Subject: SO33242 Principles of Economics

Year Level: M6/12

Inflation -defined as a sustained increase in the price level or a fall in the value of money.

-When the level of currency of a country exceeds the level of production, inflation occurs.

-Value of money depreciates with the occurrence of inflation.

Types of Inflation

1. Open Inflation - The rate where Costs rise due to Economic trends of Spending Products and Services.
2. Suppressed Inflation - Existing inflation disguised by government Price controls or other interferences
in the economy such as subsidies. Such suppression, nevertheless, can only be temporary because no
governmental measure can completely contain accelerating inflation in the long run. It is Also Called
Repressed Inflation.

3. Galloping Inflation - Very Rapid Inflation which is almost impossible to reduce.

4. Creeping Inflation - Circumstance where the inflation of a nation increases gradually, but continually,
over time. This tends to be a typically pattern for many nations. Although the increase is relatively small
in the short-term, as it continues over time the effect will become greater and greater.
5. Hyper Inflation - Hyperinflation is caused mainly by excessive deficit spending (financed by printing
more money) by a government, some economists believe that social breakdown leads to hyperinflation
(not vice versa), and that its roots lie in political rather than economic causes.

CAUSES OF INFLATION

FACTORS ON DEMAND SIDE:

 Increase in money supply

 Increase in disposable income
 Deficit financing
 Foreign exchange reserves

FACTORS ON SUPPLY SIDE

 Rise in administered prices

 Erratic agriculture growth
 Agricultural price policy
 Inadequate industrial growth

EFFECT OF INFLATION

 They add inefficiencies in the market, and make it difficult for companies to budget or plan long-
term.
  Uncertainty about the future purchasing power of money discourages investment and saving.
 There can also be negative impacts to trade from an increased instability in currency exchange
prices caused by unpredictable inflation.
 Higher income tax rates.
 Inflation rate in the economy is higher than rates in other countries; this will increase imports
and reduce exports, leading to a deficit in the balance of trade.

Factors of Production
1. Land
2. Labor
3. Capital
4. Entrepreneur

 PRODUCER - a person, company, or country that makes, grows, or supplies goods or commodities
for sale.
 LEASE - a contract by which one party conveys land, property, services, etc., to another for a
specified time, usually in return for a periodic payment.
 PENSION - a regular payment made during a person’s retirement from an investment fund to
which that person or their employer has contributed during their working life.
 OPPORTUNITY COST - What a person sacrifices when they choose one option over another.
 MARGINAL BENEFIT - The additional value resulting from a small increase in some activity.
 IMPORT - A good or service produced in another country and purchased by the residents of the
home country.
 EXPORT - A good or service produced in the home country and sold in another country.
 EXCESS DEMAND - A situation in which, at the prevailing price, the quantity demanded
surpasses the quantity supplied.
 EXCESS SUPPLY - A situation in which the quantity supplied surpasses the quantity demanded at
the prevailing price.
 GROSS DOMESTIC PRODUCT (GDP) - The total market value of final goods and services
produced within economy in a given year.
 DEPRECIATION - Reduction in the value of capital goods over a one year period due to
physical wear and tear and also to obsolescence; also called capital consumption allowance.
 PERSONAL INCOME - an individual's total earnings from wages, investment enterprises, and
other ventures. It is the sum of all the incomes received by all the individuals or household
during a given period.
 DISPOSABLE INCOME - the amount of money that households have available for spending and
saving income taxes have been accounted for.
 RECESSION - a period of temporary economic decline during which trade and industrial activity
are reduced, generally identified by a fall in GDP in two successive quarters.
 DEPRESSION - a long and severe recession in an economy or market.
 DEFLATION - Negative inflation or falling prices of goods and services.
 SAVINGS - the money one has protected, especially through a bank or official scheme.