COST OF LIVING AND STANDARD OF LIVING:

Cost of living refers to the payment incurred by an individual, for the goods and services he needs
to sustain his life in a reasonable average social status.

In most cases, the cost of living determines the standard of living of the people in a given country
orregion This is because, if the prices for goods and services are high, and the incomes are
relatively low, the citizens will not be able to purchase those items so as to lead a better standard of
living.

Therefore, for a government to improve the standard of living of its people, it should also ensure that
The cost of living is not high and the major necessities of life are within the affordable price ranges
ofan average citizen
N.B: When the cost of living is rising but the incomes are constant, then the standard of living is
deteriorating-When the cost of living is reducing with constant or increasing incomes, then the
standard of living is improving

1
CAUSES OF RISING COST OF LIVING
The rising cost of living in a county may be a result of any of the following factors;

1. Persistently increasing inflation (demand inflation)

2. Increase in the cost of factors of production or raw materials.
3. Improper costing of commodities especially those that have been imported into the country.
4. Rampant mass unemployment in the economy which leads to low incomes.
5. High taxes on incomes to reduce disposable incomes or on commodities to increase the
prices of commodities.
6. Improper distribution of resources in the economy, some areas may have commodities in
abundance while others do not have enough. This may be caused by infrastructural rigidities,
or government policies which may forbid the movement of goods from one area to another
7. Wage policies, which may keep the wages and salaries at lower levels compared to the
prices of the commodities in the economy.
Finally we can say that for a government to be successful in its effort to raise the standard of living
of its people, it has to solve those problems that lead to high costs of living.

2
INVESTMENTS
Investment is defined as the rate of adding assets to the stock of capital available in a country with
expectations

Investments are looked at as ways a country takes to increase its capital stock which can be used to
produce both producer and consumer goods.

Investments imply that people must have present sacrifice of resources and put up a strong capital
base which will create profitable and beneficial returns to society.

In many LDCs, today, a bigger part of the investments is done by foreign individuals or companies.
Though sometimes the foreigners have done It with local individuals or companies in joint stock
shareholding.

Several investments have been done in industries, Agriculture, Transport, Education,

Communication, Insurance, Banking, Trade, Capacity building etc.

3
Factors which determine/influence investments.
1. Nature of the economic system used in a country. (i.e socialist, capitalist, or mixed). This
determines how resources are exploited and the inducements for investments.

2. Income levels: It should be noted that the rich have a higher MPS while the poorhave a
higher MPC. If there are several rich people in the country then investment will be
high. If the poor dominate the economy, a reverse is expected of investment.
3. Levels of technology and education are good determinants of investment. These
determineinventions and innovations, in the production ventures.to investment will be
low.
4. Economic stability of the country. If prices and foreign exchange rates are not stable, then
inducement
5. Government policies in the economy affect the level of investment to a greater extent. These
policies may include policies on taxation, consumption, property ownerships, wages and
salaries, commodity prices, foreign investments and on income redistribution methods. If the
policies towards those variables are not conducive, then investments will be low if they are
conducive investments will be high.
6. Market size: a small market size does not foster investment. Local and foreign markets are
vital in determining the level of investments. Foreign markets will be determined by the
openness of the economy, and the accessibility to the foreign markets.
Size and structure of a country population will be vial in determining the level of investment. A
big dependent population discourages investments while big productive population encourages
investment

4
 7. The rate of interest on bank loan. Sometimes the procedures to obtain loans limit the
potential borrowers. The higher interest rates also discourage investments.
8. The level of education in the country plus the entrepreneurship abilities of the people in the
country will determine the rate of investments.
9. The political stability of the country. Political instabilities demoralize investors.
10. The availability of natural resources in the country. Some countries have low investments because
they lack enough natural resources to invest in.
11. The attitude of the population towards work and investments. When the attitude is positive,
then the level of investments will be high and vice versa.

NB: The reader should try to consider each of the above factors in relation to Somaliland's economic
and politicalsituations and find out their effects to level of investment as well as finding out what the
government is doing to rectify the situation and allow conducive atmosphere for investment.

INCOME INEQUALITIES
This may be defined as the existence of disproportionate distribution of the national income among
the people, i.e. the rich getting a higher share than the poor. Or it may refer to where there is an
economic gap between those who have and those who have not. The second definition refers to
what is commonly known as the income gap.

Income gap is a gap between the incomes earned or received by the poor and the rich people in the
population.
If the gap is too wide, then the income inequality will be bigger: Sometimes the income gap is used
in connection with the poor and rich countries. Here the gap is considered from the per capita point
of view i.e. The per capita gap between the poor nations and the rich nations. It is basically this gap
between countries that has resulted into dividing the world into first world, second world and third
world.

5
CAUSES OF INCOME INEQUALITIES
1. Education levels: Usually the people who are educated have chances of getting jobs and
hence earn higher incomes. Similarly, those with higher education qualifications have higher
pays those with lower qualifications. e.g. a person with a degree in Education earns more than
a person with a diploma in Education.
2. Age: In Africa employment age is very important. The long lived persons always earn more
than the young ones. This is more especially in the lower employment fields. The major
reason being that the employers believe that a man who is 50 years is more responsible than
a boy of 20 years doing the same work.
3. Marital Status: Married people always get higher wages because of the family
responsibilities.
Bachelors always have the basic pay only. Some organizations offer family allowances to their
employees, education and medical allowance to family and children.
4. Political factors: In Africa and more so in many of the developing countries political
opportunities are a key to increasing one's income. A person becoming a minister may have
all his people employed and earn very good incomes. Sometimes the politicians favour their
areas. Similarly, those people with access to political offices have higher incomes than those
who do not have the access.
5. Inheritance: This creates income difference basically from the family members. The heir
usually takes all the property of the deceased, leaving the rest of the sisters and brothers
without property. Hence creating income inequality in the family.
6. Talents: People who are talented in fields of income generating usually have higher incomes
than those who are not talented e.g. one may be talented in sports, drama or music, and
hence derives a lot of income from that area, where as those who are not talented cannot
earn that income.
7. Physical ability: The physically strong and normal people always work harder than the
physically handicapped. Hence the former earn more than the latter. This is more common inmanual
activities, where physical effort is needed.

6
 8. Type of employment: Some types of employments offer higher payments than the others.
e.g. consultants, Researchers and those working in non-government organizations, in
financial institutions always earn more than their counterparts in other fields despite being
with the same qualifications.
9. Sex: Most women especially the married lose a lot of income they would otherwise get. This
is particularly during their maternity leaves, when the children are sick and all sorts of
domestic problems, because these are basically for the woman to attend to. This creates the
income inequality between the men who work full time and the women. Sometimes even the
employer bases on sex to determine the wages, keeping in mind the women responsibilities.
10. Mobility of labour: When labour is mobile it can look for a better paying jobs. Labour which is
immobile tends to have low fixed income.
11. Family background: There are people who come from well to do families and tend to keep the
status of high income compared to those from poor families who face high level of
dependence.
12. Differences in resource endowments between countries or regions. Areas with resources
tendto have high incomes. E.g people in Arab countries find themselves find themselves rich
because they come from oil rich counties

Disadvantages of income inequality

1. It creates unfavorable social classes in society.
2. It may lead to unfavorable allocation of resources where production may be for the rich
leaving the poor with insufficient facilities.
3. It may reduce the aggregate demand especially if majority are poor.
4. It reduces the standard of living of the people. i.e poor people live low standard of Living
5. In case the rich are mainly foreigners, it may lead to increased capital outflow.

7
 6. Countries which are dominated by the poor the government tax revenue is reduced.
7. It increases government expenditure to take care of the disadvantaged groups with low
incomes.
8. It may lead to brain drain where the educated may migrate to outside greener pastures,
especially where the rich are the uneducated.
9. In most cases income inequality encourages rural urban migration. This is because the rural
areas are the ones with low incomes.
10. It can lead to political instabilities and unrests as well as loss of political support

.
POSSIBLE SOLUTIONS TO REDUCING THE INCOME INEQUALITY
1. Free Education: The government can offer universal free education so that the majority
population can be trained in different areas. This reduces the gap created by differences in
education levels.
2. Government can increase the job opportunities in various areas of the country so that people
can be employed and earn income.
3. Reducing Political bias: This can be avoided and offer economic benefits to all the people on
merit. Regional, tribal, religious, political discrimination be avoided.
4. The current inheritance customs: can be revised so that the property of the deceased is
equitably shared among the children.
5. Factors that limit labour mobility: can be relaxed so that labour can easily move to where it
can be appropriately and fairly rewarded.
6. Setting and enforcing of the minimum wage to all parts of the country. This reduces regional
imbalances.
7. Ensuring political stability in all parts of the country so as to create a conducive production
and trade atmosphere
8. Introducing progressive taxation so that the rich are taxed more and the money is used to
facilitate the activities of the poor
9. Discriminative pricing policies where government can set up different prices for the poor an
the rich
10. Control of corruption and embezzlement of government funds.

8
A country cannot claim to be developed when the income gap in its economy is still big. Therefore,
one indicator of a country's development is fair income distribution with a small income gap.
N.B:
The solutions to income inequalities vary from country to country or region to region depending on
the underlying causes of such inequalities. Therefore a standard set of solutions may not be very
possible for all countries.
The reader should therefore first identify the causes of the inequalities existing in a given region/
country and thereafter suggests possible solutions.

MONETARY POLICY:
This is a policy taken by the government through the central bank to control the economic activities
in the country. And this is directed through the commercial banks.

NB noted commercial banks may expand the volume of money supply to a level thatmay not be
desirable for the economy. However, sometimes the economy may need to expand the volume of
money supply so as to allow development and smooth running of the economic activities in the
economy, So monetary policy may be used for expansionist measures as well as for constructionist
measures, but still through the commercial banks.

AIMS OF MONETARY POLICY

1. To influence aggregate demand in the economy.
2. To influence the employment level in the economy.
3. To maintain stability and value of the national currency.
4. To maintain stability and faith in a country's financial system.

9
 5. To foster development and expansion of financial institutions in the economy.

6. To foster economic growth and development and try to avoid humps in the business system
aswell as investments which may result into undesirable trade cycles.

INSTRUMENTS OF MONETARY POLICY

1. Open Market Operation (OMO): This is the selling and buying of securities by the central
bank. If there is a lot of money in circulation, the central bank issues and sells the securities
to the public. This reduces the purchasing power. It also reduces the money with the
commercial banks which is available for lending out as the customers of commercial banks
will be writing out cheques to pay for the securities. Hence transfering money from the
commercial banks to the central bank. Securites include Treasury Bills and Bonds. On the
other hand, if there is less money supply the central bank will instruct the commercial banks
to make bank bills which the central bank will purchase from them, hence increasing money
with them (commercial banks) and can therefore extend credit to the public. Or the Central
Bank will liquidate the securities which the Commercial banks purchased.

2. Special Deposits: These are deposits required by the central bank from commercial banks to
deposit with it. These are not part of the legal reserve requirements but just additional
deposits that are required during the inflationary period. When such deposits have been
required, they reduce the money available to commercial banks toextend credit. They may be
required as a percentage of deposits or cash available at the bank.

On such deposits, sometimes the central bank pays interest for the time these deposits are held by
the Central Bank. This interest is determined by the central bank. But repayment of the deposits is
made in installments and after careful study of the economic atmosphere of the time.

Similarly, on the issue of the special deposits, the central bank may require businessmen to apply for
foreign exchange to import goods and to pay a certain percentage of deposit before foreign
exchange is released to them.

This percentage will depend on the value of goods to be imported.This deposit means that the
importer has to write out a cheque, payable to the central bank. This reduces the cash available at
the commercial banks where the cheque is drawn. Hence limiting the credit creation.

3. Bank Rate: This is also known as the minimum lending rate. All rates on advances, loans and
rates on deposits and discounting bills depend on the Central Bank rate. All Commercial
banks observe this rate keenly because it reflects through the lending rate of Commercial
10
 banks to the public. (In 2012 Bank of Uganda increased the Bank rate to almost 30%. This led
to the business community in Kampala to strike and closed their shops for a week.This is
because loans had become too expensive. It even became worse when the Central Bank
dictated that the new rate was to apply even on the old loans.)This rate is given to the
commercial banks by the central bank. In case there is need for restrictions purposes, the
central bank will raise the Bank rate. This makes borrowing very expensive. On the other
hand, if there is needed for expansionist purposes the Bank rate will be reduced. This makes
borrowing cheap.

4. Reserve Requirements: This is the amount of money that is required by the central bank to
be kept at its reserves from the commercial banks. This money is kept to safeguard the
customers' money in times of danger or collapse of the commercial banks. It is usually a
percentage of the total deposits. The Bank can increase the reserve requirements to reduce
the loanable funds or may decrease the reserve requirements to increase the loanable funds.

5. Selective Credit Control: The central bank may dictate areas for which the public can apply
for loans, say, only those who are to invest in agriculture and/or industry should apply for
loans. This means that loans needed for any other purpose other than the selected sector
cannot be approved. Hence the demand for loans will be limited and credit creation will
beaffected. This policy may be intended to control inflation and also direct investment
towardsvital sectors in the economy, which are developmental in nature.

LIMITATIONS TO MONETARY POLICY IN LDCs

In less developed countries monetary policy has not been very effective in controlling credit
creation or ilation in these economies. Generally it has failed to achieve its objectives or has been
slow in achieving the objectives. There are several reasons to account for that situation.

11
1. Open market operation is ineffective in these countries because commercial banks have a
lot ofcash with them which is not loaned. Secondly, very few people are aware of the
securities due to:-
a) Ignorance of most bank customers who are in most cases less educated, or not bothered
with investing in securities
B) Commercial banks are not well distributed in these countries. They are usually located only in
urban centers.
C) Those who are aware of the securities know the purpose/aim of such securities and are the very
people who gain from inflation (speculators). So they deliberately refuse to buy them (securities.

2. The Bank rate has a shortcoming in the sense that most big investments are done by the
government but this rate has little effect on the government as governments mainly borrow
from abroad rather than from central bank to finance their investment. Similarly, the
government banker sources like taxation from which it can raise money instead of borrowing
from the central bank or commercial banks.
Another big investing sector is made up of mainly foreigners who also, like Worses obtain theirmoney
from their home courisor from intermational financial insitutions like Word Bank, UND, U.S.A.I.D,
European Community, DANIDA etc.

3. The growth and development of non-banking financial institutions have reduced the
borrowing by the public from commercial banks as the former lend money on easy terms
(though expensive).This includes loans from Microfinances, SACCOs, Money lenders, and
Round pools. Such institution are less affected by the monetary policy tools. Hence the bank
rate is rendered less effective.
4. The tools tend to be ineffective because the third world economies are not fully monetised.
There is still a big subsistence sector.
5. The liberalization of the financial markets as well as the interest rates leaves much to be
determined from market forces rather than from the central control of the central banks. This
makes monetary policy tools to be slow.
6. Sometimes monetary policy tools fail to control inflation because of rampant forgeries of the
currencies which circulate in the economy but do not usually reach the banks.
7. Monetary policy is slow in effectiveness but most LDCs prefer to have policies which are direct
and fast. Hence they prefer to use fiscal policy measures and seldomly implement themonetary tools.

8. There is a lot of political interference in the running of the central bank as well as other
financial institutions. This, therefore, renders the monetary tools ineffective whenever theyare
to be used

12
UNDEREMPLOYMENT AND UNEMPLOYMENT
Underemployment can be where a withdrawal of a given labour force from a production unit does
not affect should be the total output. This hence means that underemployment refers to where
labour is less productivethan it should.

Underemployment may also refer to where the labour force works for less time than it should.
Similarly, it can refer to those who normally work full time but whose productivity is so low that a
reduction in hours would have negligible impact on total output.

It also exists if a person is doing a job whose requirements do not command the kind of skills or
level of education the person has e.g. Doctor teaching or Ph.D holder teaching in a primary school.

CAUSES OF UNDEREMPLOYMENT
1. Scarcity of job opportunities. This may lead to a person to do a kind of work which he is not
qualified to do.
2. Less supervise on of labourers. This may make labour to put in less effective input than
hewould have put in.
3. Political interference may cause underemployment. This is where politicians may dictate to
employ someone even if one does not have the skills required. e.g. Doctors becoming
ministers or professors becoming RDCs.
4. Improper paying where labour is not well trained and may leave the institutions when he is
half baked.
Such labour may be less efficient in production though he may be putting in full hours.
5. Political instability. This is where people put in less effective hours than they should because
of fear of insecurity.
6. Poor management which may have less knowledge about employments requirement where
they may employ someone with different skills to do a job he is not qualified to do.
7. Need to preserve labour for future use. An employer may employ a worker or labourer

13
 because he is expecting to use him in future in a department which is not yet established. So
such labour may do a job currently which he is not qualified to do.
8. The payment attached to the job may cause underemployment. If the wage is low labour is
likely to put in less effective input though he may be fully employed.
9. High salary offered to the job may attract people to do it even if they do not have the
necessary skills for such jobs.
Underemployment is so common in developing countries. A country cannot fully utilise its
resources if it is suffering from massive underemployment. So economic growth will take a
slow pace in a county where such a situation exists.
UNEMPLOYMENT
Central, unemployment can be taken as a situation where people in the working age group, who
should be employed are not employed. This general definition involves those who are voluntarily
having no jobs and those who are involuntarily having no jobs.
Involuntary unemployment refers to where people who are looking for jobs cannot find them, though
they are willing to work at the ongoing wage rates.

So Economists feel that the definition for involuntary unemployment is the true definition for what
unemployment means. Policy makers should be more concerned with those people who are willing
to work at the ongoing wage rates but cannot fi nd the jobs. This should exclude the dependants
(0-15 and 65+) who may be looking for jobs because they are not in the labour force.

Voluntary unemployment is also important to study and see how it can be solved but it is not easy to
solve.
Voluntary unemployment is where labour is not willing to take up any employment at the ongoing
wage rate in the market even if the jobs are available.

Causes of Voluntary Unemployment

1. Low wages in the labour market.

2. Provision of un employment benefits to the unemployed in the economy.
3. Presence of enough subsistence production in the economy especially in the rural areas.
4. Lack of serious personal society or family responsibilities.
5. Negative attitude towards work among the people.

14
 6. Presence of past accummulated resources/savings in the family.
7. Where labour does not want to be a subordinate to anyone.
8. Poor focus and lack of proper planning by an individual. This is worsened by absence of good
career guidance to students.

TYPES OF UNEMPLOYMENT
1. Frictional unemployment: This is also known as search unemployment or transitional
unemployment. At any one time there are people who are leaving their jobs to get other jobs
for better remunerations or job satisfaction. Such people may take sometime before getting
employed into a desired occupation. So the period between the previous job termination and
obtaining a new job is what makes such persons to be frictionally unemployed.

The solution to this is to increase the knowledge about labour markets to individuals. But this kindof
unemployment is not so common in LDCs, because of absence of unemployment benefits.

Sometimes people leave declining industries and start looking for jobs in other industries.Such
people also suffer from this unemployment.

2. Structural Unemplovment: Structural changes in the economy may cause unemployment. As

economic growth takes off, so many aspect in the economy will change including the form of
production and factor combinations. During these structural changes in the economy, there
are people who are displaced out of their jobs particularly those who may be trained in only
one specific occupation.
Structural unemployment depends on the occupational mobility of the workers, ability and
willingness of the unemployed to move into other areas for jobs or to go back for training in other
occupations, In LDCs, this kind of unemployment is quite common because these economies are
undergoing stuctural changes as they struggle to develop.

3. Seasonal Unemployment: This type is very common in LDCs, it occurs in sectors that produce
seasonal commodities, especially agriculture commodities. During planting and harvesting
periods there are a lot of employment opportunities, but once such periods are over, then
several people will be unemployed. In MDCs, it occurs especially during winter when most
outdoors occupations cannot take place, and therefore most people remain unemployed.

4. Disguised Unemployment: This is a form of unemployment where the labour employed is not
fully utilised. It specifically refers to that labour which is doing the work it is not supposed to
do. Hence, using skills that do not apply to the job.
Related to disguised unemployment, is hidden unemployment which is also a form of
unemploymentbut here labour puts in less than it is expected. This is due to poor supervision,
15
poor health of labour, or using poor tools. It is hidden because a person appears to be
employed but his output is too little So he is unemployed.

16
5. Casual Unemployment: This occurs when some people are employed on temporary basis.
After the work agreed upon to perform is accomplished then the person becomes
unemployed.
It is very common in LDCs. It mainly occurs among the unskilled labour.

6. Technological unemployment: This occurs where in production new technologies are

introduced especially the more efficient capital intensive techniques. Such a situation may
lead to displacing labour and use machines in production.

Similarly, the introduced technology may not necessarily replace the labour but rather require
the labour to acquire new knowledge of production techniques e.g using modern computers.
In case the labourers are not able to learn such new techniques, they will be laid off and
become unemployed. This is common in LDCs among the old as well as those who do not
desire to go for further training.

7. Residual Unemployment: This is a situation when some people are not employed because of
being physically, or mentally handicapped. It is common in the whole world. It also involves
those people who have retired due to old age. Hence it includes all the aged population.

8. Keynesian or Cyclic unemployment Demand deficience unemployment)

This arises when there is a fall in the aggregate demand in the economy. When demand falls,
it means that even industries will have to reduce output or to close down, whichever situation
results into displacing of workers.

During the depression of the 1930s this kind of unemployment was rampant. During this time
there was insufficient expenditure on goods and services available at that time. Industries
reduced their production thus rendering severalpeople unemployed.

Keynes sugested that the governments should increase money in circulation so as to increase
the purchasing power. i.e increase the incomes of the people and taxes have to be reduced
so as to increase the disposable incomes of the people. And still Keynes suggested that
government expenditure should be increased so as to increase money in circulation and
affect demand.

17
 9. Open urban unemployment; this is an unemployment which is rampant in most urban areas. It
occurs where many people move to urban areas to look for jobs but the jobs are not readily
available.
In most cases the open urban unemployment includes both the voluntary and involuntary
unemployment. In urban areas several people are not employed.
The unfortunate part of it is that over 80% of those who are unemployed in urban areas are
youthsmainly of (15-45). And most of these people are either uneducated, or semi
educated

GENERAL CAUSES OF UNEMPLOYMENT

1. Seasonal factors. Countries which depend on agriculture tend to suffer from seasonal
employment more especially where such countries have one season a year.
2. High population growth rates in especially LDCs have contributed to the rampant
unemployment.
3. The population growth rates are higher than the growth of job opportunities in these
countries.
4. Most labourers in LDCs are not educated and lack skills hence cannot easily find jobs.
5. The diminishing returns in the agriculture sector is another big cause of unemployment
because labour reduces as land becomes less productive.The inappropriate education system
has contributed a lot to the unemployment. Some people get education which cannot be
applied in the field.
6. External influences especially from the donor countries (Europe to USA) as well as IMF and
World Bank have contributed to unemployment in third world states. The conditions attached
to their assistance are affecting employment status e.g retrenchment, demobilisation,

18
 encouragement of foreign labour emphasising capacity building instead of
projectsestablishement.
7. In LDCs, many people prefer leisure to work. This has contributed
much to voluntary openunemployment.
8. Backward cultures especially to girls which discourage education and
employment of girls orwomen. These render most women unemployed
and in some countries women are taking a big portion of the population.
9. Poor manpower planning has also been partly responsible for
unemployment in LDCs.Many qualified people leave their institutions
without direct employment by governments.
10. Sectarianism and nepotism has been a major cause of unemployment
especially to those whoare not favoured. This is so common in Africa.
11. Political instabilies which lead to low production and displacement of
people also contribut much a the unemployment problem.
12. Structural changes in the conomies have tended to leave many petual
adjusted eg change inSecitols well as consumption behaviour of people
plus structural adjustment program si the third world countries.

NEGATIVE EFFECTS OF UNEMPLOYMENT TO AN ECONOMY

1. It reduces the aggregate demand due to low purchasing power since
many people do not haveincomes.
2. Unemployment increases social crimes such as robbery, thefty, prostitution
etc.
3. It may lead to under-employment (misallocation of labour skills) e. a
doctor teaching in asecondary school.
4. Unemployment creates income inequality between the employed and
those without jobs.
5. It reduces a country's GDP as well as the income per capita hence
worsening the povertysituation.
6. It encourages rural urban migration with all its associated problems.
7. It reduces the taxable capacity of the country due to low incomes
and low purchasingpower.
8. It may lead to brain drain and this may keep the country in a stagnant
undeveloped state.
9. Unemployment may lead to increased public debt because government
will have to borrowand take care of the unemployed.

19
 10. Unemployment may increase the school drop-out rate. This is more so
when the parents loseor lack jobs, and cannot have incomes to sponsor
their children in schools and universities.
11. It leads to political instabilities. It is easier to convince the
unemployed to join the antigovernment groups, and cause
instabilities than convincing an employed person.

INFLATION
Inflation is the persistent rise in the general price levels of goods and
services in a given country for a given period of time. At this time, the value
of money is persistently falling.
NB One can not talk of inflation when one or two commodity prices are
increasing. It must be a number of commodities.
And usually the commodities we consider are those that take a big portion
of the day today household expenditures of majority people.

State of Inflation
Mild Inflation (Creeping); this refers to when the general price levels
increase gradually. It is not easy to notice the rises. The percentage rise is
small over a long period of time. This kid of inflation is desirable as it gives
incentives to producers while causing little effects on consumers’ incomes.
Mild is usually a single digit inflation, and in most cases below 5%

Hyper State: This inflation is sometimes known as Galloping inflation or run

away inflation.
It refers to a state when the increase in prices is so rapid. The public notices
these rises easily and there is definitely a great effect on economic
activities in the economy.
Hyper is usually a two digit inflation and when it reaches the run away state
it goes up to even 3 digits.

Types of Inflation
The types of inflation are given according to the causes of inflation
1. Demand Pull Inflation
This inflation is caused by excess aggregate demand for money to
purchase a few commodities available. Such inflation can be

20
 acceralated by further printing of money by the central bank or
increase government expenditure.
Demand pull means that the aggregate demand keep raising but the
level of production in the country does not change.

2. Cost Push Inflation; this inflation occurs when there is a rise in the
prices of commodities as a result of the rising cost of production in
terms of factor costs. (i.e profits, rent, wage, and interest) and raw
materials costs
So when there’s desire to earn excessive rewards for these factors of
production, it means the cost of production will increase and hence
increase in the prices of commodities

3. Bottleneck/Scarcity inflation. This is inflation that due to structural

or breakdowns. e.g breakdown of transport system, breakdown of
production units especially in agriculture and industry, wars in a
specific area that might affect supply in other areas etc.
These breakdowns result into what is known as ‘Supply Shocks’ The
shortage in supply due to these breakdowns, the leads to general
increase in price levels

4. Imported inflation. This is the type of inflation that is caused by

importing commodities from high cost countries. This inflation is
therefore caused by buying commodities from a country which is
affected by inflation.

Causes of Inflation
1. Increase in money supply in circulation due to increased borrowing by
public and commercial banks from the central Bank
2. Shortages in production which causes scarcity of goods hence forcing
the prices to go up
3. Increased government expenditure especially on nonproductive
ventures which leads to too much money in circulation but with no
corresponding availability of commodities to purchase with that
money
4. Increased currency forgeries in the LDCs which increases money

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 supply and such money is out of central bank control
5. In most LDCs, inflation is due to structural breakdowns which causes
supply shocks and forces the prices of commodities to raise.
6. Continuous increase in the population which leads to increased
aggregate demand with limited supply of commodities thereby
creating demand pull inflation.

NEGATIVE EFFECTS OF INFLATION

1. Inflation affects savings in the economy. Where the inflation is high,
people are not encouraged to keep their money because money
looses value
2. Inflation reduces the ability of money to perform its functions; this
means that during inflation money will cease to;
i) Act as a medium of exchange
ii) To act as a unit of account
iii) To act as a store of value
iv) To act as a means of deferred payments.
3. Hyper inflation may discourage production. This is dangerous to the
economy because when there’s no production, then commodity prices
may just continue increasing
4. Inflation leads to unfavorable balance of payments and this is
because it discourages production of exports and therefore leads to
demand for more of imported commodities which worsens a country’s
BOP
5. Inflation may increase unemployment problems in the country. This is
because it discourages investments.
6. Inflation may lead to dumping where by a certain country makes a
country with inflation as its dumping ground for cheap but harmful or
expired commodities

MEASURES TO CONTROL INFLATION

FISCAL MEASURES
1. Increase indirect taxes, reduce disporsable incomes and hence
control demand
2. Reduce government expenditure so as to reduce money in circulation

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MONETORY POLICIES
1. Increase the bank rate to control money into circulation
2. Increase special deposits requirements from commercial banks so as
to reduce money possessed by commercial banks
3. Operate contructonist Open Market Operations
4. Use Selective Credit Control measures
5.

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