Shares the Knowledge !


Inflation


Inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

Inflation - Raising of prices 

Deflation - Decreasing of prices

Disinflation - Negative recording of Inflation

Reflation - stimulating the economy by increasing the money supply or by reducing taxes. It is the opposite of disinflation.

Stagflation - Raising of prices with unemployment

Inflationary gap - short term increasing of prices

Deflationary gap - short term decreasing of prices

Hyper Inflation - Higher Inflation

Skewflation - Both inflation and economic depression in the economy


Causes for the Inflation

  • Increasing expenditure of government
  • Increasing expenditure of people and organization
  • Increasing of exports
  • Increasing of taxes
  • Increasing of population
  • Internal debts payments
  • Black Marketing
  • Wage pull inflation
  • Income pull inflation
  • Decrease of supply of goods

Causes of Economic Inflation


The following factors can lead to inflation:
  • Printing too much money. This is called a loose or expansionary monetary policy. If there is a lot of money going around, then supply is plentiful compared to the products you can buy with that money. The law of supply and demand therefore dictates that prices will rise.
  • Increases in production costs.
  • Tax rises.
  • Declines in exchange rates.
  • Decreases in the availability of limited resources such as food or oil.
  • War or other events causing instability.
Economists generally believe that money supply is the key cause of inflation; in 2008, however, skyrocketing prices of oil, food and steel caused runaway levels of inflation in the world economy that collapsed only because of the global Financial Crisis.


Economic Effects of Inflation


One of the economic effects of inflation is the change in the marginal cost of producing money. 

This involves the appropriate 'price' of money which, in this case, is the nominal rate of interest. 

This 'price' indicates the return which has to bepre-determined to hold back the printing presses, in place of some other assets which offer the market interest rate.

In addition, if a country has a higher rate of inflation than other countries, its balance of trade is likely to move in an unfavorable direction. This is because there is a decline in its price competitiveness in the global market.

A high rate of inflation can cause the following economic impediments:
  • The value of investments are destroyed over time.
  • It is economically disastrous for lenders.
  • Arbitrary governmental control of the economy to control inflation can restrain economic development of the country.
  • Non-uniform inflation can lead to heavy competition in the global market and threaten the existence of small economies.
  • High levels of inflation tend to lead to economic stagnation.

Measures to Control Inflation


The central banks, monetary authorities or finance ministries of most nations have the authority to take economic measures to control rising inflation by regulating the following factors:
  • Reducing the central bank interest rates and increasing bank interest rates.
  • Regulating fixed exchange rates of the domestic currency.
  • Controlling prices and wages.
  • Providing cost of living allowance to citizens in order to create demand in the market.
Different schools of thought emphasize different factors as the root cause of inflation. However, there is a consensus on the view that economic inflation is caused either by an increase in the money supply or a decrease in the quantity of goods being supplied, and that the effects of either high inflation or deflation are extremely damaging to the economy.


Types of Inflation


Demand pull Inflation:
If demand increases, automatically price also increase. Then Demand pull inflation occurs.

Cost pull Inflation:
If cost of productive factors increases then Cost pull Inflation occurs. It is also called "supply shock inflation"

Built-in inflation
It is induced by adaptive expectations, and is often linked to the "price/wage spiral". 
 
It involves workers trying to keep their wages up with prices (above the rate of inflation), and firms passing these higher labor costs on to their customers as higher prices, leading to a 'vicious circle'.


Share:

0 comments:

Post a Comment

Popular Posts