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WHAT IS INFLATION?
INTRODUCTION:
The board's approval sanctions a decision earlier this month by the IMF to
help Pakistan stave off a balance of payments crisis and work toward a
broader economic revival.
Pakistan's currency, the rupee, has slumped against the dollar and the
country's stock market has fallen sharply after foreign investors took flight
amid a global credit crisis in which capital has flooded from emerging
markets to safe havens, like the United States.
"The central bank will pursue a flexible exchange rate policy, with
intervention in the foreign exchange market geared toward achieving the
program's reserve targets and smoothing excessive exchange rate
volatility," the IMF said.
Specifically, the fiscal deficit will be trimmed to 4.2 percent of GDP in
2008/2009 and 3.3 percent in 2009/2010, compared with 7.4 percent in
the fiscal year to June 2008.
Pakistan and the World Bank will create "a comprehensive and effectively
targeted social safety net" with existing social programs boosted in the
meantime, the IMF said.
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"To this end, spending on the social safety net will be increased by 0.6
percentage point of GDP, to 0.9 percent of GDP in 2008/2009," the Fund
said.
In addition, the IMF plan envisages tighter monetary policy to control
inflation. The State Bank of Pakistan recently raised interest rates 200
basis points to 15 percent and "stands ready to further tighten monetary
conditions as needed.
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Sources:
Pasha Hafiz (1995), what explain the current high rate of inflation in
Pakistan. The News, April 28, P.20.
A comparison of Pakistan’s inflation rate with the rest of the world. Shows
that although prices in Pakistan are on average staler when compared
with the average rate of inflation for developing countries but they turn
out to be far from satisfactory when compared with the average of
developed countries.
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Australia 5.1
Canada 1.6
Sweden 2.0
Malaysia 3.2
Switzerland 0.8
Singapore 0.9
Argentina 0.7
Taiwan 3.7
Denmark 1.7
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The Wholesale Price Index (WPI) during first eight months of 2008-
09 has increased by 24.7 percent, as against 11.7 percent in the
comparable period of last year. It has declined from as high as 35.7
percent in August 2008 to 15.0 percent in February 2009, reflecting
a marked downward correction in the last six months. This downturn
is contributed by both food and non-food components. The non-food
component fell more steeply from 37.4 percent in August 2008 to
9.8 percent in February 2009. Food component has decelerated
from 33.5 percent in August 2008 to 22.0 percent in February 2009.
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Inflation Situation in
Pakistan (%)
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2000 6
2001 5.2
2002 4
2003 3.9
2004 2.9
2005 4.8
2006 9.1
2007 7.9
2008 6.9
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CAUSES OF INFLATION
ON DEMAND SIDE:
Demand-Pull Inflation
Demand-pull inflation refers to the idea that the economy actual
demands more goods and services than available. This shortage of
supply enables sellers to raise prices until equilibrium is put in place
between supply and demand.
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Disposable Income:
The amount of money that households have available for spending
and saving after income taxes have been accounted for. Disposable
personal income is often monitored as one of the many key
economic indicators used to gauge the overall state of the economy.
Increase in disposable income also raises the level of inflation.
Community’s Aggregate:
Increase in community’s aggregate spending more amount of
money on consumption and investment goods.
Deficit Financing:
Means printing of currency notes by the Government, in order to
cover the defect in the budged. It will create inflationary pressure.
Foreign Remittances:
The increased remittances by the people working outside the
country, purchasing power of their families are increased day by
day. So the demand is increased.
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Increase In Wages:
Inflation can artificially be created through a circular increase in
wage earners demands and then the subsequent increase in
producer costs which will drive up the prices of their goods and
services. This will then translate back into higher prices for the wage
earners or consumers. As demands go higher from each side,
inflation will continue to rise.
Increase In Population:
The rate of population growth in Pakistan is more than 3%. Due to
this, aggregate demand is increasing day by day.
Consumption Habits:
The people in Pakistan are extravagant. The people want to achieve
high standard of living. So there is a demonstration effect in
Pakistan. As a result, the rise in prices of goods and services
continues.
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ON SUPPLY SIDE:
Cost-Push Theory:
Increase In Exports:
Increase in exports to earn foreign exchange which reduce the
domestic supply of goods.
Decrease In Imports:
Decrease in imports of a country because of trade restrictions by
government.
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commodities.
Natural Calamities:
Due to floods, excessive rains and earthquakes the level of
production is decreased increase in demand and hence, the prices
of goods is increase.
Indirect Taxes:
Indirect taxes are also blamed as the main cause of inflation. The
indirect taxes, such as sales tax and excise duties raise the prices of
consumer goods. This creates inflationary pressure. On the other
hand, direct taxes reduce the take-home income and have anti-
inflationary effect. A substantial increase in support price of wheat is
estimated to have an inflationary effect on consumer prices,
particularly food prices. This effect is due to the fact that wheat and
wheat-related products account for 5.1 per cent of the CPI basket.
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CONSEQUENCES OF INFLATION
Inflation affects both the economy of a country and its social conditions,
as well as the political and moral lives of its inhabitants. However, the
economic effects of Inflation are stated and described below:
Treasury Of A Nation:
Change In Income:
When inflation rate is down, banks would cut down interest rates to
encourage economic activities. On the other hand, during high
inflation, banks would increase the interest rates to discourage lending
and spending. Hiking up the interest rates boosts the value of the
currency. This is true in US where rising of interest rates by the Federal
bank would encourage investors to capitalize on higher returns. What is
the better way to measure inflation in a certain country rather than to
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refer its consumer price index? Each country may have different ways
of measuring and inflation indication.
• Business class enjoy the inflation. They get benefit from the
high rates of goods and services.
• Fixed income group really suffer from high rates.
This makes the gap between rich and poor. Wealth of high income
people increases and middle income group suffer most and low
income group pissed off.
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CURES OF INFLATION
Reduce Unemployment.
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Commodity balance:
The government should have a strict watch on the prices of
essential commodities in the country. It should take immediate
steps in changing the import and export duties and maintain the
availability of goods is reasonable prices. Curtailment of
administrative expenses: The curtailment of administrative
expenses can have a softening effect on inflation. Closing of the
utility stores; the net work of over 700 utility stores has not
helped in stabilizing the prices in the country. These are mostly
located in big cities and posh localities. The low income groups
are least benefiting from them. The earlier they are closed, the
better it is.
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POLICY PACKAGE:
MONETARY POLICY
First Step:
First type of anti inflationary policy is our analysis in monetary policy. And
of course a contractionary monetary policy is required to control the
problem of inflation. Anti Inflationary monetary policy can take many
forms. 1st is increase in bank rate. An increase in bank rate increases
other interest rates and thus cost of borrowing rises and at the same time
incentive to save increases. Both these results lead to contraption of
credit and control of consumption. Thus inflation curtailed.
Second Step:
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Third Step:
FISCAL POLICY
We can live with inflation but cannot live with unemployment. Because of
Phillips law as open law.
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It means that govt is able to manage its debts, especially domestic debt,
in the economy.
Last but not the least fiscal measure which we are considering here is
over valuation of the exchange rate. It means that a govt maintains a
higher value of its currency in the international market than the value
which would be determined by the free play of forces of demand and
supply.
INCOME POLICY
Wage price control it refers to direct control on prices and wages. This
policy may work in the short run, but in the long-run it becomes
ineffective because people evade control when they persist. Another
vainer may be voluntary wage-price guidelines but these too are seldom
effective.
Income policies are not always desirable. There are many important
things that need to be considered before we can apply income policies.
These things include,
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CONCLUSION
In order to control inflation in the country, the government should take
corrective measures. If the present situation prevails for long only two
classes would exist in the country -- the rich and the poor. The middle
class would vanish.
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harder and harder then the subsequent problems of even more crime and
intolerance are close to follow.
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