Effort by : Dumasia Yazad H.

Sarvajanik College of Engineering &

Technology

Computer (Shift-1) 2nd year

Basic economic problem : Inflation

Meaning and Definitions

Types of Inflation

Cause of inflation

Effects of Inflation

Control Measures

Present Scenario

Contents : A glimpse of what is to come

Definitions : “Inflation is an increase in the

quantity of purchasing power.”– Gregory

Inflation is the stage of too much money chasing too few goods.”-- Coulbourn

Meaning : Inflation is considered a global

phenomenon. It takes place because of rapidly rising prices of goods and services, resulting in the decline of the value of money.

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

In Economics, the Word inflation refers to General rise in Prices Measured against a Standard Level of Purchasing Power.

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.

Types of Inflation

2.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.

3.Sectoral Inflation: This is the 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.

Causes of Inflation

Inflation is caused due to several economic factors:

When the government of a country print money in excess, prices increase to keep up with the increase in currency, leading to inflation.

Increase in production and labor costs, have a direct impact on the price of the final product, resulting in inflation.

When countries borrow money, they have to cope with the interest burden. This interest burden results in inflation.

High taxes on consumer products, can also lead to inflation.

Demands pull inflation, wherein the economy demands more goods and services than what is produced.

Cost push inflation or supply shock inflation, wherein non availability of a commodity would lead to increase in prices

Effect of Inflation

Effect depends on the speed of inflation and the nature of the economy.Rising prices of importsLowers national savingRedistribution of Income &

WealthCollapse of Monetary systemAdverse impact socially and

politicallyDiscourages Investment &

savingsHigher Interest / Income tax

rates

• DEBTORS • ENTREPRENEURS • FARMERS • UPPER INCOME

GROUPS

BENEFITS

• CREDITORS • FIXED INCOME

GROUPS• CONSUMERS • MIDDLE AND

LOWER INCOME GROUPS

LOSES

Control Measures

≈ Monetary policy : Monetary policy can control the growth of demand through an increase in interest rates and a contraction in the real money supply.Something like

a. Credit Controlb. Demonetization of Currencyc. Issue of New Currency

≈ Fixed exchange rates: like a. Reduction in Unnecessary Expenditureb. Increase in Savingsc. Surplus Budgetsd. Public Debt

≈ Gold standard≈ Wage and price controls≈ Cost-of-living allowance

Present scenario

ITEM RICE

PETROL

INFLATION RATE

5%

7% 5% 7%

POOR 5K

3K

5L 3L

MIDDLE 5K

4K

5L

4L

RICH 5K

5K

5L

5L

Country Inflation RateConsumer price (%)

Nepal 8.6Turkey 8.7Uganda 9.4Buma 9.6

Ukraine 9.8India 9.7

SOURCE:www.wikipedia.orgwww.inflation.uswww.inflationdata.comwww.rateofinflation.comwww.tradingeconomics.comwww.hindu.comwww.businessline.comwww.deccanhearld.comwww.economywatch.com