Pakistan while formulatingVigilance of State Bank of Pakistan while formulating
Monetary Policy.Monetary Policy.
Government should curb borrowing from State Bank whichGovernment should curb borrowing from State Bank which
inflationary in nature.inflationary in nature.
Factors like hoarding should be controlled.Factors like hoarding should be controlled.
Domestic production should be encouragedDomestic production should be encouraged
