Inflation is a rise in general level of prices of goods and services over time.

Although "inflation" is sometimes used to refer to a rise in the prices of a specific set of goods or services, a rise in prices of one set (such as food) without a rise in others (such as wages) is not included in the original meaning of the word. Inflation can be thought of as a decrease in the value of the unit of currency. It is measured as the percentage rate of change of a price index[ ! but it is not uni"uely defined because there are various price indices that can be used. #any economists believe that high rates of inflation are caused by high rates of growth of the money supply.[$! %iews on the factors that determine moderate rates of inflation are more varied& changes in inflation are sometimes attributed to fluctuations in real demand for goods and services or in available supplies (i.e. changes in scarcity), and sometimes to changes in the supply or demand for money. In the mid'twentieth century, two camps disagreed strongly on the main causes of inflation at moderate rates& the "monetarists" argued that money supply dominated all other factors in determining inflation, while "(eynesians" argued that real demand was often more important than changes in the money supply. )here are many measures of inflation. *or example, different price indices can be used to measure changes in prices that affect different people. )wo widely +nown indices for which inflation rates are reported in many countries are the ,onsumer -rice Index (,-I), which measures consumer prices, and the ./- deflator, which measures price variations associated with domestic production of goods and services.

[edit] Related definitions

0elated economic concepts include& deflation, a general falling in price level1 disinflation, a decrease in the rate of inflation1 hyperinflation, an out'of'control inflationary spiral1 stagflation, a combination of inflation and slow economic growth and rising unemployment1 and reflation, which is an attempt to raise prices to counteract deflationary pressures. In classical political economy, inflation meant increasing the money supply, while deflation meant decreasing it (see Monetary inflation). 2conomists from some schools of economic thought (including some Austrian economists) still retain this usage. In contemporary economic terminology, these would usually be referred to as expansionary and contractionary monetary policies.

[edit] Measures of inflation

Inflation is measured by calculating the percentage rate of change of a price index, which is called the inflation rate. )his rate can be calculated for many different price indices, including&

Consumer price indices (,-Is) which measure the price of a selection of goods purchased by a "typical consumer." In the 3(, an alternative index called the 0etail -rice Index (0-I) uses a slightly different mar+et bas+et. Cost-of-living indices (,45I) are indices similar to the ,-I which are often used to ad6ust fixed incomes and contractual incomes to maintain the real value of those incomes. Producer price indices (--Is) which measure the prices received by producers. )his differs from the ,-I in that price subsidi7ation, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. )here is also typically a delay between an increase in the --I and any resulting increase in the ,-I. -roducer price inflation measures the pressure being put on producers by the costs of their raw materials. )his could be "passed on" as consumer inflation, or it could be absorbed by profits, or offset by increasing productivity. In India and the 3nited 8tates, an earlier version of the --I was called the Wholesale Price Index. Commodity price indices, which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee. )he G P eflator is a measure of the price of all the goods and services included in .ross /omestic -roduct (./-). )he 38 ,ommerce /epartment publishes a deflator series for 38 ./-, defined as its nominal ./- measure divided by its real ./- measure. Capital goods price Index, although so far no attempt at building such an index has been made, several economists have recently pointed out the necessity of measuring capital goods inflation (inflation in the price of stoc+s, real estate, and other assets) separately.[citation needed! Indeed a given increase in the supply of money can lead to a rise in inflation (consumption goods inflation) and or to a rise in capital goods price inflation. )he growth in money supply has remained fairly constant through since the 9:;s however consumption goods price inflation has been reduced because most of the inflation has happened in the capital goods prices.

4ther types of inflation measures include&

Regional Inflation )he <ureau of 5abor 8tatistics brea+s down ,-I'3 calculations down to different regions of the 38. !istorical Inflation <efore collecting consistent econometric data became standard for governments, and for the purpose of comparing absolute, rather than relative standards of living, various economists have calculated imputed inflation figures. #ost inflation data before the early $;th century is imputed based on the +nown costs of goods, rather than compiled at the time. It is also used to ad6ust for the differences in real standard of living for the presence of technology. )his is e"uivalent to not ad6usting the composition of bas+ets over time.

[edit] Issues in measuring inflation

#easuring inflation re"uires finding ob6ective ways of separating out changes in nominal prices from other influences related to real activity. In the simplest possible case, if the price of a ; o7. can of corn changes from =;.9; to = .;; over the course of a year, with no change in "uality, then this price change represents inflation. <ut we are usually more interested in +nowing how the overall cost of living changes, and therefore instead of loo+ing at the change in price of one good, we want to +now how the price of a large >bas+et> of goods and services changes. )his is the purpose of loo+ing at a price index, which is a weighted average of many prices. )he weights in the ,onsumer -rice Index, for example, represent the fraction of spending that typical consumers spend on each type of goods (using data collected by surveying households). Inflation measures are often modified over time, either for the relative weight of goods in the bas+et, or in the way in which goods from the present are compared with goods from the past. )his includes hedonic ad6ustments and ?reweighing@ as well as using chained measures of inflation. As with many economic numbers, inflation numbers are often seasonally ad6usted in order to differentiate expected cyclical cost increases, versus changes in the economy. Inflation numbers are averaged or otherwise sub6ected to statistical techni"ues in order to remove statistical noise and volatility of individual prices. *inally, when loo+ing at inflation, economic institutions sometimes only loo+ at subsets or special indices. 4ne common set is inflation excluding food and energy, which is often called ?core inflation@.

[edit] "ffects of inflation

A small amount of inflation can be viewed as having a beneficial effect on the economy. [A! 4ne reason for this is that it can be difficult to renegotiate prices and wages. Bith generally increasing prices it is easier for relative prices to ad6ust. #any prices are "stic+y downward" and tend to creep upward, so that efforts to attain a 7ero inflation rate (a constant price level) punish other sectors with falling prices, profits, and employment. 2fforts to attain complete price stability can also lead to deflation, which is generally viewed as a negative by (eynesians because of the downward ad6ustments in wages and output that are associated with it. Bith inflation, the price of any given good is li+ely to increase over time, therefore both consumers and businesses may choose to ma+e purchases sooner rather than later. )his effect tends to +eep an economy active in the short term by encouraging spending and borrowing, and in the long term by encouraging investments. <ut inflation can also reduce incentives to save, so the effect on gross capital formation in the long run is ambiguous. Inflation is also viewed as a hidden ris+ pressure that provides an incentive for those with savings to invest them, rather than have the purchasing power of those savings erode through inflation. In investing, inflation ris+s often cause investors to ta+e on more systematic ris+, in order to gain returns that will stay ahead of expected inflation.[citation
needed!

Inflation also gives central ban+s room to maneuver, since their primary tool for controlling the money supply and velocity of money is by setting the lowest interest rate in an economy ' the discount rate at which ban+s can borrow from the central ban+. 8ince borrowing at negative interest is generally ineffective, a positive inflation rate gives central ban+ers "ammunition", as it is sometimes called, to stimulate the economy. As central ban+s are controlled by governments, there is also often political pressure to increase the money supply to pay government services, this has the added effect of creating inflation and decreasing the net money owed by the government in previously negotiated contractual agreements and in debt. *or these reasons, many economists see moderate inflation as a benefit1 some business executives see mild inflation as "greasing the wheels of commerce."[C![D! <ut other economists have advocated reducing inflation to 7ero as a monetary policy goal ' particularly in the late 99;s at the end of a long disinflationary period, when the policy seemed within reach1 and some have even advocated deflation instead of inflation. In general, high or unpredictable inflation rates are regarded as bad&

Uncertainty about future inflation may discourage investment and saving. Redistribution o Rent Seeking ' happens when resources are used to merely transfer wealth rather than produce it. e.g. a company tries to gauge and combat the costs of inflation. o inflation redistributes income from those on fixed incomes, such as pensioners, and shifts it to those who draw a variable income, for example from wages and profits which may +eep pace with inflation. o /ebtors may be helped by inflation due to reduction of the real value of debt burden. o Inflation redistributes wealth from those who lend a fixed amount of money to those who borrow. *or example, where the government is a net debtor, as is usually the case, it will reduce this debt redistributing money towards the government. )hus inflation is sometimes viewed as similar to a hidden tax. o A particular form of inflation as a tax is Bracket Creep (also called fiscal drag). <y allowing inflation to move upwards, certain stic+y aspects of the tax code are met by more and more people. *or example, income tax brac+ets, where the next dollar of income is taxed at a higher rate than previous dollars, tend to become distorted. .overnments that allow inflation to "bump" people over these thresholds are, in effect, allowing a tax increase because the same real purchasing power is being taxed at a higher rate. International trade& Bhere fixed exchange rates are imposed, higher inflation than in trading partners> economies will ma+e exports more expensive and tend toward a wea+ening balance of trade. Shoe leather costs& <ecause the value of cash is eroded by inflation, people will tend to hold less cash during times of inflation. )his imposes real costs, for

example in more fre"uent trips to the ban+. ()he term is a humorous reference to the cost of replacing shoe leather worn out when wal+ing to the ban+.) Menu costs& *irms must change their prices more fre"uently, which imposes costs, for example with restaurants having to reprint menus. Relative Price Distortions& *irms do not generally synchroni7e ad6ustment in prices. If there is higher inflation, firms that do not ad6ust their prices will have much lower prices relative to firms that do ad6ust them. )his will distort economic decisions, since relative prices will not be reflecting relative scarcity of different goods. 0ising inflation can prompt trade unions to demand higher wages, to +eep up with consumer prices. 0ising wages in turn can help fuel inflation. In the case of collective bargaining, wages will be set as a factor of price expectations, which will be higher when inflation has an upward trend. )his can cause a wage spiral. [citation needed! In a sense, inflation begets further inflationary expectations. Hoarding& people buy consumer durables as stores of wealth in the absence of viable alternatives as a means of getting rid of excess cash before it is devalued, creating shortages of the hoarded ob6ects. Hyperinflation& if inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal wor+ings of the economy, hurting its ability to supply.

[edit] Causes of inflation

In the long run inflation is generally believed to be a monetary phenomenon while in the short and medium term it is influenced by the relative elasticity of wages, prices and interest rates.[E! )he "uestion of whether the short'term effects last long enough to be important is the central topic of debate between monetarist and (eynesian schools. In monetarism prices and wages ad6ust "uic+ly enough to ma+e other factors merely marginal behavior on a general trendline. In the (eynesian view, prices and wages ad6ust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy. A great deal of economic literature concerns the "uestion of what causes inflation and what effect it has. )here are different schools of thought as to what causes inflation. #ost can be divided into two broad areas& "uality theories of inflation, and "uantity theories of inflation. #any theories of inflation combine the two. )he "uality theory of inflation rests on the expectation of a seller accepting currency to be able to exchange that currency at a later time for goods that are desirable as a buyer. )he "uantity theory of inflation rests on the e"uation of the money supply, its velocity, and exchanges. Adam 8mith and /avid Fume proposed a "uantity theory of inflation for money, and a "uality theory of inflation for production. (eynesian economic theory proposes that money is transparent to real forces in the economy, and that visible inflation is the result of pressures in the economy expressing themselves in prices.

)here are three ma6or types of inflation, as part of what 0obert G. .ordon calls the "triangle model"&

emand-pull inflation& inflation caused by increases in aggregate demand due to increased private and government spending, etc. /emand inflation is constructive to a faster rate of economic growth since the excess demand and favourable mar+et conditions will stimulate investment and expansion. )he failing value of money, however, may encourage spending rather than saving and so reduce the funds available for investment. Cost-push inflation& presently termed "supply shoc+ inflation," caused by drops in aggregate supply due to increased prices of inputs, for example. )a+e for instance a sudden decrease in the supply of oil, which would increase oil prices. -roducers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices. #uilt-in inflation& induced by adaptive expectations, often lin+ed to the "priceHwage spiral" because it involves wor+ers trying to +eep their wages up (gross wages have to increase above the ,-I rate to net to ,-I after'tax) with prices and then employers passing higher costs on to consumers as higher prices as part of a "vicious circle." <uilt'in inflation reflects events in the past, and so might be seen as hangover inflation.

A ma6or demand'pull theory centers on the supply of money& inflation may be caused by an increase in the "uantity of money in circulation relative to the ability of the economy to supply (its potential output). )his is most obvious when governments finance spending in a crisis, such as a civil war, by printing money excessively, often leading to hyperinflation, a condition where prices can double in a month or less. Another cause can be a rapid decline in the de and for money, as happened in 2urope during the <lac+ -lague. )he money supply is also thought to play a ma6or role in determining moderate levels of inflation, although there are differences of opinion on how important it is. *or example, #onetarist economists believe that the lin+ is very strong1 (eynesian economics, by contrast, typically emphasi7e the role of aggregate demand in the economy rather than the money supply in determining inflation. )hat is, for (eynesians the money supply is only one determinant of aggregate demand. 8ome economists consider this a >hocus pocus> approach& )hey disagree with the notion that central ban+s control the money supply, arguing that central ban+s have little control because the money supply adapts to the demand for ban+ credit issued by commercial ban+s. )his is the theory of endogenous money. Advocated strongly by post'(eynesians as far bac+ as the 9E;s, it has today become a central focus of )aylor rule advocates. <ut this position is not universally accepted. <an+s create money by ma+ing loans. <ut the aggregate volume of these loans diminishes as real interest rates increase. )hus, it is "uite li+ely that central ban+s influence the money supply by ma+ing money cheaper or more expensive, and thus increasing or decreasing its production.

A fundamental concept in (eynesian analysis is the relationship between inflation and unemployment, called the -hillips curve. )his model suggests that there is a trade'off between price stability and employment. )herefore, some level of inflation could be considered desirable in order to minimi7e unemployment. )he -hillips curve model described the 3.8. experience well in the 9E;s but failed to describe the combination of rising inflation and economic stagnation (sometimes referred to as stagflation) experienced in the 9:;s. )hus, modern macroeconomics describes inflation using a -hillips curve that shifts (so the trade'off between inflation and unemployment changes) because of such matters as supply shoc+s and inflation becoming built into the normal wor+ings of the economy. )he former refers to such events as the oil shoc+s of the 9:;s, while the latter refers to the priceHwage spiral and inflationary expectations implying that the economy "normally" suffers from inflation. )hus, the -hillips curve represents only the demand'pull component of the triangle model. Another (eynesian concept is the potential output (sometimes called the "natural gross domestic product"), a level of ./-, where the economy is at its optimal level of production given institutional and natural constraints. ()his level of output corresponds to the Ion'Accelerating Inflation 0ate of 3nemployment, IAI03, or the "natural" rate of unemployment or the full'employment unemployment rate.) If ./- exceeds its potential (and unemployment is below the IAI03), the theory says that inflation will accelerate as suppliers increase their prices and built'in inflation worsens. If ./- falls below its potential level (and unemployment is above the IAI03), inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and undermining built'in inflation. Fowever, one problem with this theory for policy'ma+ing purposes is that the exact level of potential output (and of the IAI03) is generally un+nown and tends to change over time. Inflation also seems to act in an asymmetric way, rising more "uic+ly than it falls. Borse, it can change because of policy& for example, high unemployment under <ritish -rime #inister #argaret )hatcher might have led to a rise in the IAI03 (and a fall in potential) because many of the unemployed found themselves as structurally unemployed (also see unemployment), unable to find 6obs that fit their s+ills. A rise in structural unemployment implies that a smaller percentage of the labor force can find 6obs at the IAI03, where the economy avoids crossing the threshold into the realm of accelerating inflation.

[edit] Monetarism
#onetarists assert that the empirical study of monetary history shows that inflation has always been a monetary phenomenon. )he "uantity theory of money, simply stated, says that the total amount of spending in an economy is primarily determined by the total amount of money in existence. *rom this theory the following formula is created& where P is the general price level of consumer goods, DC is the aggregate demand for consumer goods and SC is the aggregate supply of consumer goods. )he idea is that the

general price level of consumer goods will rise only if the aggregate supply of consumer goods falls relative to aggregate demand for consumer goods, or if aggregate demand increases relative to aggregate supply. <ased on the idea that total spending is based primarily on the total amount of money in existence, the economists calculate aggregate demand for consumers> goods based on the total "uantity of money. )herefore, they posit that as the "uantity of money increases, total spending increases and aggregate demand for consumer goods increases too. *or this reason, economists who believe in the Juantity )heory of #oney also believe that the only cause of rising prices in a growing economy (this means the aggregate supply of consumer goods is increasing) is an increase of the "uantity of money in existence, which is a function of monetary policies, generally set by central ban+s that have a monopoly on the issuance of currency, which is not pegged to a commodity, such as gold. )he central ban+ of the 3nited 8tates is the *ederal 0eserve1 the central ban+ bac+ing the euro is the 2uropean ,entral <an+. Io one denies that inflation is associated with excessive money supply, but opinions differ as to whether excessive money supply is the cause.[citation needed!

[edit] Rational expectations

0ational expectations theory holds that economic actors loo+ rationally into the future when trying to maximi7e their well'being, and do not respond solely to immediate opportunity costs and pressures. In this view, while generally grounded in monetarism, future expectations and strategies are important for inflation as well. A core assertion of rational expectations theory is that actors will see+ to ?head off@ central'ban+ decisions by acting in ways that fulfill predictions of higher inflation. )his means that central ban+s must establish their credibility in fighting inflation, or have economic actors ma+e bets that the economy will expand, believing that the central ban+ will expand the money supply rather than allow a recession.

[edit] $ther theories a%out the causes of inflation

[edit] &ustrian 'chool
Austrian 8chool economics falls within the general tradition of the "uantity theory of money, but is notable for providing a theory of the process whereby, upon an increase of the money supply, a new e"uilibrium is pursued. #ore specifically, possessors of the additional money are held to react to their new purchasing power by changing their buying habits in a way that generally increases demand for goods and for services. Austrian 8chool economists do not believe that production will simply rise to meet all this new demand, so that prices increase and the new purchasing power erodes. )he Austrian 8chool emphasi7es that this process is not instantaneous, and that the changes in demand are not distributed uniformly, so that the process does not ultimately lead to an e"uilibrium identical to the old except for some proportionate increase in prices1 that ?nominal@ values thus have real effects. Austrian economists tend to view fiat increases in the money supply as particularly pernicious in their real effects. )his view typically

leads to the support for a commodity standard of a very strict variety where all notes are convertible on demand to some commodity or bas+et of commodities. ()he more popular of the Austrian economists unanimously favor a gold standard.)

[edit] Marxian theory

In #arxian economics value is based on the labor re"uired to extract a given commodity versus the demand for that commodity by those with money. )he fluctuations of price in money terms are inconse"uential compared to the rise and fall of the labor cost of a commodity, since this determines the true cost of a good or service. In this, #arxist economics is related to other "classical" economic theories that argue that monetary inflation is caused solely by printing notes in excess of the basic "uantity of gold. Fowever, #arx argues that the real +ind of inflation is in the cost of production measured in labor. <ecause of the classical labor theory of value, the only factor that is important is whether more or less labor is re"uired to produce a given commodity at the rate it is demanded.

[edit] 'upply-side economics

8upply'side economics asserts that inflation is caused by either an increase in the supply of money or a decrease in the demand for balances of money. )hus the inflation experienced during the <lac+ -lague in medieval 2urope is seen as being caused by a decrease in the demand for money, the money stoc+ used was gold coin and it was relatively fixed, while inflation in the 9:;s is regarded as initially caused by an increased supply of money that occurred following the 3.8. exit from the <retton Boods gold standard. 8upply'side economics asserts that the money supply can grow without causing inflation as long as the demand for balances of money also grows.[citation needed!

[edit] Issues of classical political economy

Bhile economic theory before the "marginal revolution" is no longer the basis for current economic theory, many of the institutions, concepts, and terms used in economics come from the "classical" period of political economy, including monetary policy, "uantity and "uality theories of economics, central ban+ing, velocity of money, price levels and division of the economy into production and consumption. *or this reason debates about present economics often reference problems of classical political economy, particularly the classical gold standard of K: ' 9 A, and the currency versus ban+ing debates of that period.

[edit] Currency and %an(ing schools

Bithin the context of a fixed specie basis for money, one important controversy was between the "Juantity )heory" of money and the 0eal <ills /octrine, or 0</. Bithin this context, "uantity theory applies to the level of fractional reserve accounting allowed against specie, generally gold, held by a ban+. )he 0</ argues that ban+s should also be able to issue currency against bills of trading, which is "real bills" that they buy from

merchants. )his theory was important in the 9th century in debates between "<an+ing" and ",urrency" schools of monetary soundness, and in the formation of the *ederal 0eserve. In the wa+e of the collapse of the international gold standard post 9 A, and the move towards deficit financing of government, 0</ has remained a minor topic, primarily of interest in limited contexts, such as currency boards. It is generally held in ill repute today, with *rederic #ish+in, a governor of the *ederal 0eserve going so far as to say it had been "completely discredited." 2ven so, it has theoretical support from a few economists, particularly those that see restrictions on a particular class of credit as incompatible with libertarian principles of laisse7'faire, even though almost all libertarian economists are opposed to the 0</. )he debate between currency, or "uantity theory, and ban+ing schools in <ritain during the 9th century prefigures current "uestions about the credibility of money in the present. In the 9th century the ban+ing school had greater influence in policy in the 3nited 8tates and .reat <ritain, while the currency school had more influence "on the continent", that is in non'<ritish countries, particularly in the 5atin #onetary 3nion and the earlier 8candinavia monetary union.

[edit] &nti-classical or %ac(ing theory

Another issue associated with classical political economy is the anti'classical hypothesis of money, or "bac+ing theory". )he bac+ing theory [ ! argues that the value of money is determined by the assets and liabilities of the issuing agency. 3nli+e the Juantity )heory of classical political economy, the bac+ing theory argues that issuing authorities can issue money without causing inflation so long as the money issuer has sufficient assets to cover redemptions.

[edit] Controlling inflation

See also! Inflation targeting See also! Monetary policy )here are a number of methods that have been suggested to control inflation. ,entral ban+s such as the 3.8. *ederal 0eserve can affect inflation to a significant extent through setting interest rates and through other operations (that is, using monetary policy). Figh interest rates and slow growth of the money supply are the traditional ways through which central ban+s fight or prevent inflation, though they have different approaches. *or instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied. #onetarists emphasi7e increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. (eynesians emphasi7e reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. 8upply'side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference

currency such as gold. )his would be a return to the gold standard. All of these policies are achieved in practice through a process of open mar+et operations. Another method attempted in the past have been wage and price controls ("incomes policies"). Bage and price controls have been successful in wartime environments in combination with rationing. Fowever, their use in other contexts is far more mixed. Iotable failures of their use include the 9:$ imposition of wage and price controls by 0ichard Iixon. In general wage and price controls are regarded as a drastic measure, and only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. #any developed nations set prices extensively, including for basic commodities as gasoline.[citation needed! )he usual economic analysis is that that which is under priced is overconsumed, and that the distortions that occur will force ad6ustments in supply. *or example, if the official price of bread is too low, there will be too little bread at official prices. )emporary controls may co ple ent a recession as a way to fight inflation& the controls ma+e the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the +inds of distortions that controls cause when demand is high. Fowever, in general the advice of economists is not to impose price controls but to liberali7e prices by assuming that the economy will ad6ust and abandon unprofitable economic activity. )he lower activity will place fewer demands on whatever commodities were driving inflation, whether labor or resources, and inflation will fall with total economic output. )his often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed.

)he economy of Limbabwe has evolved under uni"ue circumstances almost three of all embracing controls and regulations (Icube # 99K).)he supply and demand imbalances which characteri7ed the economy in the first decade could easily have resulted in severe inflationHdeterioration of balance of payment had it not been for the stringent interest rates, import and prices controls which had been a ma6or feature of government policies. -olicies and 8trategies implemented .overnment too+ measures such as the /raconian measuresHpolicies that is tightening of money supply and foreign currency allocation procedures and the suspension of profit repatriation helped reduce inflation in the mid 9K;s and the government also put up incentives to incentives to encourage exports e.g. the 9KA 2xport 0evolving *und (20*) which was established to provide exporters with foreign currency for importing inputs that were for meeting verified export orders.

)o encourage agricultural production, producer prices were raised this increased ./*04# $.EM in 9KC to :.DM in 9KD and thus money supply expansion decreased from $$.AM in 9KC to C.$M in 9KD and thus pushed inflation down to ;M from 9M in 9KC and also the interest rates ad6usted downwards, farm mechani7ation was also put in place as part of the government efforts to revive the agricultural sector which was the bac+bone of the economy, it also introduced the agricultural special production enhancement facility (A8-2*) to help distressed and new farmers attain finance and loans. )he government also embar+ed in a drive to commercialise and privatise loss ma+ing enterprises and rationali7ation of the civil service and a number of companies got commerciali7ed such as the ,old 8torage ,ommission, /airy #ar+eting <oard and the ,otton #ar+eting <oard and this helped reduce inflation. 8tringent import controls and "uotas were used to curb excess demand for foreign currency. )he government also embar+ed on the free7ing of prices and wages in order to bring down in which they were successful in 9K: but failed to properly implement it in $;;:. )he creation of economic processing 7ones (2-L) reduced inflation as this was also complimented by an extensive program put in place in 99; which aimed to liberali7e the economy from the system of controls that have been so pervasive during the 3/I and post independence decade through the economic structural ad6ustment program (28A-) which sought to& i) 5iberalise trade and foreign exchange which led to the formation of exchange bureaus. ii) 5iberalise and promote investment, iii) 5iberalise the financial sector i.e. interest rate deregulation, and the adoption of mar+et based monetary policies and the liberali7ation of regulations regarding entry and exit into the industry, iv) 0eform on public enterprises, rationali7ation of the civil service, plus the reduction by half of the budget deficit, v) )he deregulation of the labour mar+et. )he government also structured the investment approval procedures, done by through the formation of the Limbabwe Investment centre'a one stop shop window to facilitate and promote investment. It also allowed foreigners to trade on the Limbabwe 8toc+ 2xchange (L82) and made it one of the most active stoc+ exchanges in 8ub 8aharan Africa. Be also note that the tight monetary policies during the 28A- period were vital in reducing inflation to $AM in 99D from C$M in 99$. *urthermore, in 99K, the Limbabwe government launched the second stage of its economic structural ad6ustment programme, the Limbabwe -rogramme for 2conomic and 8ocial )ransformation (LI#-028)). LI#-028) outlined macro'economic reforms through to the year $;;;. )he plan envisaged a real annual ./- growth of EM until year $;;; and a creation of CC,;;; new 6obs per year. )o achieve such targets, savings and investments were expected to reach at least $AM of the ./- and the budget deficit reduced to fewer than DM. <esides see+ing to advance the unfinished wor+ of 28A-, LI#-028) also added socio'political goals such as improvements in the "uality of democratic institutions1 the pursuit of good governance1 and the elimination of corruption. )hus, political conditionalityNs were added to LI#-028).

)he government should also try to decrease the amount of subsidies and expenditures that they are incurring as it has been analysed as the main driver of inflation, it should fully liberalise the foreign exchange mar+et through they willing buyer, willing seller approach so that both parties are able to sell and buy foreign currency from each ,so as to completely destroy the parallel mar+et and this should be bone with complete minimi7ation of government intervention and thus re'introduce foreign currency bureaus. )he government also announces complimentary and supportive fiscal and monetary policies so as to ma+e people believe in them that they can reduce inflation and also the issue of channeling resources to capital development pro6ects. It should also try to institute the complete liberali7ation of the fuel sector, whereby we have a situation were the ma6ority of people can be able to purchase fuel at the any service station in the country as this would curb the ever souring inflation which has been starving the precious nation the most important drive of the important drive of the industry. )he need to curbHreduce new farm invasions should be done in the best interest of both parties and there should fully implement they presidential land audit, such that unproductive farmersN should have they land ta+en and given to those who have the 7eal and determination to do the tas+ at hand. Fence we also note that the 0eserve <an+ introduced a tight monetary policy (contractionary) to fight inflation in $;;A as money supply was decreased C9;.9M to A$.:DM and in turn inflation reduced from D9K.:DM to A$.KCM in $;;C. )he government should also try to ensure minimum intervention in the pricing and control of wages through they national incomes and pricing commission (II-,), as this would enhance the availability of products on the mar+et shelves and thus would bring down inflation as most shops had resorted to use the blac+ mar+et as a source of ma+ing profits as that is failing to happen through the proper channels. )hrough they double interest rate policy, which is meant to inflation to fight inflation through discouraging speculative and consumption borrowing through the imposing interest rates on speculative, consumption, and other non'productive activities to be charged unsubsidi7ed mar+et rates. )he reduction in #A growth through li"uidity support schemes granted only to solvent and viable ban+s where there is no evidence of imprudent behavior, also the implementation of the overnight accommodation rates to smoothen end of day mar+et li"uidity positions. ,onclusion the government began to address broader concerns of economic policy in the early eighties with the first five year national economic programme (**OI2-),.rowth with 2"uity, second five year national economic programme (8*OI2-), economic structural ad6ustment programme (28A-), Limbabwe programme for economic structural transformation (LI#-028)), economic millennium goals, national economic development priority programme (I2/--) among other programs with little success due

to poor planning, timing, and implementation most notably the recent programs especially I2/-- which was deemed a failure way before implementation. Fowever they had some strides in deregulating the foreign exchange, trade, labour and financial mar+ets. )he investment climate also improved through the decontrol of investment regulations and prices and the setting up of economic processing 7ones. -rogress was also made in rationali7ation and commerciali7ation of the civil service and poor performing parastatals. Fowever the deregulation of the economy resulted in high rates of interes

Controlling inflation
See also! Inflation targeting See also! Monetary policy )here are a number of methods that have been suggested to control inflation. ,entral ban+s such as the 3.8. *ederal 0eserve can affect inflation to a significant extent through setting interest rates and through other operations (that is, using monetary policy). Figh interest rates and slow growth of the money supply are the traditional ways through which central ban+s fight or prevent inflation, though they have different approaches. *or instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied. #onetarists emphasi7e increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. (eynesians emphasi7e reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. 8upply'side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. )his would be a return to the gold standard. All of these policies are achieved in practice through a process of open mar+et operations. Another method attempted in the past have been wage and price controls ("incomes policies"). Bage and price controls have been successful in wartime environments in combination with rationing. Fowever, their use in other contexts is far more mixed. Iotable failures of their use include the 9:$ imposition of wage and price controls by 0ichard Iixon. In general wage and price controls are regarded as a drastic measure, and only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. #any developed nations set prices extensively, including for basic commodities as gasoline.[citation needed! )he usual economic analysis is that that which is under priced is overconsumed, and that the distortions that occur will force ad6ustments in supply. *or

example, if the official price of bread is too low, there will be too little bread at official prices. )emporary controls may co ple ent a recession as a way to fight inflation& the controls ma+e the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the +inds of distortions that controls cause when demand is high. Fowever, in general the advice of economists is not to impose price controls but to liberali7e prices by assuming that the economy will ad6ust and abandon unprofitable economic activity. )he lower activity will place fewer demands on whatever commodities were driving inflation, whether labor or resources, and inflation will fall with total economic output. )his often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed. 8ee ,reative destruction.

[edit] World inflation crisis )*++,-*++-.

It has been suggested that this section be split into a new article entitled "orld inflation crisis. (/iscuss)

8ee&

$;;:'$;;K world food price crisis 4il price increases since $;;A

Please help improve this section %y expanding it/

*urther information might be found on the tal+ page or at re"uests for expansion.

)he economy of Limbabwe has evolved under uni"ue circumstances almost three of all embracing controls and regulations (Icube # 99K).)he supply and demand imbalances which characteri7ed the economy in the first decade could easily have resulted in severe inflationHdeterioration of balance of payment had it not been for the stringent interest rates, import and prices controls which had been a ma6or feature of government policies. -olicies and 8trategies implemented .overnment too+ measures such as the /raconian measuresHpolicies that is tightening of money supply and foreign currency allocation procedures and the suspension of profit repatriation helped reduce inflation in the mid 9K;s and the government also put up incentives to incentives to encourage exports e.g. the 9KA 2xport 0evolving *und (20*) which was established to provide exporters with foreign currency for importing inputs that were for meeting verified export orders.

)o encourage agricultural production, producer prices were raised this increased ./*04# $.EM in 9KC to :.DM in 9KD and thus money supply expansion decreased from $$.AM in 9KC to C.$M in 9KD and thus pushed inflation down to ;M from 9M in 9KC and also the interest rates ad6usted downwards, farm mechani7ation was also put in place as part of the government efforts to revive the agricultural sector which was the bac+bone of the economy, it also introduced the agricultural special production enhancement facility (A8-2*) to help distressed and new farmers attain finance and loans. )he government also embar+ed in a drive to commercialise and privatise loss ma+ing enterprises and rationali7ation of the civil service and a number of companies got commerciali7ed such as the ,old 8torage ,ommission, /airy #ar+eting <oard and the ,otton #ar+eting <oard and this helped reduce inflation. 8tringent import controls and "uotas were used to curb excess demand for foreign currency. )he government also embar+ed on the free7ing of prices and wages in order to bring down in which they were successful in 9K: but failed to properly implement it in $;;:. )he creation of economic processing 7ones (2-L) reduced inflation as this was also complimented by an extensive program put in place in 99; which aimed to liberali7e the economy from the system of controls that have been so pervasive during the 3/I and post independence decade through the economic structural ad6ustment program (28A-) which sought to& i) 5iberalise trade and foreign exchange which led to the formation of exchange bureaus. ii) 5iberalise and promote investment, iii) 5iberalise the financial sector i.e. interest rate deregulation, and the adoption of mar+et based monetary policies and the liberali7ation of regulations regarding entry and exit into the industry, iv) 0eform on public enterprises, rationali7ation of the civil service, plus the reduction by half of the budget deficit, v) )he deregulation of the labour mar+et. )he government also structured the investment approval procedures, done by through the formation of the Limbabwe Investment centre'a one stop shop window to facilitate and promote investment. It also allowed foreigners to trade on the Limbabwe 8toc+ 2xchange (L82) and made it one of the most active stoc+ exchanges in 8ub 8aharan Africa. Be also note that the tight monetary policies during the 28A- period were vital in reducing inflation to $AM in 99D from C$M in 99$. *urthermore, in 99K, the Limbabwe government launched the second stage of its economic structural ad6ustment programme, the Limbabwe -rogramme for 2conomic and 8ocial )ransformation (LI#-028)). LI#-028) outlined macro'economic reforms through to the year $;;;. )he plan envisaged a real annual ./- growth of EM until year $;;; and a creation of CC,;;; new 6obs per year. )o achieve such targets, savings and investments were expected to reach at least $AM of the ./- and the budget deficit reduced to fewer than DM. <esides see+ing to advance the unfinished wor+ of 28A-, LI#-028) also added socio'political goals such as improvements in the "uality of democratic institutions1 the pursuit of good governance1 and the elimination of corruption. )hus, political conditionalityNs were added to LI#-028).

)he government should also try to decrease the amount of subsidies and expenditures that they are incurring as it has been analysed as the main driver of inflation, it should fully liberalise the foreign exchange mar+et through they willing buyer, willing seller approach so that both parties are able to sell and buy foreign currency from each ,so as to completely destroy the parallel mar+et and this should be bone with complete minimi7ation of government intervention and thus re'introduce foreign currency bureaus. )he government also announces complimentary and supportive fiscal and monetary policies so as to ma+e people believe in them that they can reduce inflation and also the issue of channeling resources to capital development pro6ects. It should also try to institute the complete liberali7ation of the fuel sector, whereby we have a situation were the ma6ority of people can be able to purchase fuel at the any service station in the country as this would curb the ever souring inflation which has been starving the precious nation the most important drive of the important drive of the industry. )he need to curbHreduce new farm invasions should be done in the best interest of both parties and there should fully implement they presidential land audit, such that unproductive farmersN should have they land ta+en and given to those who have the 7eal and determination to do the tas+ at hand. Fence we also note that the 0eserve <an+ introduced a tight monetary policy (contractionary) to fight inflation in $;;A as money supply was decreased C9;.9M to A$.:DM and in turn inflation reduced from D9K.:DM to A$.KCM in $;;C. )he government should also try to ensure minimum intervention in the pricing and control of wages through they national incomes and pricing commission (II-,), as this would enhance the availability of products on the mar+et shelves and thus would bring down inflation as most shops had resorted to use the blac+ mar+et as a source of ma+ing profits as that is failing to happen through the proper channels. )hrough they double interest rate policy, which is meant to inflation to fight inflation through discouraging speculative and consumption borrowing through the imposing interest rates on speculative, consumption, and other non'productive activities to be charged unsubsidi7ed mar+et rates. )he reduction in #A growth through li"uidity support schemes granted only to solvent and viable ban+s where there is no evidence of imprudent behavior, also the implementation of the overnight accommodation rates to smoothen end of day mar+et li"uidity positions. ,onclusion the government began to address broader concerns of economic policy in the early eighties with the first five year national economic programme (**OI2-),.rowth with 2"uity, second five year national economic programme (8*OI2-), economic structural ad6ustment programme (28A-), Limbabwe programme for economic structural transformation (LI#-028)), economic millennium goals, national economic development priority programme (I2/--) among other programs with little success due

to poor planning, timing, and implementation most notably the recent programs especially I2/-- which was deemed a failure way before implementation. Fowever they had some strides in deregulating the foreign exchange, trade, labour and financial mar+ets. )he investment climate also improved through the decontrol of investment regulations and prices and the setting up of economic processing 7ones. -rogress was also made in rationali7ation and commerciali7ation of the civil service and poor performing parastatals. Fowever the deregulation of the economy resulted in high rates of interes

Issues in measuring inflation

#easuring inflation re"uires finding ob6ective ways of separating out changes in nominal prices from other influences related to real activity. In the simplest possible case, if the price of a ; o7. can of corn changes from =;.9; to = .;; over the course of a year, with no change in "uality, then this price change represents inflation. <ut we are usually more interested in +nowing how the overall cost of living changes, and therefore instead of loo+ing at the change in price of one good, we want to +now how the price of a large >bas+et> of goods and services changes. )his is the purpose of loo+ing at a price index, which is a weighted average of many prices. )he weights in the ,onsumer -rice Index, for example, represent the fraction of spending that typical consumers spend on each type of goods (using data collected by surveying households). Inflation measures are often modified over time, either for the relative weight of goods in the bas+et, or in the way in which goods from the present are compared with goods from the past. )his includes hedonic ad6ustments and ?reweighing@ as well as using chained measures of inflation. As with many economic numbers, inflation numbers are often seasonally ad6usted in order to differentiate expected cyclical cost increases, versus changes in the economy. Inflation numbers are averaged or otherwise sub6ected to statistical techni"ues in order to remove statistical noise and volatility of individual prices. *inally, when loo+ing at inflation, economic institutions sometimes only loo+ at subsets or special indices. 4ne common set is inflation excluding food and energy, which is often called ?core inflation@.

WPI Inflation in India at ,0 and clim%ing

)he B-I inflation is now at :M and climbing, putting the .ovt the fm and the 0<I in a tight spot. I had expected this to happen as i wasnNt "uite sure of the *#s management s+ills and mentioned it in my budget post ' <udget what matters most.

It is hurting the middle classes as everything is getting expensive, be it vegi oil or rice wheat, pulses, mil+ or other essentials. 8ummers mean more 2lectricity bills in a power deficit nation of ours. I worry about the millions that have AHC children to feed living on $= a day not getting what they were promised by the 3-A during the last general elections, in terms of subsidised food promised in <-5 cards on account of shortages due to mismanagement and huge divergence from open mar+et prices leading to blac+ mar+eting. And it shows, cause it is now affecting budgets of the upper middle class too, many of who have also been burned by the mar+et fall, and purchased their second house at atrocious prices on floating rate loans. )he press has wo+en up "uite late as normal and is doing the round of shopping malls and mar+ets, counting each rupee spent in a days shopping, instead of the regular cric+et updates, <acchan updates, scandals gossip and interviews with successful entrepreneurs in D star hotelsP rediff has a wierd articles li+e this one. 5oo+s li+e real returns on deposits after effects of inflation based on real prices or ,-I , compliance costs and taxes should now be negative, for the aam admi. -ushing 8ubsidy burden on -83 4il cos and <an+s in terms of expecting them to cushion the .overnments populous decisions is old news. 5oo+s li+e we are +noc+ing on the /i+tat H ,ontrol ra6 doors, as the .ovt is in a hurry to cut inflation by attac+ing the prices of the B-I bas+et constituents li+e steel , cement etc by some closed door coercion to -vt ,ompanies, and some threat of stern action and invo+ing provisions of draconian price fixing laws of the prohibition era, while the rail ministry on the other end increases freight rate, increasing their costs. )he 0<I is attempting to suc+ out li"uidity through m+t operations and an expected ,00 hi+e, but will it be enoughQ Borse we are importing 38 inflation by holding the 0upee to the dollar at close to 0sC;. 0ead Ilas post on dollar purchase by 0<I and watch A6ay 8hah for his excellent analysis on Borldwide Inflation of commodities. )hings are going to be interesting, and mar+ets fragile. I thin+ sooner than later the -roperty mar+ets will also start to correct by a fair bit. 0elated 0eading& /emocracy of 8hortages Fow the credit crisis affects inflation, 8lower growth plus higher interest rates, 1 2 2inan3 0ich man(-olitician)poor state, */I in *eb hits record high, Are Indian -roperty #ar+ets in a bubbleQ <lac+ money saves financial sector

M&2$4 Pra%ha(ar HH April D, $;;K at ;&$; pm inflation in india will raise further for sure 0.<.I should ma+e new attempts wich is been followed in countries li+e china,russia beacause these countries r a thic+ly populated li+e india . and old systems of controling inflation in india will not suit in these type of cases , if it continues to move on it will lead to greater problem than great depression in 9$9 and it cannot be solved easily.

Inflation in India is 5artificially suppressed6 says the R#I

4anuary *78 *++- 9 , Comments
*inally the cat is out of the box , the 0<I did some straight tal+ing and outed a well +nown secret, in its third "uarter review $;;:H;K. 0eserve <an+ of India (0<I) on #onday said inflation in India was artificially ?suppressed@ as higher international oil prices have not been passed on to domestic consumers. And that practices of increased use of innovative credit instruments and complex layering of ris+ diffusion have ta+en the investor to become remote from the ultimate borrowers. 0eliance only on rating agencies for ris+ assessment needs to be avoided and that confidence is also falling in the strength of insurers that guarantee payments on bonds. Iet net what this mumbo 6umbo means is that the 0<I is worried about the ever increasing debt burden that the ,entral govt has ta+en on its boo+s to finance oil bonds, and its effect on the economy, and about the high oil prices. 5arge scale */I into Indian mar+ets using advanced derivatives , enhanced ris+ ta+ing and the repercussions of large scale losses from 38 sub'prime mortgages on the world economies are also worrying the central ban+. )he ?elevated international food prices also pose potential inflationary pressures in the period ahead.@ Iot only that, inflation data is based on B-I (Bholesale price index ) and not ,-I (,onsumer price index) , thus the real inflation is controlled by the govt using export restrictions and import duty cuts and waivers. In India, inflation based on the wholesale price index (B-I) has remained below C per cent since mid'August $;;: , and 0<INs target is to contain inflation close to D per cent in $;;:';K, but increase in retail prices of ma6or transport fuels could lead to price levels breaching the comfort levels.

4verall the 0<I is broadly hinting why it is against a rate cut at this 6uncture

Inflation up8rupee do:n%ond prices fall

In India, inflation is measured using the Bholesale -rice Index or B-I. )he government comes out with B-I inflation figures every *riday. )he B-I presently consists of CAD items and it is dominated by manufactured goods which ma+e up EA.:DM of the index. #ost developed countries use the ,onsumer -rice Index (,-I) to calculate inflation. ,-I is a statistical time'series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that trac+s the prices of a specified bas+et of consumer goods and services, providing a measure of inflation. 5ast year, two leading economists associated with the multi'commodity exchange had pointed to serious flaws in the present method of calculating inflation and called for a change in line with prevalent methodologies in developed economies. In a research paper, economists % 8hunmugam and / . -rasad have called for a shift in the model followed by developed countries where the ,onsumer -rice Index is used to calculate inflation. In an interview to <usiness 8tandard, , 0angra6an, noted economist, ex'0<I governor and advisor to finance minister, told the reason why government is using B-I based inflation. As he told, in India, the ,-I data is not released as fre"uently as B-I data. B-I data is released almost wee+ly and sometimes at most biwee+ly, where as ,-I data is released once in a month. )here is also a lot of lag in collating all the ,-I data. )he latest, fully collated ,-I data available is for #arch $;;E. )here is another problem with the ,-I data in India. Be donNt have a single ,-I data, but four different ,-I figures relating to agriculture goods, urban manual labor and non'urban labor etc. )here is no discipline in when these different figures are released and with what fre"uency. 8o government of India has a genuine reason in not going for ,-I based inflation. 8o for the time being, we only have the B-I index, while 0<I is wor+ing on a ,-I. )he B-I'based inflation rate inched up to a six'month high of C.ADM in the wee+ ended *ebruary 9 from C. M in the previous wee+, on account of price rises in food articles such as fruit R vegetables, pulses and some manufactured products li+e imported edible oil, mustard oil and groundnut. Inflation was at E.D$M during the corresponding wee+ previous year, i.e. in $;;:. )here are chances of a further rise in inflation in the wee+s to come on account of a hi+e i n fuel prices. 5ast wee+, the government had raised fuel prices by CM to reduce the under' recoveries of oil companies. A direct influence of this apprehension of an increasing rate of inflation is that this will restrain 0<I from going in for a rate cut. #eanwhile, for the foreign exchange mar+et it was a fluctuation high. )he rupee fluctuated as much as : paise in a single day. At the same time, bond prices fell by C; paise due to the rise in bond yields. )he 0eserve <an+ of India infused 0s :,$C; crore to

the ban+ing system through its li"uidity ad6ustment facilityNs repo auction. Inter'ban+ call rates also stayed high, after opening at :.KDM and closing at K.:;M.

)he rupee fell this wee+ past the C;'per'dollar level for the first time since 8eptember after oil prices climbed to a record, sto+ing speculation Indian refiners will buy more dollars to pay for costlier crude imports. ,rude oil in Iew Oor+ reached an all'time high = ; .A$ per barrel on *eb. $;. )he commodity has gained more than C$ percent in the past six months, according to data compiled by <loomberg. India meets three "uarters of its energy re"uirements through imports. )he rupeeNs loss was also due to speculation overseas funds withdrew part of their investments in local e"uities. *unds abroad have sold Indian e"uities worth =$.9 billion more than they bought this year, after ma+ing record net purchases of = :.$ billion in $;;:, according to the 8ecurities and 2xchange <oard of India. )he benchmar+ Indian share index has lost C percent this year after advancing C: percent last year.

'uggestions

)o say that "economy is doing bad" is to say nothing. )here are two specific ways for the economy to be "doing bad". Oou can have a high inflation or a high unemployment. )o fight high inflation, you raise interest rates1 to fight high unemployment, you lower interest rates. )he big problem, of course, is stagflation '' a situation when both inflation and unemployment are high, so one cannot be fixed without ma+ing the other worse, at least temporarily. o K hours ago

0aising interest rates has the effect of cooling off the economy. A hot, or run away, economy is not a good thing either. An increase in interest rates tends to reduce inflation, e.g., the cost of a loaf of bread in post BB I .ermany was $;,;;; mar+s. 5ater the same day, the same loaf of bread may have cost D,;;;,;;; mar+s. (2ncyclopedia <rit.) Oes, a tighter credit mar+et will deter businesses from expanding if, and only if, investors withhold investing in those businesses. Fowever, it seems that the 38 economy usually averages about a ;M annual return. )hat>s not bad. 4ver the previous E years foreign fund investment has seen phenomenal returns. Iow it is time to return to normal.

)he disadvantages of inflation& .It reduces per capital income of a given country. $.It leads to wear and tear in monetary value of a nation>s currency. A.It leads to a hypertensive hardship. C.It breeds sharp bussiness practices and corruption. D.It begets emmigration.

Taxation - Capital Gains Tax

What Is the Capital Gains Tax? | Computation of Capital Gains | Why Does Capital Matter? | How Do Capital Gains Taxes Affect Workers? | A !anta"es # Disa !anta"es $f Capital Gains Tax Cut| The %ock&In 'ffect | Myths # (acts $f Capital Gains Tax Cut

Capital Gains Tax - Advantages & Disadvantages Of Capital Gains Tax Cut
$ne of the most unfair features of the capital "ains tax is that it taxes "ains that may )e attri)uta)le only to price chan"es* not real "ains+ Different analysts "i!e ifferent !iews re"ar in" Capital Gains Tax Cut+ %et us analyse )oth step wise+ Arguments for the motion: ,+ A cut woul increase in!estment* output* an real wa"es+ If the tax on the return from capital in!estments&&such as stock purchases* new )usiness start&ups* an new plant an e-uipment for existin" firms&&is re uce * more of those types of in!estments will )e ma e+ Those risk&takin" acti!ities an in!estments are the key to "eneratin" pro ucti!ity impro!ements* real capital formation* increase national output* an hi"her li!in" stan ar s+

.+ A cut woul li)erate locke &up capital for new in!estment+ (or those alrea y hol in" in!estment capital* a capital "ains tax re uction mi"ht create an /unlockin" effect/0 in i!i uals woul sell assets that ha!e accumulate in !alue an shift their portfolio hol in"s to assets with hi"her lon"&run earnin" potential+ The unlockin" effect mi"ht ha!e stron" positi!e economic )enefits as well0 the tax cut woul prompt in!estors to shift their fun s to acti!ities an assets&&such as new firms in the rapi &"rowth* hi"h&technolo"y in ustry&&offerin" the hi"hest rate of return+ 1+ A cut woul pro uce more tax re!enue for the "o!ernment+ If a capital "ains tax cut increases economic "rowth an spurs an unlockin" of unreali2e capital "ains* then a lower capital "ains rate will actually increase tax collections+ 3+ A cut woul eliminate the unfairness of taxin" capital "ains ue to inflation+ A lar"e share of the capital "ains that are taxe is not real "ains )ut inflationary "ains+ The "o!ernment shoul not tax inflation+ Arguments against the motion: ,+ 4ro!i e a lar"e tax cut for the wealthiest citi2ens+ .+ Ha!e !ery little positi!e impact on the economy+ Many ar"ue that taxes o not influence in!estment ecisions an that e!en if there were an unlockin" effect+ 1+ Increase the )u "et eficit+ If a capital "ains tax cut re uces re!enues an increases the )u "et eficit* then sa!in"s an in!estment mi"ht actually fall after the tax cut+ That woul only worsen reporte capital shorta"e+

Education
Educational polic and progress in the light of the goal of national development and priorities set from time to time! Education as a part of the Directive "rinciples of #tate "olic in the Constitution

Infrastructure
Comprehensive information on the infrastructure frame$or% availa&le in India! Gives anal tical vie$ on the &asic frame$or% from a investors and &usiness point of vie$!

'ar%ets
General information a&out the stoc% exchanges and capital mar%ets in India!

Emplo ment
An overvie$ of the manpo$er availa&le in India! (rief introductions to )ights Guarateed & *a$! Also lists the minimum $age rates and the acts related to emplo ees!

Euro Issues
An issuing compan see%ing permission for raising foreign funds & Euro-issues having a consistent trac% record of good performance +financial or other$ise, for a period of three ears shall &e allo$ed to issue GD)s-.CC(s

Agriculture
India is mainl an agricultural countr ! Agriculture accounts for approximatel // percent of India0s GD" and emplo s nearl 12 percent of the population!

3hat are the advantages and disadvantages of &oth a fixed exchange rate regime and a flexi&le exchange rate regime4
In3 2conomics

)here are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central ban+) sets and maintains as the official exchange rate. A set price will be determined against a ma6or world currency (usually the 3.8. dollar, but also other ma6or currencies such as the euro, the yen, or a bas+et of currencies). In order to maintain the local exchange rate, the central ban+ buys and sells its own currency on the foreign exchange mar+et in return for the currency to which it is pegged. If, for example, it is determined that the value of a single unit of local currency is e"ual to 38/ A.;;, the central ban+ will have to ensure that it can supply the mar+et with those dollars. In order to maintain the rate, the central ban+ must +eep a high level of foreign reserves. )his is a reserved amount of foreign currency held by the central ban+ which it can use to release (or absorb) extra funds into (or out of) the mar+et. )his ensures an appropriate money supply, appropriate fluctuations in the mar+et (inflationHdeflation), and ultimately, the exchange rate. )he central ban+ can also ad6ust the official exchange rate when necessary. *loating 3nli+e the fixed rate, a floating exchange rate is determined by the private mar+et through supply and demand. A floating rate is often termed "self'correcting", as any differences in supply and demand will automatically be corrected in the mar+et. )a+e a loo+ at this simplified model& if demand for a currency is low, its value will decrease, thus ma+ing imported goods more expensive and thus stimulating demand for local goods and services. )his in turn will generate more 6obs, and hence an auto'correction would occur in the mar+et. A floating exchange rate is constantly changing. In reality, no currency is wholly fixed or floating. In a fixed regime, mar+et pressures can also influence changes in the exchange rate. 8ometimes, when a local currency does reflect its true value against its pegged currency, a "blac+ mar+et" which is more reflective of actual supply and demand may develop. A central ban+ will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the blac+ mar+et. In a floating regime, the central ban+ may also intervene when it is necessary to ensure stability and to avoid inflation1 however, it is less often that the central ban+ of a floating regime will interfere.

&ns:er
;ixed vs/ ;lexi%le #i$ed advantages A fixed exchange rate should reduce uncertainties for all economic agents in the country. As businesses have the perfect +nowledge that the price is fixed and therefore not going

to change they can plan ahead in their productions. Inflation may have a harmful effect on the demand for exports and imports. )o ensure that inflation is +ept as low as possible the government is forced to ta+e measurements, to +eep businesses competitive in foreign mar+ets. In theory a fixed exchange rate should also reduce speculations in foreign exchange mar+ets. In reality this is not always the case as countries want to ma+e speculative gains. #i$ed Disadvantages )he government is +eeping the exchange rate fixed by manipulating the interest rates. If the exchange is in danger of falling the government needs to increase interest rates to increase demand for the currency. As this would have a deflationary effect on the economy the demand might decrease and unemployment might increase. A government has to maintain high levels of foreign reserves to +eep the exchange rate fixed as well as to instill confidence on the foreign exchange mar+ets. )his ma+es clear that a country is able to defend its currency by the buying and selling of foreign currencies. *ixing the exchange rate is not easy as there are many variables which are changing over time if the exchange rate is set wrong it might be hard for export companies to be competitive in foreign countries. International disagreement might be created when a country sets its exchange rate on a too low level. )his would ma+e a countries export more competitive which might lead to a disagreement between countries as they might see it as an unfair trade advantage. #i$ed %dvantages As the exchange rate does not have to be +ept at a certain level anymore interest rates are free to be employed as domestic management policies(Appleyard :;A). )he floating exchange rate is ad6usting itself to +eep the current account balanced, in theory. As the reserves are not used to control the value of the currency it is not necessary to +eep high levels of reserves (li+e gold) of foreign countries. #i$ed Disadvantages *loating exchange rates tend to create uncertainty on the international mar+ets. As businesses try to plan for the future it is not easy for the businesses to handle a floating exchange rate which might vary. )herefore investment is more difficult to assess and there is no doubt that excursive exchange rates will reduce the level of international investment as it is difficult to assess the exact level of return and ris+. *loating exchange rates are affected by more factors than only demand and supply, such as government intervention. )herefore they might not necessarily ad6ust themselves in order to eliminate current account deficits. )he floating exchange rate might worsen existing levels of inflation. If a country has higher inflation rate than others this will ma+e the export of the country less competitive and its imports more expensive. )hen the exchange rate will fall which could lead to even higher import prices of goods and because of cost'push inflation which might drive the overall inflation rate even more.

Bhile flexible exchange rates can ensure that the country achieves external balance, they do not ensure internal balance. In several situations the exchange rate change that reestablishes external balance can ma+e an internal imbalance worse. If a country has rising inflation and a tendency toward external deficit, the depreciation of the currency can intensify the inflation pressures in the country. If a country has excessive unemployment and a tendency toward surplus, the appreciation of the currency can ma+e the unemployment problem worse. )o achieve internal balance, the country>s government may need to implement domestic policy changes.

1he good and %ad lin(s of inflation

Suresh Krishnamurthy The administered rates on small savings would be linked to some kind of benchmark, said the Finance Minister during the Budget presentation, where the rates were revised downwards. ow a committee has been appointed under the stewardship of Mr !.". #eddy, $eputy %overnor of the #eserve Bank of &ndia, that will look at linking the administered rates with inflation. &n the &ndian conte't, there are advantages and disadvantages in linking the rates with inflation. The theoretical advantage of linking the rates with inflation is that it is an indirect way of ensuring that whichever government is in power, it will have to be show its best behaviour in fiscal terms. &f it fails to rein in unnecessary e'penditure and inflation rises, it will be rapped in the form of higher interest payments. This will then put pressure on the fiscal deficit, with the potential of showing the performance of the government in poor light. The disadvantage is there are no reliable and timely indicators of inflation in &ndia. The consumer price inde' which measures inflation at the retail level still does not capture the inflation in the basket of goods that &ndian consumers largely buy. More importantly, the cost of services are largely not given the importance they deserve in the inde'. (lso, the details regarding the )*& are dated by more than a month. &n this backdrop, if the administered rates are linked to inflation, investors will not be able to make any meaningful investment decisions because the information available with them is dated and sub+ect to change. Moreover, since they are not properly representative, they may not compensate the investor properly for the risks undertaken by them and the time period for which the investment has been made. ,owever, a link with an inflation inde' is a desirable feature since the %overnment is compelled to rein in inflation. &n this backdrop, it will be more useful if the committee recommends a revamp of the whole system of collecting information to calculate a more representative figure of inflation first before a linkage of the administered rates with inflation is established. Such an outcome would be beneficial for both the parties concerned -- the investors because it will compensate them properly for inflation, and the government because it is an indirect method for enforcing discipline

Inflation "redictions
Ganuary Kth, $;;K S inflation ' -redicting inflation is a very important tas+ for 2conomists. *uture forecasts of inflation are used to determine current monetary policy. If inflation predictions are wrong it can cause inappropriate monetary policy, resulting in either inflation or recession. Although economists may loo+ at various economic data, there is no foolproof method for predicting inflation. .enerally spea+ing inflation is easier to predict and less volatile when inflation rates are low. As inflation increases it also becomes more volatile and harder to predict.

Predicting Inflation
)o predict inflation, economists will need to loo+ at various economic data and decide whether inflationary pressures in the economy will be increasing or decreasing. )he +ey factor here is the amount of spare capacity and the rate of economic growth. 8uppose an economy, such as the 3(, has a long run trend rate of $.DM. )his means growth of $.DM or less is unli+ely to cause inflation. If however, growth is above A 'C M then the economy will "uic+ly approach full capacity and therefore inflation is li+ely to occur.

<nemployment and Inflation Predictions

8ome economists believe there is a trade off between unemployment and inflation. If unemployment falls it could be a sign that inflationary pressures will increase. As unemployment falls it gets harder to employ wor+ers causing wage inflation. )his wage inflation is li+ely to cause actual inflation. Fowever, sometimes unemployment can fall without causing inflation. *or example, unemployment has fallen in the 3(, without causing inflation. )his may be due to a sustained reduction in the natural rate (structural unemployment) Ievertheless unemployment figures can be a guide to future inflation.

!ouse Prices and ;uture Inflation/

It is often assumed that house price inflation will cause actual inflation. )here is a good economic reason for this. If house prices are rising it creates a wealth effect. 0ising wealth encourages consumer spending (e"uity withdrawal and higher confidence) this spending can then cause inflation. Fowever, it doesnNt necessarily cause inflation. In the early $;;;s, the 3( had house price inflation of over $;M, but it didnNt cause actual inflation. )here are many factors that affect inflation, not 6ust house prices.

Money 'upply and Inflation/

)he "uantity theory of money states that increased money supply will lead to inflation. )his is because of the relationship between money supply and inflation, shown in the e"uation #%T-) where % and ) are independent of the #oney 8upply. Fowever, in practise empirical evidence has shown that increased money supply doesnNt necessarily cause inflation, as there are other factors determining money supply and inflation.

!ysteresis - What !appened in the Past=

It is argued that if you want the best prediction for inflation, ignore all the economists predictions and 6ust state what happened last year. 2.g. in $;;: the 3( experienced inflation of $. M. )herefore the best prediction for inflation in $;;: is $. M. 4f course, inflation does change from year to year, but it shows the difficulty of predicting inflation that it is often best to 6ust use last years data. Fowever, there is an important point here and that is the role of expectations. If inflation is low, people will expect low inflation in the next year, wor+ers will not demand big pay rises, firms will not try to increase prices. )herefore, low inflation becomes easier to maintain. If inflation is high then people will be expecting inflation in the next year. )herefore, it becomes difficult to remove inflation from the system (without pain li+e a recession)

'upply 'ide 'hoc(s and Inflation/

Bhen predicting inflation you can never ta+e into account unexpected supply side shoc+s. *or example, a rapid increase in inflation would cause a significant rise in inflation.

My Predictions for Inflation in *++

Inflation 3( $;;K $. M Inflation $;;K 38 $.AM Inflation $;;K ,hina C. M Inflation $;;K India K.DM Inflation $;;K Gapan .$M Inflation $;;K 23 .KM

Does Economics Gro$th (ring Increased *iving #tandards4

Increasing rates of economic growth has long been the holy grail of conventional economics and politics. )o a large extent, most developed economies have been highly

successful in increasing economic output. <ut, has such an impressive increase in national output actually improved people>s standard of livingQ )o decide whether economic growth has increased happiness is highly sub6ective, and it is difficult for economists to ma+e concrete arguments.Fowever, it is worth noting the various side effects of growth and consider there impact on general living standards.

#enefits of "conomic Gro:th

>/ Increased consumption/
,onsumers can benefit from consuming more goods and services. An assumption of economics is that consumption is related to utility, so in theory, with higher consumption levels, there is greater prosperity.

*/ Improved Pu%lic 'ervices/

Bith increased )ax 0evenues the government can spend more on important public services such as health and education. Improved health care can improve "uality of life through treating diseases and increasing life expectancy. Increased educational standards can give the population a greater diversity of s+ills and literacy. )his enables greater opportunity and freedom. 2ducation is seen as an important determinant of welfare and happiness.

?/ Reduced <nemployment and Poverty/

2conomic .rowth helps to reduce unemployment by creating 6obs. )his is significant because unemployment is a ma6or source of social problems such as crime and alienation. Fowever, despite rapid increases in economic growth since the 8econd Borld Bar, areas of high unemployment in the 23 remain. *or example, in *rance and 8pain there are currently high levels of structural unemployment. )his +ind of unemployment may not be reduced by economic growth.

Why "conomic Gro:th may not %ring increased !appiness/

. /iminishing 0eturns/
If a section of the population is living in absolute poverty, economic growth enables people to have higher incomes and therefore they will be able to afford the basic

necessities of life such as1 food, and shelter. Bhen economic growth can overcome this type of poverty there is a clear lin+ with improved living standards. Fowever, when incomes increase from say =AD,;;; a year to =AE,;;; the improvement in living standards is harder to 6ustify. /iminishing returns is a basic economic concept, which suggests the tenth unit of a good will give much less satisfaction than the first. If we already have $ cars, does our living standards really improve if we now have the capacity to own A carsQ 4ften as economic growth increases incomes, people increasingly save their money (higher marginal propensity to save) this is basically because they struggle to find anything meaningful to spend their money on.

$.2xternalities of .rowth/
2conomic .rowth with involves increased output causes external side effects, such, as increased pollution. .lobal warming from pollution is becoming a real problem for society. )he economic and social costs could potentially be greater than all the perceived benefits of recent economic growth. Fowever, it is worth noting that economic growth doesnNt necessarily have to cause pollution. )he benefits of growth could be used to develop better technologies that create less pollution. It is 6ust at the moment this has been a low priority.

$. 2conomic .rowth can cause Increased Ine"uality.

It is perhaps a paradox that higher economic growth can cause an increase in relative poverty. )his is because those who benefit from growth are often the highly educated and those who own wealth. In 9K;s and 99;s higher growth in the 3( and 38 has resulted in increased ine"uality. ( ) Fowever, it depends on how growth is managed1 economic growtht can be used to reduce ine"uality. )his occurred in D;s and E;s.

A. Increase in ,rime and 8ocial problems.

It is another paradox that as incomes increase and people are better off the level of crime has increased as well. ($) )his suggests that crime is not motivated by poverty but perhaps envy. 4ne reason why crime rates increase is that "uite simply there are more things to steal. <ac+ in the 9A;s auto theft, mobile phone theft e.t.c were rare or non' existent. 2conomic .rowth has created more goods to steal. Fowever the lin+ isnNt absolute for example in recent years crime rates in 38 have reduced from their pea+. <ut there has been a general association between growth and crimes.

D. Figher 2conomic .rowth has led to more hours wor+ed.

In the beginning of the industrial revolution, higher growth led to people wor+ing lower hours.(A) Fowever, in the past couple of decades higher incomes have actually led to people wor+ing longer hours. It seems people are unable to en6oy their higher incomes. *eeling the necessity or preferring to wor+ longer hours. )his suggest people are valuing earning money more than leisure. Fowever, this trend may also be due to companies wanting people to wor+ longer hours.

@/ /iseases of Affluence.
2conomic .rowth has enabled improved health care treatments, but at the same time there has been an unexpected rise in the number of diseases and illnesses related to increased prosperity.(C) 4ne example is obesity. #odern lifestyles and modern diets have created an epidemic of obesity, with significant proportions of the population expressing a desire to lose weight. It could be argued that problems such as obesity and stress related illnesses are not a direct conse"uence of growth. )his is true, but, it is symbolic of the fact increased prosperity has created as many new problems as it has solved

Conclusion
)here are clearly some benefits of economic growth. )hese benefits are most visible when for low income countries. 2conomic growth enables the possibility to deal with many serious problems of poverty, homelessness and lac+ of basic amenities. Fowever this paper is more interested in whether economic growth in developed economies is actually increasing living standards. /oes rising incomes e"ual rising satisfactionQ )he answer is not clear'cut. Fowever there are clearly several issues, which suggest that economic growth, has contributed to serious social, environmental and economic problems, which have reduced living standards. )his is not to say economic growth is doomed to bring unhappiness. In fact the challenge is to harness the potential of economic growth to ma+e sure it really does increase sustainable living standards.

Inflation in India: 5o$ to tac%le it

Inflation is no stran"er to the In ian economy+ In fact* till the early nineties In ians were use

to ou)le& i"it inflation an its atten ant conse-uences+ 5ut* since the mi &nineties controllin" inflation has )ecome a priority for policy framers+ The natural fallout of this has )een that we* as a nation* ha!e )ecome !irtually intolerant to inflation+ While inflation till the early nineties was primarily cause )y omestic factors 6supply usually was una)le to meet eman * resultin" in the classical efinition of inflation of too much money chasin" too few "oo s7* to ay the situation has chan"e si"nificantly+ Inflation to ay is cause more )y "lo)al rather than )y omestic factors+ 8aturally* as the In ian economy un er"oes structural chan"es* the causes of omestic inflation too ha!e un er"one tectonic chan"es+ 8ee less to emphasise* causes of to ay9s inflation are complicate + Howe!er* it is in ee intri"uin" that the policy response e!en to this ay unfortunately has )een fixate on the tra itional anti&inflation instruments of the pre&li)eralisation era+ Glo&al im&alance the cause for glo&al li6uidit To un erstan the text of the present )out of inflation* let us at the outset un erstan the context0 the functionin" of the "lo)al economy* which is in a state of extreme im)alance+ This is simply )ecause e!elope western economies* particularly the :nite ;tates* are consumin" on a massi!e scale lea in" to "ar"antuan tra e eficits+ Crucially their extreme le!els of consumption an imports are matche )y the procli!ity* nay fetish* of the e!elopin" countries in ha!in" an export& ri!en economic mo el+ Thus while a set of e!elopin" countries

pro uces* exports an also sa!es the procee s )y in!estin" their forex reser!es )ack in these countries* e!elope countries are consumin" )oth the pro uction an in!estment ori"inatin" from the e!elopin" countries+ In effect* e!elopin" countries are )uil in" their forei"n exchan"e reser!es while the e!elope countries are accumulatin" the correspon in" e)t+ After all* it takes two to a tan"o+ (or instance* the :; current account eficit is estimate to )e < per cent of GD4 in .==> an stoo at approximately ?@== )illion+ $)!iously* the current account eficit of the :; )ecomes the current account surplus of other exportin" countries* !i2+ China* Aapan an other oil pro ucin" an exportin" countries+ The reason for this im)alance in the "lo)al economy is the fact that after the Asian currency crisisB many countries foun the !irtues of a weak currency an en"a"e in 9competiti!e e!aluation+9 :n er this scenario* many countries simply le!era"e their weak currency !is&&!is the :; ollar to "ain to the "lo)al 6rea :;7 markets+ This mercantilist policy to maintain their competiti!eness is achie!e when their central )anks inter!enes in the currency markets lea in" to accumulation of forei"n exchan"e* nota)ly the :; ollar* a"ainst their own currency+ Implicitly it means that the e!elopin" worl is su)si isin" the rich e!elope worl + 4ut more )luntly* it woul mean that the :; has outsource e!en efen in" the ollar to these countries* as a collapse of the :; currency woul hurt these countries hol in" more ollars in reser!es than perhaps the :; itselfC In this connection* commentin" on the a)o!e phenomenon in the Power and Interest News Report* Aephraim 4 Gun 2ik wrote that the worl "rowth /was har ly sufficient to )e )ehin the further rise of commo ity prices in the first fi!e months of this year 6i+e+ in .==>7+ Dather than eman pushin" the !alue of commo ities hi"her in the past ,E months* it has )een the 6impen in"7 ollar9s e!aluation a"ainst commo ities that has pushe commo ity prices to recor hi"hs+/ 8aturally* as the players fear a fall in the !alue of the ollar an reach out to !arious assets an commo ities* the prices of these commo ities an assets too will rise+ The ps chological dimension 5ut as the im)alance shows no si"n of correctin"* players seek to shift to commo ities an assets across continents to he "e a"ainst the impen in" fall in the :; ollar+ Thus* it is a fi"ht )etween central )anks an the psycholo"y of market players across continents+ As a correcti!e measure* economists are comin" to the conclusion that most of the currencies across the "lo)e are hi"hly un er!alue !is&&!is the ollar* which* in turn* re-uires a si"nificant ose of e!aluation+ (or instance* a consensus exists amon"st economists an currency tra ers that the Fen is one of the most hi"hly un er!alue currencies 6estimate at aroun >=G7 alon" with the Chinese Fuan 6estimate at H=G7 followe )y other countries in Asia+ This artificial un er!aluation of currencies is another fun amental cause for increasin" "lo)al li-ui ity+ To "et an i ea of the enormity of the a""re"ation of these two factors on the worl 9s supply of ollars* Aephraim 4+ Gun 2ik calculates the ollar !alue of risin" prices of Iust one commo ity && cru e oil+ In .==3* "lo)al eman for cru e oil "rew )y a mere four per cent+ 8e!ertheless hi"her oil prices a !ance )y as much as 13 per cent+ Conse-uently* it is this factor that si"nificantly contri)ute to increase the worl 9s ollar supply )y a)out ?11= )illion+ In .==H* international cru e oil prices "aine another 1H per cent an "lo)al eman for oil "rew )y only ,+> per cent+ 8onetheless* the worl 9s supply of ollars increase )y a further ?3>= )illion+

8aturally* with all currencies refusin" to )e re!alue * this lea s to increase "lo)al li-ui ity+ While one is not sure as to whether the increase in the prices of cru e le to the increase of other commo ities or !ice !ersa* the fact of the matter is that* in the a""re"ate* increase li-ui ity has le to the increase in commo ity prices as a whole+ Althou"h some of this increase in the worl 9s supply of ollars has )een rea)sor)e into :; economy )y the twin American eficits && current as well as )u "etary && it is estimate that as much as ?>== )illion remains outsi e the :;+ What has further compoun e the pro)lem is the near&2ero interest rate re"ime in Aapan+ With almost ?@=H )illion forex reser!es* it makes sense to )orrow in Aapan at such low rates an in!est elsewhere for hi"her returns+ $)!iously* some of this money && estimate )y experts to )e approximately ?.== )illion && has un ou)te ly foun its way into the asset markets of other countries+ Most of it has )een parke in alternati!e in!estments such as commo ities* stocks* real estates an other markets across continents* le!era"e many times o!er+ 8ee less to reiterate* the excessi!e ollar supply too has fuelle the property an commo ity )oom across markets an continents+ The twin causes && excessi!e li-ui ity ue to un er!aluation of !arious currencies 6technical7 an fear of the :; ollar collapse lea in" to increase purchase of !arious commo ities to he "e a"ainst a fall in :; ollar 6psycholo"ical7 && nee s to )e tackle upfront if inflation has to )e confronte "lo)ally+ 5igher international farm prices impact Indian farm prices What actually compoun s the pro)lem for In ia is the fact that lower har!est worl wi e* specifically in Australia an 5ra2il* an the o!erall stren"th of eman !is&&!is supply an low stock positions worl o!er* "lo)al wheat prices ha!e continue to rise+ Wheat eman is expecte to rise* while worl pro uction is expecte to ecline further in the comin" months* as a result of which "lo)al stocks* alrea y at historically low le!els* may fall further )y .= per cent+ These "lo)al tren s ha!e put upwar pressure on omestic prices of wheat an are expecte to continue to o so urin" the course of this year+ 8o won er* espite the "o!ernment lowerin" the import tariffs on wheat to 2ero* there has )een no si"nificant -uantity of wheat imports as the international prices of wheat are hi"her than the omestic prices+ Gro$th and forex flo$s Another cause for the increase in the prices of these commo ities has )een ue to the fact that )oth In ia an China ha!e )een recor in" excellent "rowth in recent years+ It has to )e note that China an In ia ha!e a com)ine population of .+H )illion people+ Gi!en this si2e of population e!en a mo est ?,== increase in the per capita income of these two countries woul translate into approximately ?.H= )illion in a itional eman for commo ities+ This has put an extraor inary hi"hly eman on !arious commo ities+ ;urely "rowth will come at a cost+ The excessi!e "lo)al li-ui ity as explaine a)o!e has facilitate )uoyant "rowth of money an cre it in .==H&=> an .==>&=<+ (or instance* the net accretion to the forei"n exchan"e reser!es a""re"ates to in excess of ?H= )illion 6a)out Ds ..H*=== crore7 in .==>&=<+ Crucially* this incremental flow of forei"n exchan"e into the country has resulte in increase cre it flow )y our )anks+ 8aturally this is another fuel for "rowth an crucially* inflation+ This Deser!e 5ank of In ia9s strate"y of ealin" with excessi!e li-ui ity throu"h the Market ;ta)ili2ation ;cheme 6M;;7 has its own limitations+ ;imilarly* the increase in repo rates 6ostensi)ly to make cre it o!erextension costly7 an increase in CDD rates 6to restrict excessi!e money supply7 are policy inter!entions with serious limitations in the In ian context with such hu"e forex inflows+

5o$ a&out the revaluation of the Indian )upee4 To conclu e* all these are pointers to a nee for a ifferent strate"y+ The current )out of inflation is cause )y a multiplicity of factors* mostly "lo)al an is structural+ Monetary as well as tra e policy responses* as has )een attempte till ate* woul )e ina e-uate to eal with the extant issue effecti!ely+ Crucially* a stock market )oom* a real estate )oom an a )eni"n inflation in the foo "rains market is an economic impossi)ility+ It has to )e note that the In ian market is structurally suite for le!era"in" shorta"es rather effecti!ely+ A e to this is the information asymmetry amon" !arious class of consumers as well as )etween consumers* on the one han * an pro ucers an consumers* on the other+ (urther* the sustaine flow of forei"n money* thanks to the excessi!e "lo)al li-ui ity in the worl * has fuelle the rise of the stock markets an real estate prices in In ia to unprece ente le!els+ This )oom has naturally le to correspon in" )ooms in !arious relate markets as much as the increase cre it flow has in a way resulte in o!erall inflation+ 'conomic policy rests in the trium!irate of fiscal* monetary an tra e policies+ Theoretical un erstan in" of economics meant that these policies are inter epen ent+ Also* one nee s to un erstan that "rowth naturally comes with its atten ant costs an conse-uences+ While these policies are usually intertwine an typically compensatory* one has to un erstan that the issues with respect to inflation cannot )e su)Iecte to con!entional wis om in the era of "lo)alisation+ $ne policy route yet unexamine in the In ian context )y the "o!ernment is the exchan"e rate policy* especially re!aluation of the Dupee as an instrument to control inflation+ It is time that we think a)out a re!aluation of the In ian Dupee as a policy response to the complex issue of mana"in" inflation* while simultaneously a ress the constraints on the supply si e on foo "rains throu"h increase in omestic pro uction+ A hi"her Dupee !alue !is&&!is the ollar woul mean lower purchase price of commo ities in Dupee terms+ The In ian economy has un er"one si"nificant chan"es in the past eca e an a half+ With increase linka"es to the "lo)al economy* it cannot uck the ne"ati!es of "lo)alisation+ Juite the contrary* it nee s to come with appropriate policy responses for the same* which cannot )e of the ,@>=s !inta"e+ Allowin" Dupee to appreciate is surely one of them+ The time for a rethink on our exchan"e rate policy to tackle inflation is now+ Are we rea y?