INFLATION: Inflation is a persistent rise in the

general price level rather than once-for-all rise in

it.
Three types of inflation have been distinguished:
1. Demand-pull inflation
2. Cost-push inflation
3. tructural inflation
Demand Pull Inflation ! "hen aggregate
demand for all purposes ! consumption#
investment and government e$penditure ! e$ceeds
the supply of goods at current prices# there is a rise
in prices.
%eynes e$plained that inflation arises &hen there
occurs an inflationary gap in the economy &hich
comes to e$ist &hen aggregate demand e$ceeds
aggregate supply at full employment level of
output.
Demand-'ull Inflation and "age!'rice piral ! (
rise in prices# reduces the real consumption of the
&age earners. (n increase in price# if granted# &ill
raise the prime cost of production and this &ill
lead to increase in prices. This raises the cost of
living still further and the &or)ers as) for still
higher &ages. In this &ay# &ages and prices chase
each other. This may lead to hyper-inflation &hich
signifies a state of affairs &here &ages and prices
chase each other at a very *uic) speed.
+onetarist Theory of Inflation ! +onetarists
e$plain the emergence of e$cess demand and the
resultant rise in prices on account of the increase
in money supply in the economy.
The e$cess supply of real monetary balances results
in the increase in aggregate demand for goods and
services. If there is no proportionate increase in output#
then e$tra money supply leads to e$cess demand for
goods and services# &hich causes inflation or rise in
prices.
Cost Push Inflation ! ituations &here prices may
rise if there is increase in costs independent of any
increase in aggregate demand. Three such autonomous
increases in costs &hich generate cost-push inflation
are:
1."age-push
2.'rofit-push
3.Increase in prices of ra& materials# especially
inputs such as rise in crude oil prices ,supply
shoc)s-.
Structural Inflation - The economies of developing
countries are structurally underdeveloped as &ell as
highly fragmented due to e$istence of mar)et
imperfections and structural rigidities of various
types. In some sectors there are shortages of supply
relative to demand# in others under-utilisation of
resources and e$cess capacity e$ist due to lac) of
demand. .arious sectoral constraints and bottlenec)s
have been identified &hich generate the sectoral
imbalances and price rise.
1. (gricultural bottlenec)s &hich ma)e supply of
agricultural products inelastic.
2. /esources constraints or government budget
constraint
3. 0oreign e$change bottlenec).
Deflation ! Deflation represents persistently failing
prices.
+erits:
1. It results in increase in real &ages and income
2. 0alling prices chec) speculative activities in the
economy.
3. 0alling prices imply the rising value of money.
1. 0alling prices &ill favourably affect the balance of
payments of the country.
Demerits
1. (dversely affect investments &hich may lead to
recession or depression in the economy.
2ffect of Inflation
1. Inflation raises the cost of living and hence
reduces the real income of the people.
2. Inflation ma)es e$ports costlier and imports
cheaper. 3ence# adversely affect balance of
payments.
3. .alue of money falls rapidly and hence lo&ers the
rate of savings.
1. 2ncourages investments in unproductive assets.