INFLATION & DEFLATION

INFLATION & DEFLATION

MAJOR OUTLINES
     

INTRODUCTION DEFINITION TYPES OF INFLATION/DEFLATION CAUSES OF INFLATION/DEFLATION EFFECTS OF INFLATION/DEFLATION INFLATION VS DEFLATION

Introduction
Prices 2008 commodity Prices 1956

Rs.15/kg

rice

0.30/kg

Rs.12/kg

wheat

0.25/kg

300/kg

almond

3/kg

8/kg

potato

0.20/kg

INTROuuuuu
 SITUATION OF RAPID

GENERAL INCREASE IN PRICE LEVEL.

 DECLINE IN THE VALUE

OF MONEY.

DEFINITIONS:
 ACCORDING TO CROWTHERS | INFLATION

MEANS A STATE IN WHICH THE VALUE OF MONEY IS FALLING I.E.u PRICES ARE RISING}.  ACCORDING TO PIGOU | INFLATION ARISES WHEN MONEY INCOME IS EXPANDING MORE THAN PROPORTIONATE TO INCOME EARNING ACTIVITY}.  ACCORDING TO PROF. SAMUELSON | INFLATION OCCURS WHEN GENERAL LEVEL OF PRICES & COST ARE RISING}.

Types of Inflation
 Demand-Pull: Spending or expenditure is

greater than the potential output of the economy s capacity. Prices Increase Excess Demand shortage Prices of limited real output increases Demand shifts to the right

Demand Pull Inflation

Types of Inflation
 Cost Push (supply side) : per unit costs of

production increase Companies do not want to sell at market price because market price will not yield desired profits Total input cost / units of output = increases Supply decreases (shift left) Price level increases

Cost Push Inflation

Wage Price Spiral

As the price level of goods increases, labor will demand higher wages. Due to increases in TR (PxQ), suppliers will be able to provide higher nominal wages. Suppliers will pass this increase in wage off to the consumers in the form of an increase in price. This spiral upward continues as both price levels increase and the demand for higher wages increase.

CAUSES OF INFLATION
 INCREASES IN MONEY SUPPLY.  EXPANSION OF BANK CREDIT.  DEFICIT FINANCING.  BLACK MONEY.  SCARCITY.  TAXES.  POPULATION GROWTH.

EFFECT OF INFLATION
 DEBTORS AND CREDITORS.  PEOPLE WITH FIXED INCOME.  CONSUMERS .  PRODUCERS AND BUSINESSMAN.  FARMERS.  TAX PAYERS AND GOVERNMENT.

DEFLATION
 A GENERAL DECLINE IN PRICE OFTEN CAUSED BY A REDUCTION IN THE SUPPLY OF MONEY OR CREDIT.  DEFLATION CAN BE CAUSED ALSO BY DECREASE IN GOVERNMENT , PERSONAL OR INVESTMENT SPENDING.  DEFLATION HAS THE SIDE EFFECT OF INCREASED UNEMPLOYMENT.

CAUSES OF DEFLATION
 DECREASING MONEY SUPPLY.  INCREASING SUPPLY OF GOODS.  DECREASING DEMAND OF GOODS.  INCREASING DEMAND FOR MONEY.

EFFECT ON ECONOMY AS WELL AS OUR SELF

 Inflation affects you directly when you go to

the grocery store but find that a hundred dollars doesn't get you the same amount as it did last year.  Many people hang on to their money & stop spending on many non-essential items because of fear.  Houses & Cars begin to depreciate.

Cont
 Business starts to dry up & employers find

themselves cutting down on staff.  Our fixed income gets depleted & we find ourselves having to survive on even less.  The quality or standard of life that many have grown, downgrades as a direct result of inflation.

Inflation vs Deflation
Value of Money is falling Value of Money is Rising and Prices are increasing. and Prices are falling. Employ all the factors in the economy. Post full employment concept. Decreases the employment. Under Employment concept.

Redistribute Income and Reduces the National wealth in unjust manner Income. and National Income rises.

Inflation vs Deflation
Easy to control inflation by monitory and fiscal policies. Marginal efficiency of capital increases and investment is increased. Stimulates economic development. Difficult to control from deflation. Marginal efficiency of capital diminishes and investment reduced. Demoralized economic development.