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NATURE CAUSES &EFFECTS

 Inflation:

Definition of Inflation, Measurement of Inflation  Types of inflation  Causes of Inflation  Measures to control Inflation  Inflation and Unemployment.

 Inflation

is a common phenomenon in a modern capitalistic economy  But it doesn't mean that it is ruled out in case of socialist countries  Inflation is a controversial term, which has undergone several modifications since it was first clarified by neo-classical economists  According to them, inflation is a galloping increase in price levels because of an excessive rise in the quantity of money supply in an economy

 They

considered inflation as a destroying disease born out due to lack of monetary control whose results undermined the rules of business, creating chaos in the markets and financial run of even the prudent

 It

has been defined differently by various authors  Quantity theorists-they have identified inflation with an increase in purchasing media  Hawtrey,ailton friedman have advocated the quantity theory ap[proach  They associated with the issue of too much purchasing power  Increase in stock of money may not necessarily cause a rise in the price level unless spent

 Friedman,paish,coulborn,kemmerer,golden

Weiser,pigou,emile James consider inflationa monetary phenomenon manifested by disequilibrium between stock of money or money income and volume of goods and services


INFLATION means a general rise in prices

Inflation is persistent increase in the general in the price level rather than a once-for-all rise in it.  DEFLATION represents persistently falling prices  Most of the developing countries have been suffering from inflation in the modern days  The developing countries have experienced 20 to 30% inflation  The occurrence of inflation along with high rate of unemployment is a new phenomenon and has made it difficult to control rising prices

 True

inflation occurs when aggregate demand exceeds aggregate supply at full employment level  Aggregate DemAnd>Aggregate Supply

MILD &CREEPING INFLATION general price level increases from 2% to 4% every year MODERATE OR WALKING INFLATION general price level increases from 5% to 9% every year SEVERE SCARCITY OR RUNNING INFLATION When annual inflation is 10% or higher It leads to double digit inflation HYPHER or GALLOPING INFLATION

 Deficit

induced  Wage induced/profit induced  Scarcity induced  Ratchet Inflation-When prices in the excess demand sectors rise, they are not allowed to decline in deficient demand sectors, due to resistance from industrialists and trade unions  Currency inflation  Credit inflation  Sectoral inflation

 Semi(Bottle

neck)-inflation and full (true)inflation  Inflation before full employment is semi inflation, because of increased after full employment it is true inflationfigure13.2  Peace time inflation-it occurs during a period of planned economic development in under developed economy. It occurs because of increased governmental expenditure on ambitions development projects in the

 Open

and Supresses inflation  Comprehensive and sporadic inflation

 This

is a typical type of inflation where expansion of currency is associated with static output and employment or even decreasing output and employment  It refers to period of recession and rising unemployment along with positive rates of price inflation

 In

his general theory removed all such types of fears.  Inflation is a major economic phenemenon that has been engulfed entire world since the second world war

Demand

pull inflation Cost push inflation Structural inflation

 It

represents a situation where the basic factor at work is the increase in aggregate demand for output either from the government of the entrepreneurs or the households Ex-In a situation of full employment, the increase in private expenditure /the government expenditure goes up  It may lead to inflationary tendencies in the economy

Inflation is caused by a situation where by the pressure of aggregate demand for goods and services exceeds the available supply of output(Agss) Agss >Agdd When aggregate demand increases for all purposes – Consumption(C), Investment(I) and Government Expenditure(G)- exceeds Aggregate Supply  The supply of goods at current prices, there is a rise in prices

A

rise in price reduces the real incomes of fixed income groups, pensioners  Cost of living increases further and people demand for higher salaries  Employees demand for higher salaries/dearness allowances  If unchecked it may lead to hyper-inflation

 It

may happen if the costs, particularly the wages costs, go on increasing  As the level of employment increases ,the demand for workers rises progressively so that the bargaining position of the workers is enhanced  To exploit this situation ,they may ask for an increase in wage rates which are not justifiable either on grounds of a prior rise in productivity or of cost of lining

It explains inflation in the developing countries in a slightly different way  The structuralists argue that increase in investment expenditure and the expansion of money supply to finance it are the only proximate and not the ultimate factors responsible for inflation in the developing countries

Agricultural

Bottlenecksinelastic Supply Resource Gap or Government’s Budget ConstraintRevenue<expenditure Foreign Exchange BottlenecksScarcity of forex reserves Physical Infrastructural Bottlenecks

Joint

impact of Demand-pull and Cost Push Factors Causes of inflation in developing countries

 Increase in money supply  Mounting government expenditure financed by deficit budgetary system  Black money  Population explosion  Factors operating supply side  1.Inadequate instrumental facilities  2.Long gestation period

 Prof

.A. Phillips analyzed statistical data relating unemployment percentages and percentages in money wage rates  Its objective was to identify whether demand-pull element in British Economy has been stronger than cost push or vice versa  Another object was to determine the extent to which restrictive monetary and fiscal policy will be appropriates to control inflation  Read about phillips curve

Consumption Production Distribution



   

Effect on Real Income Effect on Distribution of Income And Wealth
Creditors and debtors Fixed income groups Pensioners Business men Traders &producers Wealth holders of cash,bonds and debentures


 

Effect on Output & Effect on Long –Run Economic Growth

Food

inflation Fuel inflation

Monetary policy  It deals with incerase/decerase of money supply  It will control the cedit money and supply of money  Fiscal policy  Government taxation,public expenditure,publicdebt measures  Direct controls  Price controls  Rationing of consumer goods,hire purchase restrictions,controls over investment spending,controlsover spending by local

   

‘Inflation is the engine of economic growth'. Substantiate. Monetary policy Fiscal policy Imports Public Distribution System