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Dipal Prajapati(15) Vikrant Thakar() Gaurav Vaghela() Nikita Patel() Fouram Shah()
Outlines
y Introduction y Measures of Inflation y Classification of Inflation y Causes of Inflation y Effect of Inflation y Steps Taken by The Government to Control Inflation y Statistical Data of Inflation in India y Deflation y Stagflation
Introduction
y Inflation is a situation where the aggregate demand of
goods and services exceeds the available supply and due to this there is an increase in the price level. y Situation of rapid general increase in price level. y Decline in the value of money. y In inflation everything gets more valuable except money
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Quantity of Money
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Measures of Inflation
y Consumer Price Index (CPI) y GDP deflator y Wholesale Price Index (WPI) y Producer Price Index (PPI) y Commodity price indices y Core price indices
Measures of Inflation
y Consumer Price Index (CPI) y A measure of the average price of consumer goods and services purchased by households y CPI indicates the change in the purchasing power of the consumer y GDP deflator y Measure of the price of all the goods and services included in Gross Domestic Product (GDP)
Measures of Inflation
y Wholesale Price Index (WPI) y WPI is the price of a representative basket of wholesale goods. y India- the only major country that uses WPI y WPI focuses on the price of goods traded between corporations, rather than goods bought by consumers(measured by the CPI) y The WPI number is a weekly measure of wholesale price movement for the economy y consists of over 2,400 commodities y The indicator tracks the price movement of each commodity individually y Calculation
y y
Relative Method: It is the weighted arithmetic mean based on the fixed valuebased weights for the base period Calculation Method: Monthly price indexes are compiled by calculating the simple arithmetic mean of three ten-day sample prices in the month.
Measures of Inflation
y Producer Price Index (PPI) y Measure the average change over time in selling prices by domestic producers of goods and services. y PPI measures price change from the perspective of the seller. y In India and the United States, an earlier version of the PPI was called the Wholesale Price Index.
Measures of Inflation
y Commodity price indices y Measure the price of a selection of commodities y Core price indices y Because food and oil prices can change quickly due to changes in supply and demand conditions in the food and oil markets, it can be difficult to detect the long run trend in price levels when those prices are included. y Therefore most statistical agencies also report a measure of 'core inflation', which removes the most volatile components (such as food and oil) from a broad price index like the CPI.
Classification of Inflation
y ACCORDING TO THE RATE OF INFLATION y ACCORDING TO THE NATURE OF THE TIME
PERIOD OF OCCOURANCE y ACCORDING TO THE SCOPE AND COVERAGE y ACCORDING TO THE GOVERNMENT REACTION y ACCORDING TO THE CAUSE y ACCORDING TO THE SCHOOL OF THOUGHTS
Causes of inflation
y Increases in money supply y Expansion of bank credit y Deficit financing y Black money y Scarcity y Taxes y Population growth y Extreme Imbalance of Global Economy y Fuel Price Hike
Effect of Inflation
y The impact of Inflation on the economic system may
be classified into 3 kinds y Effects on production (Changes in the routine of economic activity) y Effects on income distribution (Re-distribution of income and wealth) y Effects on the consumption and welfare
Effects on production
y Inflation has a favorable effect on production when
there are unutilized or under-employed resources in existence in an economy . y Rising prices breed optimistic expectations within the business community, in view of increasing profit margins, if the price level moves up at a faster rate than the cost of production
not rise in the same proportion. Since the effort of inflation on the incomes of different classes of earners varies, there are serious social consequences. y During inflation, the distribution of shares to the profiteers increases more than that of the wage earners or fixed-income earners, such as the retier class. All producers , traders and speculators gain during an inflation because of the windfall profits which arise, because prices rise at a faster and higher rate than the cost of production.
money. It is a form of taxation. Due to deteriorating purchasing power the real consumption of the common people declines. Rising cost of living during inflation implies falling standard of living and lowering of general economic welfare of the community at large . y In short, inflation is unfair on the distribution of side of economic activity.
y y y y
exports and a cut in excise and customs duties are among the steps taken by the Government to control inflation in the country. The Government has directed the Reserve Bank of India (RBI) to take monetary measures and to put down interest rates to control Inflation. The central government of india has directed the chief ministers of all the states in india to take preventive measures to control inflation like cutting down of sales tax , custom and excise duties Some of the state Governments have taken up the initiative to provide lower priced ration goods for the Below Poverty Line (BPL) masses. Emphasis On Biofuel
Deflation
y A decrease in the general price level of goods and services y Opposite of inflation. y Deflation occurs when the annual inflation rate falls below zero percent (a negative inflation rate) y resulting in an increase in the real value of money allowing one to buy more goods with the same amount y Direct contractions in spending y In the form of a reduction in government spending, personal spending or investment spending. y Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy.
Causes of deflation
y Decreasing money supply. y Increasing supply of goods. y Decreasing demand of goods. y Increasing demand for money.
Stagflation
y Stagflation is the situation when both the inflation
an economy is reduced by an unfavorable supply shock, such as an increase in the price of oil for an oil importing country. y Stagnation can result from inappropriate macroeconomic policies.