inflation topic for ba economics honors.pdf

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3. INFLATION
•Sustainedandappreciableriseinthegeneral
pricelevelofallthecommoditiesinallthe
sectorsofeconomyiscalledInflation
•Inflationisbasicallyademandsupplymismatch
phenomenonwhosesymptomispricerise
•Onlythesustainedandappreciablepricerisein
allthesectorsoftheeconomyiscalledas
inflation
•Oppositephenomenaofinflationisdeflation.
•Thephenomenonofinflationissameasinflating
theballoon.Hencethename.

4. INFLATION RATE
•Rate of inflation in Tthperiod:
price level ( Tthyear)-(T-1 thyear)
price level(T-1th year)

5. Concept
•Whenthedemandofthegoodbecomemorethanitssupply
itexertsapressureonthepriceofthegoodcausinginflation
•Henceitsademandsupplymismatchphenomenonvisiblein
theformofinflation
•MajorCasesofdemandsupplymismatchleadingtodemand>
supply
Demandincreases,supplydoesnotincreases(demandpull
inflation)
Demanddoesnotincrease,supplydecreases(costpush
inflation)orstagflation(inflationplusstagnation).
Increaseindemandismorethanincreaseinsupply(phillips
curvei.egrowthineconomyleadstoinflationanddecreasein
unemployment)andstructuralbottlenecks(structuralist
inflation).
Decreaseinsupplyismorethanincreaseindemand(mixed
demandpullandcostpush)

6. Types of inflation
•1.Demandpullinflation/excessdemandinflation:demandincreases
beyondthepotentialoutputlevelofeconomy.Demandincreasesand
supplydoesnotincreasefurthercausingtoomuchmoneychasingtoo
fewgoods
•2.costpushinflation:riseincostofproduction(oilprice,farmprice,
importprice,wagepush,profitpush,markuppush)leadingtodecrease
insupplycomparisontodemand.
•3.structuralistinflation/bottleneckinflation:demandsupplymismatch
duetostructuralbottlenecksofeconomy
•4.Mixedinflation:combinationofdemandpullandcostpushinflation
whichisdifficulttodifferentiateintheeconomy.
•5.hyperinflation:Verylargespikeininflationwhichisdifficulttocontrol
eitherduetotoomuchmoneysupplyintheeconomyleadingtotoomuch
moneychasingtoofewgoods(monetaristtheoryofinflation)orinflation
fuelledbyinflationaryexpectationsofthemarket(dynamicinflation).

7. DEMAND PULL INFLATION

8. COST PUSH INFLATION

9. MIXED INFLATION

11. Other types
•Suppressed/repressedinflation:inflationundercontrol
bygovt.Intervention
•Reflation:moderatedegreeofcontrolledinflation
•Disinflation:declineintherateofinflationto
normalcy.
•Sporadicinflation:sectoralinflation
•Markupinflation:inflationduetoriseincostasdueto
addingaminimummarkup/profitmarginbythe
corporations
•Profitinducedinflation:govtdoesnotallowpriceto
decreasetomaintainprofitoffirms
•Demandshiftinflation:shiftofdemandtoother
sectorsleadingtodemandpullinflation
•Openinflation:inflationduetofreeforcesofmarket
i.e.Demandandsupplyandautocorrects,noneedof
govtintervention.

12. Degrees of inflation
•Creeping :mild, less than 3 percent inflation rate
•Walking: 3-6%
•Running:10%
•Galloping: hyperinflation,mostdangerous > 10 %

13. Measures of Inflation
•Consumer price index(cpimethod)
•Wholesale price index(wpimethod)(service not
included).
•Producer price index method( ppimethod)
•Comprehensive consumer price index( ccpimethod)
used in India.
•Gdpdeflator method(most comprehensive ,covers all
commodities and services)

15. •Priceindex:Apriceindexisaweighted
averageofindividualpriceswhereweightof
aneachcommodity’spricereflectsthe
economicimportanceofthatcommodity.
•GDPdeflator:ratioofnominalGDPtoreal
GDP.
•NominalGDP:GDPcalculatedatcurrent
prices
•RealGDP:GDPcalculatedatsomebaseyear
price.(currently2012)

16. Causes of inflation
1.Factorscausingincreaseindemand
•Increaseinmoneysupply
•Increaseindisposableincome
•Increaseincommunityaggregatespending
•Increaseinpopulation
•Speculationandhoardingforprofiteering
•Increaseinexports

17. 2.Factorscausingdecreaseinsupplyandstructuralfactorsof
economy
•Deficiencyofcapitalequipment
•Scarcityofothercomplementaryfactorsofproduction
•Increaseinexports
•Decreaseinimports
•Hoardingbytraders
•Naturalcalamities
•Riseincostofproduction
•Markupandprofiteeringtendency
•Agriculturalbottlenecks
•Govtbudgetconstraint
•Foreignexchangebottleneck
•Taxationpolicies
•Importsubstitution

18. Effects of inflation
•Decreaseinpurchasingpowercapacityof
money/incomei.e.erosionofrealvalueof
money/income
•Henceloansbecomecheaperdebtor
•Andsavingfetcheslessreturnforsaver
•Thephenomenoniscalledfishereffect:
•Realinterestrate=nominalinterestrate-
inflationrate.
•Redistributionofwealthfromwageearnersand
fixedincomegrouptoprofitrecipientshence
causesinequalityandsocialunrestultimately
leadingtostagflationandrecession.

19. •Misallocationofresources
•Hoardingandblackmarketing
•Reductioninsaving
•Decreaseinexportleadingtohinderingofforeign
capitalandriseinforexratehenceadverseBoP.
•Encouragesspeculation
•Realburdenofpublicdebtdecreases
•Govtrevenuerisesbutproductioncostalsorises
•Initiallyunleashesanimalspiritandboomin
economyduetorisingexpectationoffuture
prospectiveyieldsforentrepreneurbutatthe
endSocialunrestandlackofmorale

20. Measures to control inflation
•Reducingfiscaldeficit:decreasingpublic
expenditure(,subsidy,salary)andraisingpublic
revenue(tax)
•Monetarytightening:Reducingmoneysupplyin
economybyincreasingreporate,reverserepo
rate,CRR,SLR,MSF,marginrequirementtomakeloan
costlyandsavingattractive.
•Increasingrealsupplyofgoodsineconomyby
strengtheninginfrastructure,managingimportsand
rationing
•Freezingriseinsalaryandwagestocooloffdemand
•Legislativemeasurestostrengthenagriculture
marketingandsupplychainanddiscourageblack
marketingandhoardingaswellaspricecontrolunder
essentialcommoditiesact