Unemployment

Costs to the Individual

When a person loses his or her job, there is often an immediate impact to that person's standard
of living
That means these people are consuming far less than usual.Prolonged unemployment can lead to
an erosion of skills.Prolonged unemployment can lead to greater skepticism and pessimism about
the value of education and training and lead to workers being less willing to invest in the long years
of training some jobs require. On a similar note, the absence of income created by unemployment
can force families to deny educational opportunities to their children and deprive the economy of
those future skills. Studies have shown that prolonged unemployment harms the mental health of
workers and can actually worsen physical health and shorten lifespans.
Costs to Society
Countries may impose severe restrictions on immigration.Other social costs include how people
interact with each other. Elevated unemployment often leads to higher crime rate among people to
meet their economic needs or simply to alleviate boredom. The volunteerism decline does not have
an obvious explanation, but could perhaps be tied to the negative psychological impacts of being
jobless or perhaps even resentment toward those who do not have a job.
Costs to the Country
Unemployment leads to higher payments from state and federal governments for unemployment
benefits, food assistance, and Medical aid.
It is also worth noting that companies pay a price for high unemployment as well. Unemployment
benefits are financed largely by taxes assessed on businesses. When unemployment is high,
states will often look to replenish their coffers by increasing their taxation on businesses - counter-
intuitively discouraging companies from hiring more workers. Not only do companies face less
demand for their products, it is also more expensive for them to retain or hire workers.

The Bottom Line

Governments rightly fret about the consequences of inflation, but unemployment is likewise a
serious issue. Apart from the social unrest and disgruntlement that unemployment can produce in
the electorate, high unemployment can have a self-perpetuating negative impact on businesses
and the economic health of the country.

Worse still, some of the worst effects of unemployment are both subtle and very long-lasting -
consumer and business confidence are key to economic recoveries, and workers must feel
confident in their future to invest in developing the skills - and building the savings - that the
economy needs to grow in the future. The costs of unemployment go far beyond the accumulated
sums handed out as
Inflation

economic and social consequences.

1. Income redistribution: One risk of higher inflation is that it has a regressive effect on
lower-income families and older people in society. This happen when prices for food and
domestic utilities such as water and heating rises at a rapid rate
2. Falling real incomes: With millions of people facing a cut in their wages or at best a pay
freeze, rising inflation leads to a fall in real incomes.
3. Negative real interest rates: If interest rates on savings accounts are lower than the rate
of inflation, then people who rely on interest from their savings will be poorer.
4. Cost of borrowing: High inflation may also lead to higher borrowing costs for businesses
and people needing loans and mortgages as financial markets protect themselves against
rising prices and increase the cost of borrowing on short and longer-term debt. There is
also pressure on the government to increase the value of the state pension and
unemployment benefits and other welfare payments as the cost of living climbs higher.
5. Risks of wage inflation: High inflation can lead to an increase in pay claims as people
look to protect their real incomes. This can lead to a rise in unit labour costs and lower
profits for businesses
6. Business competitiveness:If one country has a much higher rate of inflation than others
for a considerable period of time, this will make its exports less price competitive in world
markets. Eventually this may show through in reduced export orders, lower profits and
fewer jobs, and also in a worsening of a country’s trade balance. A fall in exports can
trigger negative multiplier and accelerator effects on national income and employment.
7. Business uncertainty: High and volatile inflation is not good for business confidence
partly because they cannot be sure of what their costs and prices are likely to be. This
uncertainty might lead to a lower level of capital investment spending.

How Can Inflation Be Good For The Economy?

1. Erodes Purchasing Power
This first effect of inflation is really just a different way of stating what it is. Inflation is a decrease in
the purchasing power of currency due to a rise in prices across the economy. Within living memory,
the average price of a cup of coffee was a dime. Today the price is closer to two dollars.

Such a price change could conceivably have resulted from a surge in the popularity of coffee, or
price pooling by a cartel of coffee producers, or years of devastating drought/flooding/conflict in a
key coffee-growing region. In those scenarios, the price of coffee products would rise, but the rest
of the economy would carry on largely unaffected. That example would not qualify as inflation since
only the most caffeine-addled consumers would experience significant depreciation in their overall
purchasing power.
nflation requires prices to rise across a "basket" of goods and services, such as the one that
comprises the most common measure of price changes, the consumer price index (CPI). When the
prices of goods that are non-discretionary and impossible to substitute—food and fuel—rise, they
can affect inflation all by themselves. For this reason, economists often strip out food and fuel to
look at "core" inflation, a less volatile measure of price changes.

2. Encourages Spending, Investing

A predictable response to declining purchasing power is to buy now, rather than later. Cash will
only lose value, so it is better to get your shopping out of the way and stock up on things that
probably won't lose value.

For consumers, that means filling up gas tanks, stuffing the freezer, buying shoes in the next size
up for the kids, and so on. For businesses, it means making capital investments that, under
different circumstances, might be put off until later. Many investors buy gold and other precious
metals when inflation takes hold, but these assets' volatility can cancel out the benefits of their
insulation from price rises, especially in the short term.

Over the long term, equities have been among the best hedges against inflation. At close on Dec.
12, 1980, a share of Apple Inc. (AAPL) cost $29 in current (not inflation-adjusted) dollars.
According to Yahoo Finance, that share would be worth $7,035.01 at close on Feb. 13, 2018, after
adjusting for dividends and stock splits. The Bureau of Labor Statistics' (BLS) CPI calculator gives
that figure as $2,449.38 in 1980 dollars, implying a real (inflation-adjusted) gain of 8,346%.

Say you had buried that $29 in the backyard instead. The nominal value wouldn't have changed
when you dug it up, but the purchasing power would have fallen to $10.10 in 1980 terms; that's
about a 65% depreciation. Of course not every stock would have performed as well as Apple: you
would have been better off burying your cash in 1980 than buying and holding a share of Houston
Natural Gas, which would merge to become Enron.
3. Causes More Inflation
Unfortunately, the urge to spend and invest in the face of inflation tends to boost inflation in turn,
creating a potentially catastrophic feedback loop. As people and businesses spend more quickly in
an effort to reduce the time they hold their depreciating currency, the economy finds itself awash in
cash no one particularly wants. In other words, the supply of money outstrips the demand, and the
price of money—the purchasing power of currency—falls at an ever-faster rate.

When things get really bad, a sensible tendency to keep business and household supplies stocked
rather than sitting on cash devolves into hoarding, leading to empty grocery store shelves. People
become desperate to offload currency so that every payday turns into a frenzy of spending on just
about anything so long as it's not ever-more-worthless money.
The result is hyperinflation, which has seen Germans papering their walls with the Weimar
Republic's worthless marks (the 1920s), Peruvian cafes raising their prices multiple times a day
(the 1980s), Zimbabwean consumers hauling around wheelbarrow-loads of million- and billion-Zim
dollar notes (the 2000s) and Venezuelan thieves refusing even to steal bolívares (2010s).

4. Raises the Cost of Borrowing

As these examples of hyperinflation show, states have a powerful incentive to keep price rises in
check. For the past century in the U.S., the approach has been to manage inflation using monetary
policy. To do so, the Federal Reserve (the U.S. central bank) relies on the relationship
between inflation and interest rates. If interest rates are low, companies and individuals can borrow
cheaply to start a business, earn a degree, hire new workers, or buy a shiny new boat. In other
words, low rates encourage spending and investing, which generally stoke inflation in turn.

By raising interest rates, central banks can put a damper on these rampaging animal spirits.
Suddenly the monthly payments on that boat, or that corporate bond issue, seem a bit high. Better
to put some money in the bank, where it can earn interest. When there is not so much cash
sloshing around, money becomes more scarce. That scarcity increases its value, although as a
rule, central banks don't want money literally to become more valuable: they fear
outright deflation nearly as much as they do hyperinflation. Rather, they tug on interest rates in
either direction in order to maintain inflation close to a target rate (generally 2% in developed
economies and 3% to 4% in emerging ones).
Another way of looking at central banks' role in controlling inflation is through the money supply. If
the amount of money is growing faster than the economy, the money will be worthless and inflation
will ensue. That's what happened when Weimar Germany fired up the printing presses to pay its
World War I reparations, and when Aztec and Inca bullion flooded Habsburg Spain in the 16th
century. When central banks want to raise rates, they generally cannot do so by simple fiat;
rather they sell government securities and remove the proceeds from the money supply. As the
money supply decreases, so does the rate of inflation.

5. Lowers the Cost of Borrowing

When there is no central bank, or when central bankers are beholden to elected politicians,
inflation will generally lower borrowing costs.
Say you borrow $1,000 at a 5% annual rate of interest. If inflation is 10%, the real value of your
debt is decreasing faster than the combined interest and principle you're paying off. When levels of
household debt are high, politicians find it electorally profitable to print money, stoking inflation and
whisking away voters' obligations. If the government itself is heavily indebted, politicians have an
even more obvious incentive to print money and use it to pay down debt. If inflation is the result, so
be it (once again, Weimar Germany is the most infamous example of this phenomenon).

Politicians' occasionally detrimental fondness for inflation has convinced several countries that
fiscal and monetary policymaking should be carried out by independent central banks. While the
Fed has a statutory mandate to seek maximum employment and steady prices, it does not need a
congressional or presidential go-ahead to make its rate-setting decisions. That does not mean the
Fed has always had a totally free hand in policy-making, however. Former Minneapolis Fed
president Narayana Kocherlakota wrote in 2016 that the Fed's independence is "a post-1979
development that rests largely on the restraint of the president."

6. Reduces Unemployment
There is some evidence that inflation can push down unemployment. Wages tend to be sticky,
meaning that they change slowly in response to economic shifts. John Maynard Keynes theorized
that the Great Depression resulted in part from wages' downward stickiness. Unemployment
surged because workers resisted pay cuts and were fired instead (the ultimate pay cut).

The same phenomenon may also work in reverse: wages' upward stickiness means that once
inflation hits a certain rate, employers' real payroll costs fall, and they're able to hire more workers.

7. Increases Growth
Unless there is an attentive central bank on hand to push up interest rates, inflation discourages
saving, since the purchasing power of deposits erodes over time. That prospect gives consumers
and businesses an incentive to spend or invest. At least in the short term, the boost to spending
and investment leads to economic growth. By the same token, inflation's negative correlation with
unemployment implies a tendency to put more people to work, spurring growth.

This effect is most conspicuous in its absence. In 2016, central banks across the developed world
found themselves vexingly unable to coax inflation or growth up to healthy levels. Cutting interest
rates to zero and below did not seem to be working. Neither did the buying of trillions of dollars'
worth of bonds in a money-creation exercise known as quantitative easing. This conundrum
recalled Keynes's liquidity trap, in which central banks' ability to spur growth by increasing the
money supply (liquidity) is rendered ineffective by cash hoarding, itself the result of economic
actors' risk aversion in the wake of a financial crisis. Liquidity traps cause disinflation, if not
deflation.

In this environment, moderate inflation was seen as a desirable growth-driver, and markets
welcomed the increase in inflation expectations due to Donald Trump's election. In February 2018,
however, markets sold off steeply due to worries that inflation would lead to a rapid increase in
interest rates.
8. Reduces Employment, Growth
Wistful talk about inflation's benefits is likely to sound strange to those who remember the
economic woes of the 1970s. In today's context of low growth, high unemployment (in Europe) and
menacing deflation, there are reasons think a healthy rise in prices – 2% or even 3% per year –
would do more good than harm. On the other hand, when growth is slow, unemployment is
high and inflation is in the double digits, you have what a British Tory MP in 1965 dubbed
"stagflation."

9. Weakens or Strengthens Currency

High inflation is usually associated with a slumping exchange rate, though this is generally a case
of the weaker currency leading to inflation, not the other way around. Economies that import
significant amounts of goods and services – which, for now, is just about every economy – must
pay more for these imports in local-currency terms when their currencies fall against those of their
trading partners. Say that Country X's currency falls 10% against Country Y's. The latter doesn't
have to raise the price of the products it exports to Country X for them to cost Country X 10%
more; the weaker exchange rate alone has that effect. Multiply cost increases across enough
trading partners selling enough products, and the result is economy-wide inflation in Country X.

But once again, inflation can do one thing, or the polar opposite, depending on the context. When
you strip away most of the global economy's moving parts it seems perfectly reasonable that rising
prices lead to a weaker currency. In the wake of Trump's election victory, however, rising inflation
expectations drove the dollar higher for several months. The reason is that interest rates around
the globe were dismally low – almost certainly the lowest they've been in human history – making
markets likely to jump on any opportunity to earn a bit of money for lending, rather than paying for
the privilege (as the holders of $11.7
he below mentioned article provides an overview on social costs of inflation.
Expected Inflation:
Consider first the case of expected inflation. One cost of expected high inflation is the distortion of
the inflation tax on the amount of money people hold. A higher inflation rate leads to a higher
nominal interest rate which, in turn, leads to lower real balances. If people are to hold lower money
balances on average, they must make more frequent trips to the bank to withdraw money. The
inconvenience of reducing money holding is called the shoe-leather cost of inflation.
A second cost of inflation arises because high inflation induces firms to change their prices more
often. Changing prices is sometimes costly: for example it may require printing and distribution of a
new catalogue. These costs are called menu costs, because the higher the rate of inflation, the
more often restaurants have to print new menus.
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A third cost of inflation arises because firms facing menu costs change prices infrequently: thus,
the higher the rate of inflation, the greater the variability in relative price. Since market economics
rely on relative prices to allocate resources efficiently, inflation leads to microeconomic
inefficiencies.
A fourth cost of inflation results from the tax laws. Many provisions of the tax code do not take into
account the effects of inflation. Inflation can alter individual’s tax liability, often in the ways that
lawmakers did not intend.
A fifth cost of inflation is the inconvenience of living in a world with a changing price level. Money is
the yardstick with which we measure economic transactions. When there is inflation, that yardstick
is changing in length. For example, a changing price level complicates personal financial planning.
One important decision that all households face is how much of their income to consume today
and how much to save for old age. A pound saved today and invested at a fixed nominal interest
rate will yield a fixed sterling amount in the future. Yet the real value of that pound depends on the
future price level. Deciding how much to save would be much simpler if one could count on the
stable price level.
Unexpected Inflation:
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Unexpected inflation has an effect that is more pernicious than any of the cost discussed under
anticipated inflation. It arbitrarily redistributes income and wealth among individuals. We can see
how this works by examining long- term loans. Loan agreements specify a nominal interest rate,
which is based on the expected rate of inflation.
If actual inflation turns out differently from what was expected, the ex post real return that the
debtor pays to the creditor differs from what both parties anticipated. If inflation is higher than
expected, the debtor wins and the creditor loses because the debtor repays the loan with less
valuable money. On the other hand, if inflation is lower than expected, the creditor wins and debtor
loses because the repayment is worth more than anticipated.
Unanticipated inflation also hurts individuals on pension. Workers and firms often agree on a fixed
nominal pension when the workers retires. Since pension is deferred earnings, the workers are
essentially providing the firm a loan. Like any creditor, the worker is hurt when inflation is higher
than anticipated. Like any debtor, the firm is hurt when inflation is lower than anticipated.
These situations provide a clear argument against highly variable inflation. The more variable the
rate of inflation, the greater the uncertainty. Since most people arc risk averse — they do not like
uncertainty.
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Given these effects of inflation uncertainty, it is surprising that nominal contracts are so prevalent.
One might expect creditors and debtors to protect themselves from this uncertainty by writing
contracts in real terms — that is, by indexing the price level. Indexation is often widespread with
high and variable inflation.
Types and Causes of Inflation:
Inflation is often defined as a state of rising prices. It is indicated by increase in the index number
of prices over time. It reflects disequilibrium condition in the economy. Sometimes an inflationary
situation may not exhibit itself by an increase in the price index because of price control and
rationing practiced by the government. In order to distinguish between the two situations we use
the terms “open inflation” and “suppressed inflation”.
In an open inflation, the disequilibrium condition expresses itself through the rise in the price level,
while in the case of & suppressed inflation the disequilibrium force is counteracted by the extra-
market force. If extra-market forces are withdrawn, prices would rise and the inflation becomes
open.
Thus, to find out the causes of inflation, we must look into the conditions that are responsible for
the existence of disequilibrium in the economy. Mere existence of price stability does not mean the
absence of the inflationary situation. The price stability may be forced by the government
intervention.
The price level is in equilibrium so long there is equality between the aggregate demand and the
aggregate supply. It may so happen that the overall aggregate demand is equal to overall
aggregate supply, but some demands are greater than their respective supplies, while some other
demands are less than their corresponding supplies. Had all prices been flexible, the result would
be a change in the relative prices only; there would be no change in the general price level.
When the prices are flexible only in the upward direction, an inflationary situation may arise, even
when the aggregate supply is equal to the aggregate demand. Then prices are likely to be pushed
up by the forces of excess demand where it exists, but they are not pulled down by the force of
excess supply existing in the other markets.
As a result, the level of prices increased. Thus, the downward inflexibility of prices in the face of
excess supply—combined with the existence of excess demand in some markets—may be
responsible for the emergence of an inflationary situation in the economy. This type of inflation is
known as “structural inflation”.
Though a structural inflation may be the consequence of the emergence of excess demand
somewhere in the economy, it is basically caused by the rigidities in the inter-sectoral relations and
also by the downward inflexibility of prices. The rigidities may exist either by technologically fixed
input-output relations or by complementarity among various commodities that are consumed by the
people. Such a structural inflation is associated with structural unemployment.
All productive agents must have a positive price. However, because of rigidities in the inter-
commodity relations-both in the supply side and in the demand side—some productive agents may
remain unemployed, while their prices may not come down to zero or negative. The downward
inflexibility of prices may be caused by the emergence of monopolistic control over production.
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In any case, because of the existence of downward inflexibility of prices, there is no spontaneous
mobility of resources between sectors; and this together with the presence of some excess
demands in some sectors of the economy may be responsible for the structural inflation.
The equilibrium in the price level may also be disturbed by some changes in the aggregate
demand and supply. Given the aggregate demand for output, there may be an autonomous fall in
the aggregate supply, thus resulting in excess demand in the output market, and this will lead to a
rise in the level of price Again, it may so happen that the fall in the aggregate supply is
accompanied by a decline in the aggregate demand, but the fall in demand may be comparatively
less than the supply.
Thus, an excess demand appears in the output market to raise the price level. But this type of an
inflationary situation is generated by an autonomous fall in the aggregate supply which means a
leftward shift in the supply curve. The supply curve is given by the marginal cost curve. Thus, an
autonomous increase in the cost of production leads to a leftward shift in the supply curve.
When the rise in the cost of production affects almost all of the producers in the economy, the
aggregate supply falls. This type of inflation is known as “the cost-push inflation”. It is so called
because the rise in the cost of production pushes the price up.
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Again given the aggregate supply, there may be an autonomous rise in the aggregate demand,
when an excess demand appears in the economy to raise the price level. The rise in the aggregate
demand may be combined with a less than proportionate rise in the aggregate supply.
Whenever the autonomous rise in the aggregate demand is associated with an inelastic aggregate
supply, an excess demand must arise in the market, and this leads to a rise in the price level. The
ultimate responsibility for the price rise, then, lies in the autonomous increase in the aggregate
demand, and this is the reason why it is called “the demand-pull inflation”.
Though in economic-theory prices are determined by the interaction between the forces of demand
and supply, in practice price-formation is made through a different process in which the forces of
demand and supply play an indirect role. The price of a product determines the income of the seller
who frames the price in order to gel his share in income. Price charged by the seller may or may
not be accepted by the buyers.
If the buyers refuse to pay the price asked by the sellers, he will have to revise the prices. But the
sellers may also revise the prices on their own, if they want to increase their shares in income. The
seller of a product fixes its price at such a level so as to get his expected share of income after
covering all expenses. The same procedure may be adopted by the sellers of a factor of product.
He may determine price in such a way as to realise his expected share in the product.
ADVERTISEMENTS:
Prices framed in this way constitute the claims of different parties on the income that have been
produced. When any party wants to improve its share in income, it may do so by an upward
revision of its price. The initiative for the revision in their shares may be taken together by all
parties at a time.
The outcome of the struggle is that, the total claims are greater than the real income itself. In this
case, prices are raised. Thus, an excess income-claim over the actual income may cause inflation.
This type of inflation may be called “the income-demand inflation”. One variety of the income-
demand inflation is ‘the cost inflation’. Another variety of it is called ‘the profit inflation’.
In this way, we may think about a bewildering variety of inflation models. In fact, when inflation
become a world-wide phenomenon, every writer on inflation puts forward his own theory. In this
book it is impossible even to make a brief summary of the voluminous literature in this field. In the
discussion that follows, we shall examine only those models that have become text book theories.
Demand-Pull Theory of Inflation:
The earliest attempt was made by classical economists to explain inflation with the help of the
quantity theory of money. According to this theory, the price level depends directly and
proportionately on the quantity of money. Inflation occurs when the quantity of money increases.
The rate of inflation depends on the rate of money supply.
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The quantity theory, however, could not explain the mechanism through which price level will rise
as a result of the rise in money supply. It was Wicksell who analysed the mechanism by which an
increase in money would lead to an increase in the price level.
He pointed out that an increase in money supply increases the aggregate demand in the economy.
Wicksell’s theory states that, when money supply increases, the market rate of interest falls below
the natural rate and this will induce investors and consumers to spend more in the economy. As a
result, the aggregate demand will increase-which will increase the price level— assuming that
aggregate supply will remain constant at full employment level. The price level will go on
increasing, so long as the market rate of interest is below the natural rate.
When money supply will stop increasing, the market rate of interest will rise and become equal to
the natural rate and the inflationary pressure will be halted with it. Wicksell realised that the rise in
the price level itself would not reduce aggregate demand, because, after a time lag, money
incomes would rise in proportion to prices, leaving consumers and investors to compete for the
limited supply of goods.
Keynesian theory of inflation is nothing more than a modification and generalisation of Wicksell’s
theory of inflation. Suppose, there is already full employment in the economy, and investment
demand increases. This means that, total demand for goods and services is greater than the
available supply. Thus, prices are bid up.
Since consumer demand depends on real income which is not reduced by rising prices because
the sale at higher prices creates an equivalent rise in money wages without eliminating excess
demand. Thus, Keynes broke the dose link between the quantity of money and the level of
aggregate demand associated with classical-economists. According to Keynes, there may be some
inflation in the economy even with a constant money supply. In a situation of constant money
supply, an increased price level would raise the transaction demand for money and, thus, push up
interest rate, which would reduce investment demand.
The decreased investment demand will moderate the inflationary pressure, but is unlikely to
eliminate it. The reason is that the rise in interest rate will free some money from speculative
demand to meet the added transaction demand. Only at zero speculative demand this would
correspond to Wicksell’s theory.
There is, thus, a significant difference between Wicksell’s and Keynes’ theory of inflation. For the
former any increase in the supply of money is inflationary. For the latter, the rise in prices may
occur even without any increase in the supply of money.
Again, an increase in the supply of money may not have any impact on prices in the Keynesian
System, especially if the economy starts from a position of unemployment. Despite these
differences, both the theories explain inflation as arising from an excess of aggregate demand over
the full employment aggregate supply.

This can be done through the rise in the price level, as the real output is constant at full
employment. So long the inflationary gap exists the price level will go on increasing. Inflation goes
on without limit unless the inflationary gap is eliminated by actions of fiscal and monetary
authorities or by the indirect effect of inflation on real demand. If aggregate demand is less than
aggregate supply at full-employment then we have the deflationary gap. When there is a
deflationary gap, the economy will settle at a less than full employment situation.
We now examine the indirect effects of the existence of inflationary gap on the components of
demand and see whether the inflationary gap can automatically be eliminated as a result of the
operation of these indirect effects.
First, if money supply remains constant the rate of interest will increase because the price increase
will reduce the real money supply. As the rate of interest increases, the investment demand will fall
and the aggregate demand will be reduced, thereby eliminating a part of the inflationary gap.
Second, as a result of the operation of the Pigou effect, an increase in the price level will reduce
the real value of the given supply of money, which will reduce the aggregate real consumption
expenditure thus shifting the consumption function— and, consequently, the aggregate demand
function—in a downward direction.
Third, indirect effect of the price increase would be to redistribute income against fixed income
groups (i.e. between wages and profits). If the MPC of the fixed income groups is assumed higher
than the average of the economy, such redistribution will reduce aggregate consumption
expenditure.

Cost Inflation:
Cost inflation arises when there is an increase in the cost of production. A rise in the cost of
production may come from various factors, such as labour cost, raw materials, etc. If we assume
that labour is the only variable factor in the short-run, then the cost of production will increase if the
wage rate rises. Thus, cost inflation may arise, as a result of an increase in the wage rates.
Wage rates may increase due to two factors:
(1) As a result of collective bargaining or trade union pressure and
(2) An increased demand for labour.
If the wage rate increases due to increased demand for labour it should not be regarded as cost
inflation, because, it is a case of demand inflation where inflationary forces originated in the factor
market. For true cost inflation, wage rate increases must be due to trade union pressure even
when there is no excess demand for labour. A theory of cost inflation can be developed under the
assumption that the wage rate is not market-determined, which means that the forces of demand
and supply do not play any role in wage determination.
If an independent role of the trade unions is introduced in the determination of the wage rate, we
can build a model in which a rise in the wage rate can take place in the absence of excess demand
for labour. Thus, the theory of cost inflation is based on the hypothesis that the wage rate is
determined by the trade unions independently of the market force.
It is still assumed that commodity prices are determined by the interaction between the forces of
demand and supply. A rise in the level of commodity prices may take place only when there is an
excess demand in the commodity market. However, in the theory of cost inflation, we assume that
the wage rate is not market determined though the commodity prices are.
In the case of a demand inflation, the commodity prices rises when there is excess demand in the
output market and the wage rate rise in response to the excess demand in the labour market. The
excess demand in the labour market is derived from the excess demand in the commodity market.
Whereas, in the case of cost inflation, the wage rate rises independently of the excess demand of
the labour market, but the commodity prices rise in response to the excess demand in the output
market.
Thus, initially, there must not be any excess demand in the output market, when the rise in the
wage rate takes place; and the rise in the wage rate must be followed by the emergence of the
excess demand in the output market—which will push the commodity prices upward.
Thus, in the theory of a true cost inflation, we must have the following sequence of events:
(a) There is an autonomous increase in the wage rate in the absence of any excess demand for
labour and output,
(b) The rise in the wage rate is followed by changes in the demand and for the supply of output,
(c) An excess demand in the output market produce a rise in prices of commodities.
The determination of the wage rate with the interaction of the trade union provides us with the first
logical step in the process. Let us assume that the trade union asks for a higher wage rate in the
absence of excess demand for labour and that the trade union pressures compel the employers to
accept the higher wage demands.
It may so happen that the higher wage rate is followed by a rise in productivity, but if the rise in the
wage rate exceeds the rise in productivity, this amounts to an autonomous rise in the wage rate.
Thus, the wage cost per unit of output is raised thereby.
The second step is the process to see the effects of the rise in the wage rate on demand and
supply. We must, now, know the resultant changes in the demand and supply of output. If the
guiding principle of the employer is profit maximisation, and, if the law of diminishing returns
applies to labour, the autonomous rise in the wage rate will lead to a fall in the level of output and
employment.
The resultant change in the aggregate demand depends on the changes in the distribution of
income and on the marginal propensities to spend of the employers and workers. If the elasticity of
demand for labour is less than one, the income of the workers will increase.
If it is equal to one, the income of the workers will remain unchanged. However, there may be a fall
in the profit income, as the total income has fallen. If the elasticity of demand for labour is greater
than one, there will be a fall in the income of the workers. As a result of the change in the
distribution of income, there will be a change in the aggregate demand.
When the wage income rises, the expenditure of the workers rises, but, then, the expenditure of
the employers falls, as their profit income falls. If the marginal propensity to spend of the profit-
earners is lower than that of workers, the aggregate expenditure will rise. In the opposite case, it
will fall. When the total wage income remains unchanged, the expenditure of the businessmen
falls, but the expenditure of the workers does not change. Thus, the aggregate expenditure falls.
If, however, we assume that, the marginal propensity to spend of the economy as a whole is less
than one, we can go to the third logical step. If, then, the aggregate demand falls, this fall must be
less than the fall in the aggregate supply. The result will be an emergence of excess demand in the
output market. Thus, there will be a rise in the price level.
The situation of a cost inflation may also be considered in a slightly different way in which the
excess demand is the originating factor, but the role of the trade union may be responsible for the
determination of wage rate and the spread of inflation in the whole economy. If there is an excess
demand in some sectors of the economy, prices will rise in those sectors.
However, because of structural rigidities, it is not possible to transfer labour from other sectors to
those sectors. Thus, the wage rate of the workers employed in those sectors will rise, while those
in other sectors will not fall. Trade unions in other sectors will put forward higher wage claims in
order to maintain the relative position of their members.
When they are successful in realising their higher wage claims, there is an autonomous rise in the
wage rate in the rest of the economy, even where no excess demand exists. The result is a cost
inflation all over the economy. Thus, the inflation has originated from the demand side, but it then
spread into the economy by the cost factor through the role of the trade union.
The wage-price spiral can also be explained with the role of the trade unions. The autonomous rise
in the wage rate is followed by an increase in the price level and this increases the cost of living of
the workers. The price rise leads to a fall in the real wage rate. The trade unions will then demand
a higher wage increase. Once this higher wage claim is granted by the businessmen, there is a
second round of price inflation caused by the cost factor. This process may continue indefinitely, if
it is not checked by other factors.
The Quantity Theory Approach to Inflation:
The neo-classical economists used to believe that inflation is created by the increase in the supply
of money. The speed of inflation is determined by the rate of increase of money supply as the
quantity theory establishes a direct and proportional relation between the price level and the
quantity of money. This approach assumed that there was always full employment in the economy.
If there is an increase in money supply in the economy, there will be an expansion of aggregate
demand. The inevitable result is an increase in price level as the supply of output is fixed at the full
employment level. Thus, the cause of excess demand is the rise in the money supply, which has
produced inflationary situation. The dis-equilibrating factor is an increase in the supply of money.
However, Keynesian economists denied the rigid link between the quantity of money and the price
level. Keynes pointed out that even if the quantity of money remains the same inflationary situation
may emerge if aggregate demand is greater than aggregate supply. Keynes shifted the link from
the relation between the stock of money and the flow of income to the relation between the flow of
capital expenditure and income.
He regards that the change in the stock of money is of minor importance in times of unemployment
and may exercise a significant influence only when there is full employment. Later Keynesians
argued that “money does not matter”, and that the stock of money was mainly passive of
economic change and play no part except as it might affect interest rates.
The new quantity theory formulated by Friedman in the 1950s again emphasizes the rate of the
quantity of money in generating inflation. It was first formulated by Morton, who argued that, prices
and wages were rising only formulated by Morton, who argued that, prices and wages were rising
only because the monetary authorities in their attempt to maintain full employment were prepared
to create money that was appropriate to full employment.
If the objective of full employment was abandoned and the money supply was increased, there
might not be an inflationary situation. The monetarists in the reformulation of the quantity theory
emphasise the importance of the substitution between goods and money rather than Keynesian
substitution between money and other assets. Friedman came to the conclusion on the basis of
empirical evidence that, in each case, supply of money changed autonomously first, leading to
change in the price level.
According to him the supply of money is not a passive factor as described by the Keynesian
economists. Changes in the supply of money are caused by factors which has nothing to do with
the changes in the price level or in the level of income. In fact, changes in the price level or the
level of income are caused by changes in the stock of money in the economy.
The price level will remain stable only if the stock of money changes at a fairly steady rate — which
is equal to or slightly higher than the average rate of growth in the economy. In short, this approach
maintains that money stock — rather than the income flow — determines both the level of
economic activity and the price level. Thus, to control inflation, the rate of growth of money supply
should be controlled first.
The basic postulate of the quantity theory approach is that there is a stable demand function for
money in real terms, into which the rate of inflation enters as a cost of holding real balances which
influences the quantity of real balances held. Given this function, the rate of increase of the
nominal stock of money determines the rate of inflation.
In order to maintain its real balances constant in the face of inflation it is necessary to accumulate
money balances at the rate of inflation. This accumulation of money balances in order to preserve
real balances is achieved at the cost of sacrificing the consumption of current income. This can be
regarded as the cost of holding real balances.
This cost or tax on real balances accrues as revenue to the beneficiaries of the inflationary
increase in the money supply. This can be represented in the Fig. 16.11, where the rate of inflation
is measured in the vertical axis and the ratio of money stock to income in the horizontal axis. DD’ is
the demand for real money balances as a proportion of real income. The curve is downward
sloping, which means that the lower the rate of inflation the greater is the demand for real balances
relative to the real income.
With zero inflation the ratio of real balances relative to real income is OD’. With the rate of inflation
of OP, the demand for real balances falls to OM which is due to increase in the cost of holding real
balances. The area OMP’P represents the proportion of real income that holders of real balances
are obliged by inflation to accumulate in the form of money balances in order to keep the real
balance intact.

How is inflation measured? The Philippine Statistics Authority (PSA) releases inflation data every
1st week of the month for the public to be aware of just how much prices have changed compared
to a year ago.
Statisticians and experts measure inflation by looking at a "basket of goods" which "contain" what
the typical Filipino consumes on a regular basis. (IN CHARTS: What your P100 can buy under
runaway inflation)

This "basket" contains the following:

•Food and non-alcoholic beverages

•Alcoholic beverages and tobacco

•Clothing and footwear

•Housing, water, electricity, gas and other fuels

•Furnishing, household equipment, and routine maintenance of the house

•Health

•Transport

•Communication

•Recreation and culture

 •Education

•Restaurants and miscellaneous goods and services

This long list of goods and their prices comprise the consumer price index (CPI). The annual
percentage change in the CPI is then used to measure inflation.

What causes inflation? Inflation may be driven either by supply or demand.

Supply-driven or cost-push inflation happens when the cost of producing goods, the prices of raw
materials, and wages go up. (READ: Rice prices soar as Duterte marks 2nd year in office)

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In this scenario, there are fewer goods being produced due to the high costs of production, yet
demand remains consistent.

On the other hand, demand-pull inflation occurs when people's demand outpace the ability of
industries to supply goods.

How does inflation affect you? Inflation means you need to pay more for the same goods and
services.
One could also think of inflation as a reduction of the value of money, as consumers are able to
purchase less than before. As inflation rises, the value of the peso diminishes more quickly.
(READ: EXPLAINER: What is hyperinflation?)

Elevated prices of goods hit hardest those consumers who have not received salary increases over
time. In effect, people have to constantly get a raise to keep up with the prices of goods.

High inflation is also not good for people who have long-term investments in banks, as it may
erode the value of money.

Is inflation all bad? No. In fact, the government wants inflation, but only within an acceptable
range.

For instance, economic managers want inflation for 2018 to 2020 to settle between 2% and 4%.
The problem, however, is that inflation in 2018 continues to shoot up beyond the target range.
(WATCH: Rappler Talk: Making sense of the Philippine economy)

Revising monetary and trade policies, as well as providing subsidies to the poor, are only some of
the ways by which the government can restrain inflation within the acceptable range.

Inflation, especially when it is demand-driven, is an indicator that people have more money to
spend and reflects a growing economy. (READ: BSP's interest hike won't address supply-driven
inflation – Pernia)

The government is also avoiding deflation, or the decline of prices of goods. While it may sound
good, deflation is an indicator of anemic or poor economic activity.

Low consumption slows down the economy, which would then lead to fewer jobs and
opportunities. – Rappler.com
Essay on Inflation: Types, Causes and Effects
Article Shared by
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Essay on Inflation!
Essay on the Meaning of Inflation:
Inflation and unemployment are the two most talked-about words in the contemporary society.
These two are the big problems that plague all the economies. Almost everyone is sure that he
knows what inflation exactly is, but it remains a source of great deal of confusion because it is
difficult to define it unambiguously.
Inflation is often defined in terms of its supposed causes. Inflation exists when money supply
exceeds available goods and services. Or inflation is attributed to budget deficit financing. A deficit
budget may be financed by additional money creation. But the situation of monetary expansion or
budget deficit may not cause price level to rise. Hence the difficulty of defining ‘inflation’.
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Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not
the price of only one or two goods. G. Ackley defined inflation as ‘a persistent and appreciable
rise in the general level or average of prices’. In other words, inflation is a state of rising price
level, but not rise in the price level. It is not high prices but rising prices that constitute inflation.
It is an increase in the overall price level. A small rise in prices or a sudden rise in prices is not
inflation since these may reflect the short term workings of the market. It is to be pointed out here
that inflation is a state of disequilibrium when there occurs a sustained rise in price level.
It is inflation if the prices of most goods go up. However, it is difficult to detect whether there is an
upward trend in prices and whether this trend is sustained. That is why inflation is difficult to define
in an unambiguous sense.
Let’s measure inflation rate. Suppose, in December 2007, the consumer price index was 193.6
and, in December 2008 it was 223.8. Thus the inflation rate during the last one year was 223.8 –
193.6/193.6 × 100 = 15.6%.
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As inflation is a state of rising prices, deflation may be defined as a state of falling prices but not fall
in prices. Deflation is, thus, the opposite of inflation, i.e., rise in the value or purchasing power of
money. Disinflation is a slowing down of the rate of inflation.
Essay on the Types of Inflation:
As the nature of inflation is not uniform in an economy for all the time, it is wise to distinguish
between different types of inflation. Such analysis is useful to study the distributional and other
effects of inflation as well as to recommend anti-inflationary policies.
Inflation may be caused by a variety of factors. Its intensity or pace may be different at different
times. It may also be classified in accordance with the reactions of the government toward inflation.
Thus, one may observe different types of inflation in the contemporary society:
(a) According to Causes:
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i. Currency Inflation:
This type of inflation is caused by the printing of currency notes.
ii. Credit Inflation:
Being profit-making institutions, commercial banks sanction more loans and advances to the public
than what the economy needs. Such credit expansion leads to a rise in price level.
iii. Deficit-Induced Inflation:
The budget of the government reflects a deficit when expenditure exceeds revenue. To meet this
gap, the government may ask the central bank to print additional money. Since pumping of
additional money is required to meet the budget deficit, any price rise may be called deficit-induced
inflation.
iv. Demand-Pull Inflation:
An increase in aggregate demand over the available output leads to a rise in the price level. Such
inflation is called demand-pull inflation (henceforth DPI). But why does aggregate demand rise?
Classical economists attribute this rise in aggregate demand to money supply.
If the supply of money in an economy exceeds the available goods and services, DPI appears. It
has been described by Coulborn as a situation of “too much money chasing too few goods”.

Keynesians hold a different argument.

They argue that there can be an autonomous increase in aggregate demand or spending, such as
a rise in consumption demand or investment or government spending or a tax cut or a net increase
in exports (i.e., C + I + G + X – M) with no increase in money supply. This would prompt upward
adjustment in price. Thus, DPI is caused by both monetary factors (classical argument) and non-
monetary factors (Keynesian argument).
DPI can be explained in terms of the following figure (Fig. 11.2) where we measure output on the
horizontal axis and price level on the vertical axis. In Range 1, total spending is too short of full
employment output, Yf. There is little or no rise in price level. As demand now rises, output will rise.
The economy enters Range 2 where output approaches full employment situation.

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Note that, in this region, price level begins to rise. Ultimately, the economy reaches full
employment situation, i.e., Range 3, where output does not rise but price level is pulled upward.
This is demand-pull inflation. The essence of this type of inflation is “too much spending chasing
too few goods.”
v. Cost-Push Inflation:
Inflation in an economy may arise from the overall increase in the cost of production. This type of
inflation is known as cost-push inflation (henceforth CPI). Cost of production may rise due to
increase in the price of raw materials, wages, etc. Often trade unions are blamed for wage rise
since wage rate is not market-determined. Higher wage means higher cost of production.
Prices of commodities are thereby increased. A wage-price spiral comes into operation. But, at the
same time, firms are to be blamed also for the price rise since they simply raise prices to expand
their profit margins. Thus we have two important variants of CPI: wage-push inflation and profit-
push inflation. Anyway, CPI stems from the leftward shift of the aggregate supply curve.
ADVERTISEMENTS:

(b) According to Speed or Intensity:

i. Creeping or Mild Inflation:
If the speed of upward thrust in prices is very low then we have creeping inflation. What speed of
annual price rise is a creeping one has not been stated by the economists? To some, a creeping or
mild inflation is one when annual price rise varies between 2 p.c. and 3 p.c.
If a rate of price rise is kept at this level, it is considered to be helpful for economic development.
Others argue that if annual price rise goes slightly beyond 3 p.c. mark, still then it is considered to
be of no danger.
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ii. Walking Inflation:
If the rate of annual price increase lies between 3 p.c. and 4 p.c., then we have a situation of
walking inflation. When mild inflation is allowed to fan out, walking inflation appears. These two
types of inflation may be described as ‘moderate inflation’.
Often, one-digit inflation rate is called ‘moderate inflation’ which is not only predictable, but also
keep people’s faith on the monetary system of the country’. People’s confidence get lost once
moderately maintained rate of inflation goes out of control and the economy is then caught with the
galloping inflation.
iii. Galloping and Hyperinflation:
Walking inflation may be converted into running inflation. Running inflation is dangerous. If it is not
controlled, it may ultimately be converted to galloping or hyperinflation. It is an extreme form of
inflation when an economy gets shattered. “Inflation in the double or triple digit range of 20,
100 or 200 per cent a year is labelled galloping inflation”.
iv. Government’s Reaction to Inflation:
Inflationary situation may be open or suppressed. Because of ant-inflationary policies pursued by
the government, inflation may not be an embarrassing one. For instance, an increase in income
leads to an increase in consumption spending which pulls the price level up.
If the consumption spending is countered by the government via price control and rationing device,
the inflationary situation may be called a suppressed one. Once the government curbs are lifted,
the suppressed inflation becomes open inflation. Open inflation may then result in hyperinflation.
Essay on the Causes of Inflation:
Inflation is mainly caused by excess demand/or decline in aggregate supply or output. Former
leads to a rightward shift of aggregate demand curve while the latter causes aggregate supply
curve to shift leftward. Former is called demand-pull inflation (DPI) and the latter is called cost-
push inflation (CPI).
Before describing the factors that lead to a rise in aggregate demand and a decline in aggregate
supply, we like to explain “demand-pull” and “cost- push” theories of inflation.
Demand-Pull Inflation Theory:
There are two theoretical approaches to DPI —one is the classical and the other is the Keynesian.
According to classical economists or monetarists, inflation is caused by the increase in money
supply which leads to a rightward shift in negative sloping aggregate demand curve.
Given a situation of full employment, classicists maintained that a change in money supply brings
about an equi-proportionate change in price level. That is why monetrarists argue that inflation is
always and everywhere a monetary phenomenon.
Keynesians do not find any link between money supply and price level causing an upward shift in
aggregate demand. According to Keynesians, aggregate demand may rise due to a rise in
consumer demand or investment demand or government expenditure or net exports or the
combination of these four.
Given full employment, such increase in aggregate demand leads to an upward pressure in prices.
Such a situation is called DPI. This can be explained graphically.
Just like the price of a commodity, the level of prices is determined by the interaction of aggregate
demand and aggregate supply. In Fig. 11.3, aggregate demand curve is negative sloping while
aggregate supply curve before the full employment stage is positive sloping and becomes vertical
after the full employment stage. AD1 is the initial aggregate demand curve that intersects the
aggregate supply curve AS at point E1.

The price level thus determined is OP1. As aggregate demand curve shifts to AD2, price level rises
to OP2. Thus, an increase in aggregate demand at the full employment stage leads to an increase
in price level only, rather than the level of output. However, how much price level will rise following
an increase in aggregate demand depends on the slope of the AS curve.
Causes of Demand-Pull Inflation:
DPI originates in the monetary sector. Monetarists’ argument that “only money matters” is based
on the assumption that at or near full employment, excessive money supply will increase
aggregate demand and will thus cause inflation.
An increase in nominal money supply shifts aggregate demand curve rightward. This enables
people to hold excess cash balances. Spending of excess cash balances by them causes price
level to rise. Price level will continue to rise until aggregate demand equals aggregate supply.
Keynesians argue that inflation originates in the non-monetary sector or the real sector. Aggregate
demand may rise if there is an increase in consumption expenditure following a tax cut. There may
be an autonomous increase in business investment or government expenditure. Governmental
expenditure is inflationary if the needed money is procured by the government by printing
additional money.
In brief, an increase in aggregate demand i.e., increase in (C + I + G + X – M) causes price level to
rise. However, aggregate demand may rise following an increase in money supply generated by
the printing of additional money (classical argument) which drives prices upward. Thus, money
plays a vital role. That is why Milton Friedman believes that inflation is always and everywhere a
monetary phenomenon.
There are other reasons that may push aggregate demand and, hence, price level upwards. For
instance, growth of population stimulates aggregate demand. Higher export earnings increase the
purchasing power of the exporting countries.
Additional purchasing power means additional aggregate demand. Purchasing power and, hence,
aggregate demand, may also go up if government repays public debt. Again, there is a tendency
on the part of the holders of black money to spend on conspicuous consumption goods. Such
tendency fuels inflationary fire. Thus, DPI is caused by a variety of factors.
Cost-Push Inflation Theory:
In addition to aggregate demand, aggregate supply also generates inflationary process. As inflation
is caused by a leftward shift of the aggregate supply, we call it CPI. CPI is usually associated with
the non-monetary factors. CPI arises due to the increase in cost of production. Cost of production
may rise due to a rise in the cost of raw materials or increase in wages.
Such increases in costs are passed on to consumers by firms by raising the prices of the products.
Rising wages lead to rising costs. Rising costs lead to rising prices. And rising prices, again,
prompt trade unions to demand higher wages. Thus, an inflationary wage-price spiral starts.
This causes aggregate supply curve to shift leftward. This can be demonstrated graphically (Fig.
11.4) where AS1 is the initial aggregate supply curve. Below the full employment stage this AS
curve is positive sloping and at full employment stage it becomes perfectly inelastic. Intersection
point (E1) of AD1 and AS1 curves determines the price level.

Now, there is a leftward shift of aggregate supply curve to AS2. With no change in aggregate
demand, this causes price level to rise to OP2 and output to fall to OY2.
With the reduction in output, employment in the economy declines or unemployment rises. Further
shift in the AS curve to AS2 results in higher price level (OP3) and a lower volume of aggregate
output (OY3). Thus, CPI may arise even below the full employment (Yf) stage.
Causes of CPI:
It is the cost factors that pull the prices upward. One of the important causes of price rise is the rise
in price of raw materials. For instance, by an administrative order the government may hike the
price of petrol or diesel or freight rate. Firms buy these inputs now at a higher price. This leads to
an upward pressure on cost of production.
Not only this, CPI is often imported from outside the economy. Increase in the price of petrol by
OPEC compels the government to increase the price of petrol and diesel. These two important raw
materials are needed by every sector, especially the transport sector. As a result, transport costs
go up resulting in higher general price level.
Again, CPI may be induced by wage-push inflation or profit-push inflation. Trade unions demand
higher money wages as a compensation against inflationary price rise. If increase in money wages
exceeds labour productivity, aggregate supply will shift upward and leftward. Firms often exercise
power by pushing up prices independently of consumer demand to expand their profit margins.
Fiscal policy changes, such as an increase in tax rates leads to an upward pressure in cost of
production. For instance, an overall increase in excise tax of mass consumption goods is definitely
inflationary. That is why government is then accused of causing inflation.
Finally, production setbacks may result in decreases in output. Natural disaster, exhaustion of
natural resources, work stoppages, electric power cuts, etc., may cause aggregate output to
decline.
In the midst of this output reduction, artificial scarcity of any goods by traders and hoarders just
simply ignite the situation.
Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Thus,
inflation is caused by the interplay of various factors. A particular factor cannot be held responsible
for inflationary price rise.
Essay on the Effects of Inflation:
People’s desires are inconsistent. When they act as buyers they want prices of goods and services
to remain stable but as sellers they expect the prices of goods and services should go up. Such a
happy outcome may arise for some individuals; “but, when this happens, others will be getting
the worst of both worlds.” Since inflation reduces purchasing power it is bad.
The old people are in the habit of recalling the days when the price of say, meat per kilogram cost
just 10 rupees. Today it is Rs. 250 per kilogram. This is true for all other commodities. When they
enjoyed a better living standard. Imagine today, how worse we are! But meanwhile, wages and
salaries of people have risen to a great height, compared to the ‘good old days’. This goes
unusually untold.
When price level goes up, there is both a gainer and a loser. To evaluate the consequence of
inflation, one must identify the nature of inflation which may be anticipated and unanticipated. If
inflation is anticipated, people can adjust with the new situation and costs of inflation to the society
will be smaller.
In reality, people cannot predict accurately future events or people often make mistakes in
predicting the course of inflation. In other words, inflation may be unanticipated when people fail to
adjust completely. This creates various problems.
One can study the effects of unanticipated inflation under two broad headings:
(i) Effect on distribution of income and wealth
(ii) Effect on economic growth.
(a) Effects of Inflation on Income and Wealth Distribution:
During inflation, usually people experience rise in incomes. But some people gain during inflation
at the expense of others. Some individuals gain because their money incomes rise more rapidly
than the prices and some lose because prices rise more rapidly than their incomes during inflation.
Thus, it redistributes income and wealth.
Though no conclusive evidence can be cited, it can be asserted that following categories of
people are affected by inflation differently:
i. Creditors and Debtors:
Borrowers gain and lenders lose during inflation because debts are fixed in rupee terms. When
debts are repaid their real value declines by the price level increase and, hence, creditors lose. An
individual may be interested in buying a house by taking a loan of Rs. 7 lakh from an institution for
7 years.
The borrower now welcomes inflation since he will have to pay less in real terms than when it was
borrowed. Lender, in the process, loses since the rate of interest payable remains unaltered as per
agreement. Because of inflation, the borrower is given ‘dear’ rupees, but pays
back ‘cheap’ rupees.
However, if in an inflation-ridden economy creditors chronically loose, it is wise not to advance
loans or to shut down business. Never does it happen. Rather, the loan- giving institution makes
adequate safeguard against the erosion of real value.
ii. Bond and Debenture-Holders:
In an economy, there are some people who live on interest income—they suffer most.
Bondholders earn fixed interest income:
These people suffer a reduction in real income when prices rise. In other words, the value of one’s
savings decline if the interest rate falls short of inflation rate. Similarly, beneficiaries from life
insurance programmes are also hit badly by inflation since real value of savings deteriorate.
iii. Investors:
People who put their money in shares during inflation are expected to gain since the possibility of
earning business profit brightens. Higher profit induces owners of firms to distribute profit among
investors or shareholders.
iv. Salaried People and Wage-Earners:
Anyone earning a fixed income is damaged by inflation. Sometimes, unionized worker succeeds in
raising wage rates of white-collar workers as a compensation against price rise. But wage rate
changes with a long time lag. In other words, wage rate increases always lag behind price
increases.
Naturally, inflation results in a reduction in real purchasing power of fixed income earners. On the
other hand, people earning flexible incomes may gain during inflation. The nominal incomes of
such people outstrip the general price rise. As a result, real incomes of this income group increase.
v. Profit-Earners, Speculators and Black Marketeers:
It is argued that profit-earners gain from inflation. Profit tends to rise during inflation. Seeing
inflation, businessmen raise the prices of their products. This results in a bigger profit. Profit
margin, however, may not be high when the rate of inflation climbs to a high level.
However, speculators dealing in business in essential commodities usually stand to gain by
inflation. Black marketeers are also benefited by inflation.
Thus, there occurs a redistribution of income and wealth. It is said that rich becomes richer and
poor becomes poorer during inflation. However, no such hard and fast generalizations can be
made. It is clear that someone wins and someone loses from inflation.
These effects of inflation may persist if inflation is unanticipated. However, the redistributive
burdens of inflation on income and wealth are most likely to be minimal if inflation is anticipated by
the people.
With anticipated inflation, people can build up their strategies to cope with inflation. If the annual
rate of inflation in an economy is anticipated correctly people will try to protect them against losses
resulting from inflation.
Workers will demand 10 p.c. wage increase if inflation is expected to rise by 10 p.c. Similarly, a
percentage of inflation premium will be demanded by creditors from debtors. Business firms will
also fix prices of their products in accordance with the anticipated price rise. Now if the entire
society “learns to live with inflation”, the redistributive effect of inflation will be minimal.
However, it is difficult to anticipate properly every episode of inflation. Further, even if it is
anticipated it cannot be perfect. In addition, adjustment with the new expected inflationary
conditions may not be possible for all categories of people. Thus, adverse redistributive effects are
likely to occur.
Finally, anticipated inflation may also be costly to the society. If people’s expectation regarding
future price rise become stronger they will hold less liquid money. Mere holding of cash balances
during inflation is unwise since its real value declines. That is why people use their money
balances in buying real estate, gold, jewellery, etc.
Such investment is referred to as unproductive investment. Thus, during inflation of anticipated
variety, there occurs a diversion of resources from priority to non-priority or unproductive sectors.
b. Effect on Production and Economic Growth:
Inflation may or may not result in higher output. Below the full employment stage, inflation has a
favourable effect on production. In general, profit is a rising function of the price level. An
inflationary situation gives an incentive to businessmen to raise prices of their products so as to
earn higher doses of profit.
Rising price and rising profit encourage firms to make larger investments. As a result, the multiplier
effect of investment will come into operation resulting in higher national output. However, such a
favourable effect of inflation will be temporary if wages and production costs rise very rapidly.
Further, inflationary situation may be associated with the fall in output, particularly if inflation is of
the cost-push variety. Thus, there is no strict relationship between prices and output. An increase in
aggregate demand will increase both prices and output, but a supply shock will raise prices and
lower output.
Inflation may also lower down further production levels. It is commonly assumed that if inflationary
tendencies nurtured by experienced inflation persist in future, people will now save less and
consume more. Rising saving propensities will result in lower further outputs.
One may also argue that inflation creates an air of uncertainty in the minds of business community,
particularly when the rate of inflation fluctuates. In the midst of rising inflationary trend, firms cannot
accurately estimate their costs and revenues. Under the circumstance, business firms may be
deterred in investing. This will adversely affect the growth performance of the economy.
However, slight dose of inflation is necessary for economic growth. Mild inflation has an
encouraging effect on national output. But it is difficult to make the price rise of a creeping variety.
High rate of inflation acts as a disincentive to long run economic growth. The way the hyperinflation
affects economic growth is summed up here.
We know that hyperinflation discourages savings. A fall in savings means a lower rate of capital
formation. A low rate of capital formation hinders economic growth. Further, during excessive price
rise, there occurs an increase in unproductive investment in real estate, gold, jewellery, etc.
Above all, speculative businesses flourish during inflation resulting in artificial scarcities and,
hence, further rise in prices. Again, following hyperinflation, export earnings decline resulting in a
wide imbalance in the balance of payments account.
Often, galloping inflation results in a ‘flight’ of capital to foreign countries since people lose
confidence and faith over the monetary arrangements of the country, thereby resulting in a scarcity
of resources. Finally, real value of tax revenue also declines under the impact of hyperinflation.
Government then experiences a shortfall in investible resources.
Thus, economists and policy makers are unanimous regarding the dangers of high price rise. But
the consequence of hyperinflation is disastrous. In the past, some of the world economies (e.g.,
Germany after the First World War (1914-1918), Latin American countries in the 1980s) had been
greatly ravaged by hyperinflation.

7 Major Causes leading to Inflation in India

Major causes leading to inflation are as follows:

Causes
1. Increase in money supply:
Over the last few years the rate of increase in money supply has varied between 15 and 18 per
cent, whereas the national output has increased at an annual average rate of only 4 per cent.
Hence the rate of increase in output has not been sufficient to absorb the rising quantity of money
in the economy. Inflation is the obvious result.
2. Deficit financing:
When the government is unable to raise adequate revenue for its expenditure, it resorts to deficit
financing. During the sixth and seventh Plans, massive doses of deficit financing had been
resorted to. It was Rs. 15,684 crores in the sixth Plan and Rs. 36,000 crores in the seventh Plan.
3. Increase in government expenditure:
Government expenditure in India during the recent years has been rising very fast. What is more
disturbing, proportion of non-development expenditure increased rapidly, being about 40 per cent
of total government expenditure. Non-development expenditure does not create real goods; it only
creates purchasing power and hence leads to inflation.
Not only the above mentioned factors on the Demand side cause inflation, factors on the Supply
side also add fuel to the flame of inflation.
4. Inadequate agricultural and industrial growth:
Agricultural and industrial growth in our country has been much below what we had targeted for.
Over the four decades period, food grains output has increased and-.i.e. of 3.2 per cent per
annum.
But there are years of crop failure due to droughts. In the years of scarcity of food grains not only
the prices of food articles increased, the general price level also rose.

Failure of crops always encouraged big wholesale dealers to indulge in hoarding which
accentuated scarcity conditions and pushed up the price level.
Performance of the industrial sector, particularly in the period 1965 to 1985, has not been
satisfactory. Over the 15 years period from 1970 to 1985, industrial production increased at a
modest rate of 4.7 per cent per annum.
Our industrial structure, developed on the basis of heavy industry-led growth, is not suitable to
meet the current demand for consumer goods.
5. Rise in administered prices:
In our economy a large part of the market is regulated by government action. There are a number
of important commodities, both agricultural and industrial, for which the price level is administered
by the government.
The government keeps on raising prices from time to time in order to cover up losses in the public
sector. This policy leads to cost-push inflation.
The upward revision of administered prices of coal, iron and steel, electricity and fertilisers were
made at regular intervals. Once the administered prices are raised, it is a signal for other price to
go up.
6. Rising import prices:
Inflation has been a global phenomenon. International inflation gets imported into the country
through major imports like fertilisers, edible oil, steel, cement, chemicals, and machinery. Increase
in the import price of petroleum has been most spectacular and its contribution to domestic price
rise is very high.
7. Rising taxes:
To raise additional financial resources, government is depending more and more on indirect taxes
such as excise duties and sales tax. These taxes invariably raise the price level.

2.CAUSES OF INFLATON Inflation refers to a rise in prices that causes the purchasing
power of a nation to fall. Inflation is a normal economic development as long as the annual
percentage remains low; once the percentage rises over a pre-determined level, it is
considered an inflation crisis. There are many causes for inflation, depending on a number
of factors. Excess printing of money Inflation can happen when governments print an
excess of money to deal with a crisis. As a result, prices end up rising at an extremely high
speed to keep up with the currency surplus. This is called the demand-pull, in which prices
are forced upwards because of a high demand. Rise in production costs Another common
cause of inflation is a rise in production costs, which leads to an increase in the price of the
final product. For example, if raw materials increase in price, this leads to the cost of
production increasing, this in turn leads to the company increasing prices to maintain
steady profits. Rising labor costs can also lead to inflation. As workers demand wage
increases, companies usually chose to pass on those costs to their customers.
International lending and national debts Inflation can also be caused by international
lending and national debts. As nations borrow money, they have to deal with interests,
which in the end cause prices to rise as a way of keeping up with their debts. A deep drop
of the exchange rate can also result in inflation, as governments will have to deal with
differences in import/export level. Rise in tax and duties Finally, inflation can be caused by
federal taxes put on consumer products such as cigarettes or fuel. As the taxes rise,
suppliers often pass on the burden to the consumer; the catch, however, is that once prices
have increased, they rarely go back, even if the taxes are later reduced. Wars are often
cause for inflation, as governments must both recoup the money spent and repay the funds
borrowed from the central bank. War often affects everything from international trading to
labor costs to product demand, so in the end it always produces a rise in prices. 3.EFFECT
OF INFLATION As we know Inflation is the increase in the price of general goods and
service. Thus, food, commodities and other services become expensive for consumption.
Inflation can cause both short-term and long-term damages to the economy; most
importantly it causes slow down in the economy. 1.People start consuming or buying less
of these goods and services as their income is limited. This leads to slowdown not only in
consumption but also production. This is because manufactures will produce fewer goods
due to high costs and anticipated lower demand. 2.Banks will increase interest rates as
inflation increases otherwise real interest rate will be negative. (Real interest = Nominal
interest rate – inflation). This makes borrowing costly for both consumers and corporate.
Thus people will buy fewer automobiles, houses and other goods. Industries will not borrow
money from banks to invest in capacity expansion because borrowing rates are high.
3.Higher interest rates lead to slowdown in the economy. This leads to increase in
unemployment because companies start focusing on cost cutting and reduces hiring.
Remember Jet Airways lay off over 1000 employees to save cost. 4.Rising inflation can
prompt trade unions to demand higher wages, to keep up with consumer prices. Rising
wages in turn can help fuel inflation. 5.Inflation affects the productivity of companies. They
add inefficiencies in the market, and make it difficult for companies to budget or plan long-
term. Inflation can act as a drag on productivity as companies are forced to shift resources
away from products and services in order to focus on profit and losses from currency
inflation.
UNEMPLOYMENT ESSAY

One of the major hindrances in the growth of any country is unemployment. Unemployment is a
serious issue in India. Lack of education, lack of employment opportunities and performance
issues are some of the factors that lead to unemployment. The government of India must take
effective steps to eliminate this problem. One of the main problems faced by the developing
countries is unemployment. It is not only one of the major obstacles in the country’s economic
growth but also has several other negative repercussions on the individual as well as the society
as a whole.
LONG AND SHORT ESSAY ON UNEMPLOYMENT IN ENGLISH
We have provided below short and long essay
on unemployment in English for your knowledge and information. These essays have been written
in simple and impressive language to convey the message with minimum effort.
After going through these Essays on Unemployment you will know about the factors leading to
unemployment in India; what are the possible solutions for the eradication of unemployment;
different types of unemployment; initiatives taken by the government to reduce unemployment;
unemployment statistics in India etc.
 These Unemployment essay will be useful in your school/college events of essay writing, speech
giving or debate.
UNEMPLOYMENT ESSAY 1 (200 WORDS)
People who are willing to work and are earnestly looking for job but are unable to find one are said
to be unemployed. It does not include people who are voluntarily unemployed as well as those who
are unable to seek job due to certain physical or mental health problem.
There are various factors that lead to the problem of unemployment in the country. These include:
 Slow Industrial Growth
 Rapid Increase in Population
 Focus on Theoretical Education
 Fall in Cottage Industries
 Lack of alternative employment opportunities for the agricultural workers
 Technological Advancement
Unemployment does not impact only the individuals but also the growth of the country. It has a
negative impact on social and economic growth of the country. Here are some of the
consequences of unemployment:
 Increase in crime rate
 Poor standard of living
 Loss of skill
 Political instability
 Mental health issues
 Slow economic growth
Surprisingly, despite the negative repercussions it has on the society, unemployment is one of the
most overlooked issues in India. The government has taken certain steps to control the problem;
however, these have not been effective enough. The government should not just initiate programs
to control this problem but also keep a check on their effectiveness and revise them if need be.

UNEMPLOYMENT ESSAY 2 (300 WORDS)

Introduction
Unemployment is a curse to the society. It does not only impact the individuals but also the society
as a whole. There are a number of factors that lead to unemployment. Here is a look at these
factors in detail and also the possible solutions to control this problem.
Factors Leading to Unemployment in India
1. Growth in Population
The rapid growth in the population of the country is one of the leading causes of unemployment.
2. Slow Economic Growth
Slow economic growth of the country results in lesser employment opportunities for people,
thereby leading to unemployment.
3. Seasonal Occupation
Large part of the country’s population is engaged in the agricultural sector. With this being a
seasonal occupation, it provides work opportunity only for a certain part of the year.
4. Slow Growth of Industrial Sector
The growth of industrial sector in the country is slow. Thus, the employment opportunities in this
sector are limited.
5. Fall in Cottage Industry
The production in cottage industry has fallen drastically and this has left several artisans
unemployed.
Possible Solutions to Eradicate Unemployment
1. Population Control
 It is high time the government of India should take stern steps to control the population of the
country.
2. Education System
The education system in India focuses majorly on the theoretical aspects rather than skill
development. The system must be improved to generate skilled manpower.
3. Industrialization
The government must take steps to boost the industrial sector to create greater opportunities for
people.
4. Overseas Companies
The government must encourage foreign companies to open their units in the country to generate
more employment opportunities.
5. Employment Opportunities
Employment opportunities must be created in rural areas for seasonally unemployed people.
Conclusion
The problem of unemployment in the country has persisted since long. While the government has
launched several programmes for employment generation, desirable progress has not been
achieved. The policy-makers and the citizens should make collective efforts in creating more jobs
as well as acquiring the right skill-set for employability.

UNEMPLOYMENT ESSAY 3 (400 WORDS)

Introduction
Unemployment in India can be divided into many categories including disguised unemployment,
open unemployment, educated unemployment, cyclic unemployment, seasonal unemployment,
technological unemployment, underemployment, structural unemployment, frictional
unemployment, chronic unemployment and casual unemployment. Before leaning about these
types of unemployment in detail let us understand as to who exactly is said to be unemployed. It is
basically a person who is willing to work and is seeking an employment opportunity, however, is
unable to find one. Those who choose to remain unemployed voluntarily or are unable to work due
to some physical or mental health issue are not counted as unemployed.
Here is a detailed look at the different types of unemployment:
Disguised Unemployment
When more than the required numbers of people are employed at a place, it is said to be disguised
unemployment. Removing these people does not impact the productivity.
Seasonal Unemployment
As the term suggests, this is the type of unemployment that is seen during certain seasons of the
year. The industries mostly affected by seasonal unemployment include the agricultural industry,
resorts and ice factories, to name a few.
Open Unemployment
This is when a vast number of labourers are unable to seek a job that provides them regular
income. The problem occurs as the labour force increases at a much greater rate compared to the
economy’s growth rate.
Technological Unemployment
The use of technological equipments has also led to unemployment by reducing the requirement of
manual labour.
Structural Unemployment
This kind of unemployment occurs because of a major change in the country’s economic structure.
This is said to be a result of technological advancement and economic development.
Cyclic Unemployment
A reduction in the overall level of business activities leads to cyclic unemployment. However, the
phenomenon is short-run.
 Educated Unemployment
Inability to find a suitable job, lack of employable skill and flawed education system are some of the
reasons why the educated lot remains unemployed.
Underemployment
In this kind of unemployment people either take up a job on part time basis or take up work for
which they are over-qualified.
Frictional Unemployment
This occurs when the demand of labour force and its supply are not synced appropriately.
Chronic Unemployment
This is long-term unemployment that continues in a country due to the rapid increase in population
and low level of economic development.
Casual Unemployment
This may occur because of a sudden fall in demand, short-term contracts or shortage of raw
material.
Conclusion
Though the government has launched several programmes to control each type of unemployment,
however, the results are far from satisfactory. The government needs to devise more effective
strategies for employment generation.

UNEMPLOYMENT ESSAY 4 (500 WORDS)

Introduction
Unemployment is a serious problem. There are a number of factors including lack of education,
lack of employment opportunities, lack of skill, performance issues and increasing population rate
that lead to this issue in India. Unemployment has a number of negative repercussions on the
individuals as well as the country as a whole. The government has taken several initiatives to
control this problem. Some of these are mentioned here in detail.
Government Initiatives to Reduce Unemployment
1. Training for Self Employment
Launched in 1979, the program was named, National Scheme of Training of Rural Youth for Self
Employment (TRYSEM). It is aimed at reducing unemployment among the youth in the rural areas.
2. Integrated Rural Development Programme (IRDP)
In the year 1978-79, the Indian government launched the Integrated Rural Development
Programme to ensure full employment opportunities in rural areas. A sum of Rs. 312 crore was
spent on this programme and as many as 182 lakh families benefited from it.
3. Employment in Foreign Countries
The government helps people get employment in overseas companies. Special agencies have
been established to hire people for work in other countries.
4. Small and Cottage Industries
In an attempt to reduce the issue of unemployment, the government has also developed small and
cottage industries. Several people are making their living with this initiative.
5. The Swaran Jayanti Rozgar Yojana
This program is aimed at providing self-employment as well as wage-employment opportunities to
the urban population. It includes two plans:
 Urban Self-Employment Programme
 Urban Wage Employment Programme
6. Employment Assurance Scheme
The program was launched in as many in 1994 in as 1752 backward blocks in the country. It
provided unskilled manual work for 100 days to the poor unemployed people living in rural areas.
7. Drought Prone Area Programme (DPAP)
The program was started in 13 states and covered as many as 70 drought-prone districts with an
aim to remove seasonal unemployment. In its seventh plan, the government spent Rs. 474 crore.
8. Jawahar Rozgar Yojana
The program launched in April 1989 aimed at providing employment to a minimum of one member
in each poor rural family for a period of fifty to hundred days a year. The employment opportunity is
provided in the person’s vicinity and 30% of these opportunities are reserved for women.
9. Nehru Rozgar Yojana (NRY)
There are a total of three schemes under this program. Under the first scheme, the urban poor are
given subsidy to establish micro enterprises. Under the second scheme, wage-employment is
arranged for labourers in cities having a population of less than 10 lakh. Under the third scheme,
urban poor in the cities are given employment opportunities matching their skills.
10.Employment Guarantee Scheme
Unemployed people are provided economic assistance under this scheme. It has been launched in
a number of states including Kerala, Maharashtra, Rajasthan, etc.
Apart from this, many other similar programs have been launched to reduce unemployment.
Conclusion
Though the government has been taking several measures to control the problem of
unemployment in the country a lot still needs to be worked upon in order to curb this problem in
true sense.

UNEMPLOYMENT ESSAY 5 (600 WORDS)

Introduction
People who are willing to work and are earnestly looking for job but are unable to find one are said
to be unemployed. It does not include people who are voluntarily unemployed as well as those who
are unable to seek job due to certain physical or mental health problem.
Unemployment is a grave issue. The major factors lead to it are lack of proper education, lack of
good skill set, inability to perform, lack of good employment opportunities and rapidly increasing
population. Here is a look at the unemployment statics in the country, the consequences of
unemployment and the measures taken by the government to control it.
Here is a detailed look at the different types of unemployment:
Disguised Unemployment
When more than the required numbers of people are employed at a place, it is said to be disguised
unemployment. Removing these people does not impact the productivity.
Seasonal Unemployment
As the term suggests, this is the type of unemployment that is seen during certain seasons of the
year. The industries mostly affected by seasonal unemployment include the agricultural industry,
resorts and ice factories, to name a few.
Open Unemployment
 This is when a vast number of labourers are unable to seek a job that provides them regular
income. The problem occurs as the labour force increases at a much greater rate compared to the
economy’s growth rate.
Technological Unemployment
The use of technological equipments has also led to unemployment by reducing the requirement of
manual labour.
Structural Unemployment
This kind of unemployment occurs because of a major change in the country’s economic structure.
This is said to be a result of technological advancement and economic development.
Cyclic Unemployment
A reduction in the overall level of business activities leads to cyclic unemployment. However, the
phenomenon is short-run.
Educated Unemployment
Inability to find a suitable job, lack of employable skill and flawed education system are some of the
reasons why the educated lot remains unemployed.
Underemployment
In this kind of unemployment people either take up a job on part time basis or take up work for
which they are over-qualified.
Frictional Unemployment
This occurs when the demand of labour force and its supply are not synced appropriately.
Chronic Unemployment
This is long-term unemployment that continues in a country due to the rapid increase in population
and low level of economic development.
Casual Unemployment
This may occur because of a sudden fall in demand, short-term contracts or shortage of raw
material.

Factors Leading to Unemployment in India

1. Growth in Population
The rapid growth in the population of the country is one of the leading causes of
unemployment.
2. Slow Economic Growth
Slow economic growth of the country results in lesser employment opportunities for
people,thereby leading to unemployment.
3. Seasonal Occupation
Large part of the country’s population is engaged in the agricultural sector. With this being a
seasonal occupation, it provides work opportunity only for a certain part of the year.
4. Slow Growth of Industrial Sector
The growth of industrial sector in the country is slow. Thus, the employment opportunities in
this sector are limited.
5. Fall in Cottage Industry
The production in cottage industry has fallen drastically and this has left several artisans
unemployed.

Consequences of Unemployment
Unemployment leads to serious socio-economic issues. It does not only impact the individuals but
the society as a whole. Shared below are some of the major consequences of unemployment:
 Increase in Poverty
 It goes without saying that increase in unemployment rate results in increase in the rate of poverty
in the country. Unemployment is largely responsible for hampering the economic growth of the
country.
 Increase in Crime Rate
Unable to find a suitable job, the unemployed youth usually takes the path of crime as this seems
to be an easy way of making money. One of the main causes of rapidly increasing cases of theft,
robbery and other heinous crimes is unemployment.
 Exploitation of Labour
Employees usually take advantage of scarcity of jobs in the market by offering low wages. Unable
to find a job matching their skill people usually settle for a low-paying job. Employees are also
forced to work for more than the set number of hours each day.
 Political Instability
Lack of employment opportunities results in loss of faith in the government and this often leads to
political instability.
 Mental Health
The dissatisfaction level among unemployed people increases and it can gradually lead to anxiety,
depression and other mental health problems.
 Loss of Skill
Staying out of job for long period of time makes one dull and eventually results in the loss of skill. It
also lowers a person’s self confidence to a large extent.
Government Initiatives to Reduce Unemployment
The government of India has taken several initiatives to reduce the problem of unemployment as
well as to help the unemployed lot in the country. Some of these include the Integrated Rural
Development Programme (IRDP), Jawahar Rozgar Yojana, Drought Prone Area Programme
(DPAP), Training for Self-Employment, Nehru Rozgar Yojna (NRY), Employment Assurance
Scheme, Prime Minister’s Integrated Urban Poverty Eradication Program (PMIUPEP)
Development of Organized Sector, Employment Exchanges, Employment in Foreign Countries,
Small and Cottage Industries, Employment Guarantee Scheme and Jawahar Gram Samridhi
Yojana, to name a few.
Besides offering employment opportunities by way of these programs, the government is also
sensitizing the importance of education and providing skill training to the unemployed people.
Conclusion
Unemployment is the root cause of various problems in the society. While the government has
taken initiatives to reduce this problem, the measures taken are not effective enough. The various
factors causing this problem must be studied well to look for effective and integrated solutions for
the same. It is time the government should recognize the sensitivity of the matter and take some
serious steps to reduce it.
POVERTY
Pverty a social condition where individuals do not have financial meansto pay for basic needs of
daily life like food, clothes and shelter.
Poverty also keeps people away from accessing social needs of well-being like education and
health requirements. The direct symptoms of this problem are hunger, malnutrition and
susceptibility to diseases.

Causes of Poverty in India

1.Over population: The growth of population in the country has so far exceeded the growth in
economy a. In rural areas, size of the families is bigger and hence the per capita income values will
be less and the standard of living will be pthetic. Growth in population leads to generation of
unemployment ,low wages for jobs and low income.
2. Poor Agricultural Infrastructure–Agriculture is the backbone of Indian economy. But outdated
farming practices, lack of proper irrigation infrastructure and even lack of formal knowledge of crop
handling has affected the productivity in this sector tremendously. As a consequence there is
redundancy and sometimes complete lack of work leading to decreased wages that is insufficient
for meeting daily needs of a labourer’s family plunging them into poverty.
3.Unequal distribution of assets– Upper and middle income groups see a faster increase in
earnings than lower income groups. Also assets like land, cattle as well as realty are distributed
disproportionately among the population with certain people owning majority shares than other
sectors of the society and their profits from these assets are also unequally distributed. In India it is
said that 80% wealth in the country is controlled by just 20% of the population.
4.Unemployment– Another major economic factor that causes poverty in the country is the rising
unemployment rate.
5.Inflation and Price hike– the term Inflation may be defined as an increase in prices of
commodities coinciding with the fall in the purchasing value of money. As a direct consequence of
inflation, effective price of food, clothing items as well as real estate rises. The salaries and wages
do not rise as much in keeping up with the inflated prices of commodities leading to effective
decrease of the per capita income.
6.Faulty economic liberalization–The economical liberalisation policies implemented by the
Government were successful to certain extent in reviving the economy.But it had detrimental
effects on increasing the wealth distribution scenario. Rich became richer, while the poor remained
poor.

Effects of Poverty
1. Effect on Health–The most prominent health issue stemming from poverty is malnutrition.
Children are most adversely affected by this and over time they suffer from severe health problems
like low body weight, mental, physical disabilities and a general poor state of immunity making
them susceptible to diseases. Children from poor backgrounds are twice as susceptible to suffer
from anemia, nutrient deficiencies, impaired vision, and even cardiac problems. Malnutrition is a
gross contributor of infant mortality in the country and 38 out of every 1,000 babies born in India
die before their first birthday. Malnutrition among adult also leads to poor health in adults that
leaches their capacity for manual labour leading to a decrease in income due to weakness and
diseases. Poverty also causes definite decline in the sanitary practices among poor who cannot
afford proper bathrooms and disinfectants. As a result susceptibility to waterborne diseases peak
among the poor. Lack of access to as well as means to procure appropriate treatment also affects
overall mortality of the population which is lower in poor countries than developed nations
2. Effects on Society– poverty exerts some gravely concerning effects over the overall societal
health as well. These may be discussed along the following lines:-
a. Violence and crime rate–Due to unemployment and marginalization, the poor resort to criminal
activities to earn money. Coupled with lack of education and properly formed moral conscience, a
poverty ridden society is more susceptible to violence by its people from a sense of deep-seated
discontent and rage.
b. Homelessness– Poverty ridden homelessness affects child health, women safety and overall
increase in criminal tendencies.
c. Stress– lack of money is a major cause of stress among the middle-class and the poor and
leads to decline in productivity of individuals.
d. Child labour– In a poverty-ridden society, large families fail to meet the monetary needs of the
members and children at their younger age are made to start earning in order to contribute to the
family income.
e. Terrorism– extreme poverty and lack of education make youngsters susceptible to
brainwashing towards terrorism. Terrorist organizations offer poverty-ridden families money in
exchange for a member’s participation in their activities which induces a sense of accomplishment
among the youth.
3. Effect on Economy– The number of people living under the poverty threshold indicates
whether the economy is powerful enough to generate adequate jobs and amenities for its people.
Schemes providing subsidies for the poor of the country again impose a drain on the economy.
Solutions
The measures that should be taken to fight the demon of poverty in India are outlined below:-
1. Growth of population at the current rate should be checked by implementation of policies and
awareness promoting birth control.
2. All efforts should be made to increase the employment opportunities in the country, either by
inviting more foreign investments or by encouraging self-employment schemes.
3. Measures should be taken to bridge the immense gap that remains in distribution in wealth
among different levels of the society.
4. Certain Indian states are more poverty stricken than others like Odhisha and the North East
states. Government should seek to encourage investment in these states by offering special
concessions on taxes.
5. Primary needs of people for attaining a satisfactory quality of life like food items, clean drinking
water should be available more readily. Improvement of the Subsidy rates on commodities and
Public Distribution system should be made. Free high school education and an increased number
of functioning health centers should be provided by the government.