The Third Session of

An Academic Get together between a group of foreign students

 in the department of Politics & Public Administration, University of Pune, India

INFLATION

Presented by Satar Mosavi

B.Com Student (from Afghanistan)

Introduction

The Gallup organization regularly conducts opinion poll asking, what is the most important problem facing the country?

Possible answer includes drugs, crime, pollution, and the threat of nuclear war.

But in 1981 with the inflation rate in double digits, a majority of the polled named inflation as the most important problem facing the country.

Inflation is defined as a sustained increase in the general level of prices for goods and services.

It is measured as an annual percentage increase.

As inflation rises, every dollar you own buys a smaller percentage of goods or services. The value of dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which are the real, tangible goods that money can buy.

When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.2% in a year. After inflation, your dollar cannot buy the same goods it could beforehand. 

Meaning and definition of inflation

Inflation is a persistent and considerable rise in the general level of prices. As in the words of, ”Crowther” A state in which the value of money keeps falling. According the standpoint of,”Hawtrey” The issue of too much currency. 

Characteristics of inflation

1. A temporary rise in the general price level cannot be termed as inflation. It must be continuous and persistent.

2. It implies a fall or decline in the value of money.

3. Inflation generally occurs during the boom period of trade cycle.

4. Inflation is monetary phenomenon.

Note: during the depression period of trade cycle prices and wages coupled with decrease in production. And increase in unemployment while during the period of boom prices and wages coupled with increase in production, unemployment decreases and the level of employment increases.

Types of inflation

Inflation can be characterized into various types depending on the rate at which the prices rise.

Creeping inflation: it occurs when prices rise at a very slow rate which is about 2-3%.

Walking inflation: under this type of inflation the prices rise at about 4-5% if not controlled can move into the stage of running inflation.

Running inflation: it is a situation where the prices increase at a very rapid rate about 10% per annum. Remember such level of inflation can have extreme adverse effects in the economy and it should be controlled.

Galloping or Hyperinflation: it is the most dangerous type of inflation in which the prices skyrockets (i.e. rise) every minute. Keynes refers to this type of inflation as true inflation. Generally such type of inflation occurs after full employment is reached. Full employment is a conditional of national economic where really all persons willing and able to work at the prevailing wages and working condition are able to do so.

Also inflation is classified on the basis of how the government reacts to this phenomenon.

Open inflation: it is a situation where the government takes no step to control the rise in the price level. Here the market mechanism works without interference of government. In such case allocation of resources distribution of income and economic development take place freely without the interference of government.

Repressed or suppressed inflation: it is a situation where the government actively intervenes to control rise in the level of prices. This may be done through various policies followed by government as, monetary, fiscal, income and wages policies.

Causes of inflation

a.   Caused on the demand side,” causes operating on the demand side leading of demand pull theory of inflation”.

b.  Causes on supply side,” causes operating on supply side leading to the cast push theory of inflation”.

Explanations of the two factors:

Demand-pull theory of inflation (DPI)

According to this theory- inflation arises when aggregate demand is in excess of supply of goods and services, this excess demand pulls up the prices cause (DPI)

Cost-push inflation theory (CPI)

According to this theory inflation occurs mainly because there is a rise in the cost of production, which push up the level of prices leading to what has been termed as (CPI) 

Effects of inflation

A mild degree of inflation is beneficial to an economy, since it implies rising profit and favorable business conditions. Such inflation actually generates output, income, and employment in an economy.

However, when inflation becomes excessive it becomes a matter of concern and has to be controlled.

The effects and consequences of inflation can be discussed as given below.

a.   Effects on production: it increases the overall cost of production, which further aggravates in inflation.

b.  Effects on consumption: it causes a rise in the prices of goods and services, therefore a decline in the standard of living.

c.   Effects on distribution: a long period of inflationary pressure results in a redistribution of income and wealth in favor of the richer class of the society.

Control of inflation

Inflation is a very complicated phenomenon. Thus, measures have to be taken on many fronts, monetary and non-monetary to control it. These are the measures which control inflation:

a.   Monetary policy measures.

b.  Fiscal policy measures.

One of the major instruments to correct inflation is the monetary policy. The central bank through its quantitative and qualitative instruments of monetary policy regulates the money supply and credit in the economy and this controls inflation. During the inflationary period the central bank can raise the cost of borrowing and reduce the credit creating capably of the commercial banks.

The major monetary measures to control inflation include:

a.   Increase the bank rate.

b.  Government sale of securities in the open market.

c.   Increasing the cash reserve ratio.

Fiscal policy measures

During inflationary period the government uses its major fiscal policy instruments in the following manner to control inflation:

a.   Increasing personal income tax to reduce disposable income.

b.  Increasing other taxes on expenditure.

c.   Reduce deficit financing.

Thanking You

Satar Mosavi

B.Com student from Afghanistan

Dear visitor, you can also participate in our group discussion just by adding your views or comments in YOUR IDEA section.

This presentation is presented and edited by Satar Mosavi, a B.Com student of Pune University. References for this presentation needs to be noted.

Note: Academic get-together is an informal voluntary meeting which takes place in Pune University between a number of foreign students.

Baloch Academy Of Humanities www.balochacademy.org