Inflation

Inflation is a quantitative measure of the rate at which

the average price level of a basket of selected goods
and services in an economy increases over some
period of time. It is the rise in the general level of
prices where a unit of currency effectively buys less
than it did in prior periods. Often expressed as a
percentage, inflation thus indicates a decrease in the
purchasing power of a nation’s currency.
. Most commonly used inflation indexes are
the Consumer Price Index (CPI) and the
Wholesale Price Index (WPI).
The lowest inflation rate, technically deflation was recorded
in May 1976 at minus 11.31 percent. On the other hand,
highest inflation rate observed was 34.68 percent in
September 1974.
In early 1971, she was riding the ‘Garibi Hatao’ pink populism. By the end of the year, she was
‘Maa Durga’ incarnate, having defeated and dismembered Pakistan. She could walk on water.
The economy was already collapsing under the weight of her maniacal nationalisations,
entrepreneurs were fleeing an invasive licence-quota raj, super-high taxation (97.5 per cent
ultimately) created the black economy that still hasn’t been defeated and the expense of the
war didn’t help. world oil prices also rising.
Monsoon failed in succession in 1972 and 1973. Most parts of the country faced droughts.
Massive shortage of foodgrains was reported from all regions pushing the prices up. India was
still importing foodgrains for sustenance. The war had eaten up a large chunk of foreign
exchange reserve, which depleted further with rising cost of foodgrain import.
Failed monsoon and fall in agriculture production also led to drop in power generation and
very low demand for manufactured goods. Industrial production went down. Lay-offs were too
frequent and too many in all industrial centres. This led to sharp spike in unemployment.
Rising unemployment and low income reflected in poor healthcare and school enrolment.
money inflation
Quantity theory of money
V AND T are kept constant.
then M=P
 high 0
MS

increasing
increasing

0
demand for money = downward high
sloping
money supply determined by the
govt so straight line
Types of demand for money
1. Transaction demand – money needed to buy goods – this is
related to income.
2. Precautionary demand – money needed for financial
emergencies.
3. Asset motive/speculative demand – when people wish to hold
money rather than buy assets/bonds/risky investment.
 2 4

1 5
Deflation
Deflation is defined as a decrease in the general price level.

It is a negative inflation rate.

Deflation means the value of money will increase.
Deflation is often associated with periods of negative or stagnant
economic growth (Great Depression, Japanese economy in the 1990s,
early 2000s). In fact, deflation is often used to express a declining
economy.
However, if deflation is caused by rising productivity,
improved technology and lower costs, the deflation
may not be harmful but beneficial.
Deflation is considered harmful to economy because

1. People delay spending; hoping prices will be lower next year; this causes
further falls in aggregate demand and rate of economic growth.
2. Workers resist nominal wage cuts. Therefore, real wages rise causing real wage
unemployment.
3. Real interest rates become too high.
4. Deflation increases the burden of debt and reduces the disposable income of
indebted people.
5. Deflation can become entrenched in the economy – causing sluggish rates of
economic growth.
Disinflation
Definition of disinflation

Disinflation is a fall in the inflation rate. It means that the general price level is
increasing at a slower rate.
While a negative growth rate—such as -2%—
indicates deflation, disinflation is demonstrated
by a change in the inflation rate from one year
to the next. So disinflation would be measured
as a change of 4% from one year to 2.5% in
the next.
2012 BASE YEAR FOR INDIA STANDS AT 100
In 2013, the consumer price index replaced the wholesale price index
(WPI) as a main measure of inflation. In India, the most important
category in the consumer price index is Food and beverages (45.86
percent of total weight), of which Cereals and products (9.67 percent),
Milk and products (6.61 percent), Vegetables (6.04 percent), Prepared
meals, snacks, sweets, etc. (5.55 percent), Meat and fish (3.61
percent), and Oils and fats (3.56 percent). Miscellaneous accounts for
28.32 percent, of which Transport and communication (8.59 percent),
health (5.89 percent), and education (4.46 percent). Housing accounts
for 10.07 percent; Fuel and light for 6.84 percent; Clothing and footwear
for 6.53 percent; and Pan, tobacco and intoxicants for 2.38 percent.
FOR ADDITIONAL READING
https://economictimes.indiatimes.com/news/economy/indias-economy
-dashboard/gdp-growth-rate/slideshow/67755937.cms
GDP DEFLATOR CALCULATION OF REAL
WAGES
WAGE WAS 5000
INCREASED TO 6000
AND INFLATION ROSE BY 25%
WHAT IS THE REAL RISE IN WAGE
PRICE INDEX IN THE baseYEAR* WAGE RISE= REAL VALUE OF WAGE
PRICE IN THE current YEAR
100/125*6000= 4800
REAL VALUE OF THE RISE IN WAGES
WATCH THIS FOR MORE CLEARING OF
CONCEPTS
https://www.youtube.com/watch?v=0jJKjgE3qfE
https://www.youtube.com/watch?v=SmOMp8gycMA