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This report is generated under the academic supervision of Dr. Sameer Kumar Sheel, Associate Professor,

This report is generated under the academic supervision of Dr. Sameer Kumar Sheel, Associate Professor, Department of marketing, University of Dhaka. This report is prepared as the requirement of Macroeconomics course. The topic is “Inflation Trend in the economy of Bangladesh”

The main aim of preparing the report is to fulfill the requirement of our course
The main aim of preparing the report is to fulfill the requirement of our course instructor.
The report helps to find out the factors that influence our Inflation and GDP.
The other objectives behind this study are as follows:
 To have more clear knowledge about the techniques, rules and standards of
measurement of inflation trends to fulfill the partial requirement of the course
“Macroeconomics” offered in BBA program
 To find out the current situation of Inflation and GDP in Bangladesh
 To compare the inflation fluctuation and its impact on GDP periodically
 To explore the implication of forecasting technique in the GDP of Bangladesh
 To find out the causes relevant to that inflation and GDP fluctuation
 To improve our skills on report writing. As corporate executive put great value on report
writing as an important element in management success, this part of the course will
prepare us to face the future challenges of corporate world
Inflation is that condition of economy whereby general price will be going higher and higher
and constant. In other words, Inflation is defined as a sustained increase in the general
level of prices for goods and services and fall of purchasing power.
Features

It will be marked by constant price rising

It is measured as an annual percentage increase.

As inflation rises, every dollar you own buys a smaller percentage of a good or service.

annual percentage increase.  As inflation rises, every dollar you own buys a smaller percentage of

As a result

Inflation is caused by a combination of four factors:

The supply of money goes up.
The supply of other goods goes down.
Demand for money goes down. Demand for other goods goes up.

 Inflation does not mean that all prices are increasing, even during period of rapid
Inflation does not mean that all prices are increasing, even during period of rapid inflation;
some prices may be relatively constant while others are falling. The troublesome aspect of
inflation is that prices rise unevenly, some rises sharply, some slowly and some don’t rise at
all. The main measure of inflation is the consumer price index.
History of Inflation
Bangladesh is the youngest country in the South Asian region. The economy has
experienced accelerated economic growth during the early 1990s in comparison with the
1980s. However, after that period, the economy experienced most severe exigency states
like increasing inflationary pressures, deteriorating government’s budgetary balances and
decreasing foreign exchange resaves. The GDP growth rate declined moderately during the
second half of 1980s when inflation rate gradually decreased to below 8-percent. However,
a moderate rate of inflation and an increasing rate of GDP growth are observed throughout
the 1990s. Throughout the first half of the 1990s, inflation rate was, on average, 5.37
percent, while GDP growth rate was 4.06 percent. Although inflation rate increased, on
average, to 5.52 percent in the second half of the 1990s, the growth rate of GDP continued
to increase. The increasing trend of inflation rate during the latter half of 1990s had been
corrected since the beginning of the new decade after 1990s and was observed at 4.14
percent, on average, during 2001 to 2005, when growth rate of GDP was, on average, 5.19
percent. So the GDP and inflation rate both the positive and negative relations between
them. The development of the economy largely depends on the proportional development
of middleclass and poor people. And these classes of people are most affected by the
inflation rate or rise in price because of limitation in income. The continuous rise in GDP
holds the GDP growth nearly 6% for couple of year. The price level chart shows that increase
in price is the main constraint of savings and investment by both public and private.
If we look the today’s economic giant India and china we see that they were the developing
country and now they are the economic giants. It is surprising but true that both of the
country took almost same strategy for developing their nation and that is ‘Banned foreign
import to protect, retain and sustain the domestic industry ’. Now china and India open
their market but their own industry established that time and now they share the export

and import in Asian and as well as in America. But Bangladesh has no similar strategy like

that-

Import destroys our local industry.

Decreasing the purchasing and standard of living.

strategy like that-  Import destroys our local industry.  Decreasing the purchasing and standard of

Due to destruction of domestic industry the unemployment rises.

Import relates with foreign currency and reserves of foreign currency measure the exchange rate, huge volume of import decrease supply and decrease the real exchange rate as well as PPP.

And all this things ultimately affects the GDP, which is the measurement of economic growth
And all this things ultimately affects the GDP, which is the measurement of economic
growth and development.
Recent facts
Recent time during fiscal year [2007-2008] the price of the goods and services increase
beyond the capabilities of the poor people. The point-to-point inflation climbed down below
the double digit compared to that in July and August. The point-to-point inflation reached
10.10 points in July for the first time in the last two decades and went up further to 10.11
points in August this year.
Point-to-point inflation soared to its record high of 10.10 per cent in July and inched up by
0.01 per cent in a month, Bangladesh Bureau of Statistics data showed.
Economists and a consumer rights activist said unabated price hike of food items led to the
double-digit growth of inflation and called for urgent steps to give consumers a respite from
skyrocketing prices and restore business confidence.
However, the provisional data prepared by the Bangladesh Bureau of Statistics (BBS) and
sent to the planning ministry showed that food inflation has dropped in both rural and
urban areas.
Year
Inflation Rate
(Consumer Prices)
Rank
Percent Change
Date of Information
2003
3.10
%
117
2002 est.
2004
5.60
%
67
80.65
%
2003 est.
2005
6.00
%
160
7.14
%
2004 est.
2006
7.00
%
160
16.67
%
2005 est.
2007
7.20
%
163
2.86
%
2006 est.

The main problem is that the prices increase of daily commodity and essential food items such as rice, powder milk, soybean oil and grains and vegetables. The prices of the shopping goods are moderate in terms of daily convenient goods.

Overall inflation rate continues to increase with a 0.85 percentage point increase in April

of daily convenient goods. Overall inflation rate continues to increase with a 0.85 percentage point increase
of daily convenient goods. Overall inflation rate continues to increase with a 0.85 percentage point increase

compared to the rate in March 0.45 and 1.59 percentage points increase inflation rate of food and non-food items.

Inflation Rate Rural Urban Food 8.79 9.44 Non-food 7.83 6.09 Many economists raise their cautionary
Inflation Rate
Rural
Urban
Food
8.79
9.44
Non-food
7.83
6.09
Many economists raise their cautionary about price increase, “The country’s economy
would head for a state of stagflation if the government fails to cool off some heat and
check erosion in business confidence” economist Atiur Rahman cautioned.
Official statistical agency’s figures show annualized average inflation kept on creeping up
steadily from as low as 1.66 per cent in 2000-01 fiscal year to 7.1 per cent in 2006-07; The
rate was 3.58 in 2001-02 and continued to go up since then, with 5.03 in 2002-2003, 5.64 in
2003-04, 7.35 in 2004-05 and 7.54 in 2005-06, according to the economic survey of the
finance ministry.
The jump was more galloping in point-to-point counts this year, from 5.94 per cent in
January to 10.11 in August.
Bangladesh Inflation Rate (Consumer Prices)
Inflation rate (consumer prices): 8.1% (2010 est.) 5.4% (2009 est.)
Year
Inflation Rate
(Consumer Prices)
Rank
Percent Change
Date of Information
2003
3.10
%
117
2002 est.
2004
5.60
%
67
80.65
%
2003 est.
2005
6.00
%
160
7.14
%
2004 est.
2006
7.00
%
160
16.67
%
2005 est.
2007
7.20
%
163
2.86
%
2006 est.
2008
9.10
%
184
26.39
%
2007 est.
2009
8.90
%
137
-2.20 %
2008 est.
2010
5.40
%
148
-39.33 %
2009 est.
2011
8.10
%
185
50.00
%
2010 est.
Inflation (General) Period Point-to-point 12 month average Weight End of Period 1996-97 3.96 1997-98 8.66
Inflation (General)
Period
Point-to-point
12 month average
Weight
End of Period
1996-97
3.96
1997-98
8.66
1998-99
7.06
1999-00
2.79
2000-01
1.66
1.94
2001-02
3.58
2.79
2002-03
5.03
4.38
2003-04
5.64
5.83
2004-05
7.35
6.48
2005-06
7.54
7.16
2006-07
9.2
7.2
2007-08
10.04
9.94
2008-09
2.25
6.66
2009-10
8.7
7.31
9.94 0 7.2 0 7.31 0 7.16 0 6.48 0 5.83 0 9.2 10.04 4.38
9.94
0
7.2 0
7.31
0
7.16
0
6.48
0
5.83
0
9.2 10.04
4.38
0
0
6.66
0
8.7
8.66 7.06
0
7.35 7.54
2.79
0
5.03 5.64
3.96
0
0
3.58
2.79 1.94
0
2.25
1.66
0
0 0
0
0
0
0
0
0
0
0
0
0
Inflation (General) CPI Period Food Weight 58.84 1996-97 103.67 1997-98 114.51 998-99 125.16 1999-00 128.52
Inflation (General)
CPI
Period
Food
Weight
58.84
1996-97
103.67
1997-98
114.51
998-99
125.16
1999-00
128.52
2000-01
130.3
2001-02
132.43
2002-03
137.01
2003-04
146.5
2004-05
158.08
2005-06
170.34
2006-07
184.16
2007-08
206.78
2008-09
221.64
2009-10
240.55
2003-04 146.5 2004-05 158.08 2005-06 170.34 2006-07 184.16 2007-08 206.78 2008-09 221.64 2009-10 240.55
300 250 240.55 200 221.64 206.78 184.16 150 170.34 158.08 125.16 128.52 130.3 132.43 137.01
300
250
240.55
200
221.64
206.78
184.16
150
170.34
158.08
125.16 128.52 130.3 132.43 137.01 146.5
100
103.67 114.51
50
58.84
0
0
CPI Food
Inflation (Food)
Period
Point -to- Point
12- Month Average
Weight
End of period
1996-97
3.67
1997-98
10.46
1998-99
9.3
1999-00
2.68
2000-01
0.87
1.39
2001-02
1.94
1.63
2002-03
5.22
3.46
2003-04
6.64
6.92
2004-05
8.73
7.91
2005-06
8.81
7.76
2006-07
9.82
8.11
2007-08
14.1
12.28
2008-09
0.25
7.19
2009-10
10.88
8.53
30 25 20 12.28 15 8.53 7.91 7.76 8.11 10 6.92 3.46 14.1 5 10.46
30
25
20
12.28
15
8.53
7.91 7.76 8.11
10
6.92
3.46
14.1
5
10.46
10.88
9.3
7.19
1.63
5.22 6.64 8.73 8.81 9.82
3.67
2.68
1.39
0
0.87 1.94
0
0
0
0.25
Inflation (Food)
CPI
Period
Non-Food
Weight
41.16
1996-97
104.47
1997-98
110.73
1998-99
115.1
1999-00
118.64
2000-01
122.25
2001-02
127.89
2002-03
135.13
2003-04
141.03
2004-05
147.14
2005-06
156.56
2006-07
165.79
2007-08
176.26
2008-09
186.67
2009-10
196.84
250 200 196.84 186.67 176.26 150 165.79 156.56 147.14 135.13 141.03 122.25 127.89 100 104.47
250
200
196.84
186.67
176.26
150
165.79
156.56
147.14
135.13 141.03
122.25 127.89
100
104.47 110.73 115.1 118.64
50
41.16
0
0
CPI Non-Food 41.16
Inflation (Non-food)
Period
Point -to-Point
12 Month Average
Weight
End of period
1996-97
4.47
1997-98
5.99
1998-99
3.95
1999-00
3.08
2000-01
3.14
3.05
2001-02
4.14
4.61
2002-03
4.68
5.66
2003-04
4.26
4.37
2004-05
5.32
4.33
2005-06
5.73
6.4
2006-07
8.34
5.9
2007-08
3.54
6.32
2008-09
5.94
5.91
2009-10
5.24
5.45
Inflation Inflation (Non-food) 16 14 5.9 12 6.4 5.91 5.45 5.66 10 4.33 6.32 4.61
Inflation
Inflation (Non-food)
16
14
5.9
12
6.4
5.91
5.45
5.66
10
4.33
6.32
4.61
4.37
8.34
8
6
5.99
3.05
5.32 5.73
5.94 5.24
4.47
4
4.14 4.68 4.26
3.54
3.95 3.08 3.14
2
0
0
0
0
0
0
0
0
0
0
0
The economy of Bangladesh has been suffering from a double-digit inflation. A shortage of
oil production or energy crisis world-wide, increase in energy prices and cost-of production
in combination with a demand-pull inflation from expansionary economic policies have
caused a persistent inflation. Altogether these have created a supply-side problem by
decreasing the productivity. The situation of Bangladesh has been aggravated due to
political problems and effort of minimizing corruption and a lack of confidence in business
and manufacturing. It is hard to assume that we can ever get back to the single digit
inflation. It is almost clear that we have to live with this double-digit inflation. We must find
out the avenue how to increase output and income, aggregate production and supply of
goods and services in an effort to fight the inflation.
The natural rate of inflation from four to five per cent is accepted in almost any developing
country. But, a double-digit inflation of more than ten percent must have some reasons.
Inflation is the persistent and generalized increase in the level of prices of goods and
services. Consumers are worried about higher or increasing prices of their consumer goods
as their real income, purchasing power and their standard of living is going down.
Producers, manufactures, businessmen and traders are overly concerned about increasing
prices of raw materials, energies including
electricity,
gas and oil and
the higher cost of production.

Producers would like to maximize their profit by meeting the consumer demand and by keeping their plant, factories and firms/ farms in operation at higher prices. Producers and suppliers do not have any other alternative except to charge a higher price

in operation at higher prices. Producers and suppliers do not have any other alternative except to

directly from the consumer and

indirectly from dealers, whole-sellers and retailers.

The market intermediaries are the last agents to charge higher prices.

Recently most of our economists think that devaluation or depreciation of the exchange rate of
Recently most of our economists think that devaluation or depreciation of the exchange
rate of Taka is another cause of inflation, with whom the Governor of Bangladesh Bank (BB)
disagreed. It matters little how the devaluation is related to inflation rate. We are in an
economic stage of recession with lower output and income, higher unemployment and an
unacceptably high instability in prices and inflation. We simply cannot afford to have a
contractionary monetary policy to increase the exchange rate or value of Taka currency.
On the other hand, contractionary monetary policy will further lower the output and
income, increase unemployment and lower purchasing power and further aggravate the
situation, and may not be able to decrease the cost-push inflation.
On the basis of reason
1. Cost push inflation
Inflation can result from a decrease in aggregate supply. The two main sources of decrease
in aggregate supply are
 An increase in wage rates
 An increase in the prices of raw materials etc.
These sources of a decrease in aggregate supply operate by increasing costs, and the
resulting inflation is called cost-push inflation.
Other things remaining the same, the higher the cost of production, the smaller is the
amount produced. At a given price level, rising wage rates or rising prices of raw materials

such as oil lead firms to decrease the quantity of labor employed and to cut production."

prices of raw materials such as oil lead firms to decrease the quantity of labor employed

Cost-push inflation occurs when businesses respond to rising costs, by increasing their prices to protect profit margins.

Possible causes of cost-push inflation

i. Component costs e.g. an increase in the prices of raw materials and components. This
i. Component costs e.g. an increase in the prices of raw materials and components. This
might be because of a rise in global commodity prices such as oil, gas copper and
agricultural products used in food processing – a good recent example is the surge in the
world price of wheat.
ii. Rising labor costs caused by wage increases that exceed improvements in productivity.
Wage and salary costs often rise when unemployment is low (creating labor shortages)
and when people expect inflation so they bid for higher pay in order to protect their real
incomes.
iii. Higher indirect taxes imposed by the government for example a rise in the duty on
alcohol, cigarettes and petrol/diesel or a rise in the standard rate of Value Added Tax.
Depending on the price elasticity of demand and supply, suppliers may pass on the
burden of the tax onto consumers.
iv. A fall in the exchange rate this can cause cost push inflation because it normally leads to
an increase in the prices of imported products. For example during 2007-08 the pound
fell heavily against the Euro leading to a jump in the prices of imported materials from
Euro Zone countries.
High cost
High cost
of factors
High Price
Price
of
of
of goods
Inflation
production
production
Illustration
Cost-push inflation can be illustrated by an inward shift of the short run aggregate supply
curve. The fall in SRAS causes a contraction of GDP together with a rise in the level of prices.
One of the risks of cost-push inflation is that it can lead to stagflation.
Important note
Many of the causes of cost-push inflation come from external economic shocks – e.g.
unexpected volatility in the prices of internationally traded commodities and large-scale
movements in variables such as the exchange rate. A country can also import cost-push
inflation from another country that is suffering from rising inflation of its own.

2. Demand pull inflation

The inflation resulting from an increase in aggregate demand is called demand-pull inflation. Such inflation may arise from any individual factor that increases aggregate demand, but the main ones that generate ongoing increases in aggregate demand are

factor that increases aggregate demand, but the main ones that generate ongoing increases in aggregate demand
factor that increases aggregate demand, but the main ones that generate ongoing increases in aggregate demand

i. Increases in the money supply

ii. Increases in government purchases

iii. Increases in the price level in the rest of the world

Inflation caused by an increase in aggregate demand, is inflation caused by factor 4 (An
Inflation caused by an increase in aggregate demand, is inflation caused by factor 4 (An
increase in the demand for goods). The three most likely causes of an increase in aggregate
demand will also tend to increase inflation:
i. Increases in the money supply This is simply factor 1 inflation.
ii. Increases in government purchases The increased demand for goods by the government
causes factor for inflation
iii. Increases in the price level in the rest of the world Suppose you are living in the United
States. If the price of gum rises in Canada, we should expect to see less Americans buy
gum from Canadians and more Canadians purchase the cheaper gum from American
sources. From the American perspective the demand for gum has risen causing a price
rise in gum; a factor 4 inflation.
Demand pull inflation occurs when aggregate demand and output is growing at an
unsustainable rate leading to increased pressure on scarce resources and a positive output
gap. When there is excess demand in the economy, producers are able to raise prices and
achieve bigger profit margins because they know that demand is running ahead of supply.
Typically, demand-pull inflation becomes a threat when an economy has experienced a
strong boom with GDP rising faster than the long run trend growth of potential GDP. The
last time this happened to any great extent in the UK economy was in the late 1980s.
Possible causes of demand pull inflation

i. A depreciation of the exchange rate which makes exports more competitive in overseas markets leading to an injection of fresh demand into the circular flow and a rise in national and demand for factor resources there may also be a positive multiplier effect on the level of demand and output arising from the initial boost to export sales.

may also be a positive multiplier effect on the level of demand and output arising from

ii. Higher demand from a government (fiscal) stimulus e.g. via a reduction in direct or indirect taxation or higher government spending and borrowing. If direct taxes are reduced, consumers will have more disposable income causing demand to rise. Higher government spending and increased borrowing feeds through directly into extra demand in the circular flow.

iii. Monetary stimulus to the economy A fall in interest rates may stimulate too much
iii. Monetary stimulus to the economy A fall in interest rates may stimulate too much
demand – for example in raising demand for loans or in causing rise in house price
inflation.
iv. Faster economic growth in other countries providing a boost to UK exports overseas.
v. Improved business confidence which prompts firms to raise prices and achieve better
profit margins
Demand pull inflation is most likely to occur when an economy is becoming stretched and is
said to be danger of over-heating. This is often seen towards the end of a boom when
output is expanding beyond the economy’s usual capacity to supply, the result being higher
prices and also a larger trade deficit (imports act as a kind of safety valve to take away some
of the excess AD).
On the basis of rate
1. Mild inflation
It is a slow rise in price level of no more than 5 percent per annum. It is associated with a
low level of unemployment and is during the upswing phase of a trade cycle. Such
creeping inflation has beneficial effects on an economy. It is a sign of a buoyant
economy or an expanding economy, implying the generation of jobs, output and growth.
2. Strato-inflation
The inflation rate ranges from about 10 percent to several hundred per cent. Many
developing countries particularly those in Latin America experienced this.
3. Hyper-inflation
It is a very rapidly accelerating inflation which is also known as runaway inflation or
galloping inflation. This usually leads to the breakdown of the country's monetary
system as the existing currency may have to be withdrawn and a new one introduced.
Causes of inflation
i. Short in production If the demand remains constant but the supply of the product
decreases then there will be a shortage between demand and supply. In this situation
inflation occurs and as a result price rises. So many of the consumers are deprived from
consuming their required goods.

ii. High in demand In this case supply remains constant but demand increases because of increasing money supply, increasing disposable income etc. As the demand increases the price of the product also increases.

money supply, increasing disposable income etc. As the demand increases the price of the product also

iii.

Natural calamity In such situation the demand of the country remains same but the supply decreases because of natural disaster such as flood, cyclone, drought etc. Then the price of the goods and services will go high. In agro based country like Bangladesh natural calamity effects very negatively on price inflation.

iv. Man-made calamity There are some calamity which is created by human being itself such
iv.
Man-made calamity There are some calamity which is created by human being itself
such as transportation strike, human strike etc. In this case the supply of the product will
decreases or it will be hampered. It results in price rising. It is one of the most prominent
reasons of price inflation in Bangladesh.
v.
Fiscal policy Fiscal policy is related to the income & expenditure pattern of the
government.
 If the tax of the product is high then the price of the product will also high and price
inflation occurs.
 On the other hand if the tax of the product decreases then the price of the product will
low and in such condition price inflation does not occur.
vi.
High amount of government development expenditure The expenditure of the
government will be the income of the public.
The more
the
The more
development
The more
The more
expenditure
expenditure
income
spending
of people
of the
government
vii.
Monetary policy Policy relating the supply of money and credit control. The central bank
controls it through its schedule banks.
 If cash reserve increases then supply of money decreases. So value of money will go high
and price will decrease. As a result price inflation does not occur.
 If cash reserve decreases then supply of money increases. So value of money will go low
and price will go high. In this situation price inflation occurs.
viii.

Role of banks & financial institutions Now banks and other institutions provide more loans. It creates higher money supply. So consumer living standard becomes higher & it creates price inflation.

The more open policy in the market- the more supply of money in the market.

This inflation will be welcomed by the country because it grows up the economy of the country. But it is not applicable in Bangladesh.

will be welcomed by the country because it grows up the economy of the country. But
will be welcomed by the country because it grows up the economy of the country. But

ix.

High profit motive of greedy businessmen They want to exploit money for their own interest.

High profit motive Price More activities inflation expenditure without any Increases the price of the
High profit
motive
Price
More
activities
inflation
expenditure
without any
Increases
the price of
the needed
products
occurs
reason
x. Illegal extortion of money in different phases Although they are not visible but in real
life they exist which ultimately raises the price of the product. It is a very common
reason of price rising in Bangladesh.
Inflation always hurts your standard of living. Rising prices means you have to pay more for
the same goods and services. If your income increases at a slower rate as inflation, your
standard of living declines even if you are making more. Inflation's main consequence is a
subtle reduction in your standard of living. The impact of inflation in different classes of
people is given below:
1. For customer
Uneven distribution of income or income disparity is caused by inflation on the
customers. As a result, it brings hazards for customer class.
2. For entrepreneur
Price inflation is always a pleasant experience for the entrepreneur class.
3. For debtor
As price increases in a higher rate, it is not favorable for them.
4. For creditor
Through inflation remains, interest rate becomes high. As a result creditor and bank get
profit from inflation.

5. For service-holder For general people, inflation is unpleasant because it increases their expenditure rather than income.

For service-holder For general people, inflation is unpleasant because it increases their expenditure rather than income.

6. For peasant class In our country, peasant when producer enjoy inflation as they get profit. Peasant when customer affect adversely as they have to spend money to purchase items.

7. For investor Inflation has positive impact on them. When inflation occurs, investors invest more money which generates employment development in a higher scale; as a result it causes higher production that leads to higher consumption.

We have studied above that inflation is caused by the failure of aggregate supply to
We have studied above that inflation is caused by the failure of aggregate supply to
equal the increase in aggregate demand. Inflation can, therefore, be controlled by
increasing the supplies and reducing money incomes in order to control aggregate
demand. The various methods are usually grouped under three heads: Monetary
measures, fiscal measures and other measures.
1. Monetary Measures
Monetary measures aim at reducing money incomes.
i. Credit Control
One of the important monetary measures is monetary policy. The central bank
of the country adopts a number of methods to control the quantity and quality
of credit. For this purpose, it raises the bank rates, sells securities in the open
market, raises the reserve ratio, and adopts a number of selective credit
control measures, such as raising margin requirements and regulating
consumer credit.
Monetary policy may not be effective in controlling inflation, if inflation is due to
cost-push factors. Monetary policy can only be helpful in controlling inflation due
to demand-pull factors.
ii.
Demonetization of Currency
However, one of the monetary measures is to demonetize currency of higher
denominations. Such a measure is usually adopted when there is abundance of
black money in the country.
iii.

Issue of New Currency The most extreme monetary measure is the issue of new currency in place of the old currency. Under this system, one new note is exchanged for a number of notes of the old currency. The value of bank deposits is also fixed accordingly. Such a measure is adopted when there is an excessive issue of notes and there is hyperinflation in the country. It is very effective measure but is inequitable for its hurts the small depositors the most.

in the country. It is very effective measure but is inequitable for its hurts the small

2. Fiscal Measures Monetary policy alone is incapable of controlling inflation. It should, therefore, be supplemented by fiscal measures. Fiscal measures are highly effective for controlling government expenditure, personal consumption expenditure, and private and public investment. The principal fiscal measures are the following:

i. Reduction in Unnecessary Expenditure The government should reduce unnecessary expenditure on non-development
i.
Reduction in Unnecessary Expenditure
The government should reduce unnecessary expenditure on non-development
activities in order to curb inflation. This will also put a check on private
expenditure which is dependent upon government demand for goods and
services. But it is not easy to cut government expenditure. Though economy
measures are always welcome but it becomes difficult to distinguish between
essential and non-essential expenditure. Therefore, this measure should be
supplemented by taxation.
ii.
Increase in Taxes
To cut personal consumption expenditure, the rates of personal, corporate and
commodity taxes should be raised and even new taxes should be levied, but the
rates of taxes should not be so high as to discourage saving, investment and
production. Rather, the tax system should provide larger incentives to those who
save, invest and produce more. Further, to bring more revenue into the tax-net, the
government should penalize the tax evaders by imposing heavy fines. Such
measures are bound to be effective in controlling inflation. To increase the supply of
goods within the country, the government should reduce import duties and increase
export duties.
iii.
Increase in Savings
Another measure is to increase savings on the part of the people. This will tend to
reduce disposable income with the people, and hence personal consumption
expenditure. But due to the rising cost of living, people are not in a position to save
much voluntarily. Keynes, therefore, advocated compulsory savings or what he
called `deferred payment' where the saver gets his money back after some years.
For this purpose, the government should float public loans carrying high rates of
interest, start saving schemes with prize money, or lottery for long periods, etc. It
should also introduce compulsory provident fund, provident fund-cum-pension
schemes, etc. compulsorily. All such measures to increase savings are likely to be
effective in controlling inflation.
iv.

Surplus Budgets An important measure is to adopt anti-inflationary budgetary policy. For this purpose, the government should give up deficit financing and instead have surplus budgets. It means collecting more in revenues and spending less.

should give up deficit financing and instead have surplus budgets. It means collecting more in revenues

v. Public Debt At the same time, it should stop repayment of public debt and postpone it to some future date till inflationary pressures are controlled within the economy. Instead, the government should borrow more to reduce money supply with the public.

Like the monetary measures, fiscal measures alone cannot help in controlling inflation. They should be supplemented by monetary, non-monetary and non-fiscal measures.

3. Direct-action policy i. Straight Method Here govt. have to take straight methods to work
3. Direct-action policy
i. Straight Method
Here govt. have to take straight methods to work directly to control inflation.
ii. Price Ceiling
A legally established maximum price that is imposed on a market BELOW the price that
otherwise would be achieved in equilibrium. A price ceiling is placed on a market with
the goal of keeping the price low, presumably based on the notion that the equilibrium
price is too high. If imposed on a competitive market free of market failures, a price
ceiling creates a shortage, or excess demand.
A price ceiling places an upward limit on the price of good. Buyers and sellers can exchange
the good at prices less than the ceiling, but not greater. The primary goal of a price ceiling is
to keep the price of a good low and thus more affordable to the buyers.
Price ceilings are most often placed on markets for goods that policy makers deem are basic
necessities and that the existing price is excessive, perhaps due to market control among
the suppliers. Examples of markets that have been subject to price ceilings include
apartments, gasoline, natural gas, food, and prescription drugs.
How it works
As luck would have it, the Shady Valley City Council has decided to impose a price ceiling on
the market for 8-track tapes. The current equilibrium condition for this market is illustrated
in the graph presented to the right.

Without the price ceiling buyers and sellers trade 400 tapes at a price of 50 cents each. For some unknown reason, the Shady Valley City Council feels that 50 cents is simply too much

at a price of 50 cents each. For some unknown reason, the Shady Valley City Council

to pay for 8-track tapes. Hence they have decided to impose a price ceiling of 30 cents on this market.

What is the market to do?

Supply Side

The sellers are willing and able to offer 200 tapes for sale at the 30
The sellers are willing and able to offer 200 tapes for sale at the 30 cent price, which can
be revealed by clicking the [Supply] button. At 30 cents, suppliers can cover the
production cost of 200 tapes. They are unwilling and unable to sell more.
 Demand Side
The buyers, however, are willing and able to purchase 600 tapes at this 30 cent price,
which can be highlighted by clicking the [Demand] button. At this price, demanders can
obtain at least 30 cents worth of satisfaction from 600 tapes.
 Shortage
The combination of the quantity demanded and the quantity supplied means that the
market has a shortage of 400 tapes. The buyers want to buy 400 tapes more than the
sellers want to sell. This shortage can be highlighted by clicking the [Shortage] button.
Good for Some, Bad for Others

The usual objective of a price ceiling is to keep a good affordable to the buyers. A 30 cent price ceiling on the market for 8-track tapes certainly accomplishes this goal. Those who buy 8-track tapes pay 30 cents each, rather than 50 cents. They save 20 cents on each tape. Good for them. There is, however, a bit of bad with this price ceiling. Prior to the price ceiling, 400 tapes are exchanged in the market. With the price ceiling, only 200 tapes are exchanged. Fewer tapes are exchanged. Moreover, given the low, 30 cent price, buyers are actually willing to buy 600 tapes, 400 tapes more than are offered for sale. While those who are able to buy the tapes do so at a lower price, a great many buyers do without. They are unable to buy at any price, low or high, bad for them.

do so at a lower price, a great many buyers do without. They are unable to

Although this particular market for 8-track tapes generates a substantial shortage at the 30 cent price, the shortage that might arise in other markets depends on the specific characteristics of the market. From a sheer graphical standpoint, the shortage is less if the demand and supply curves are more steeply sloped or less elastic. In other words, if the demand and supply are relatively inelastic, then the goal of keeping the good affordable, without excluding a lot of buyers from the market, is more easily achieved.

Result of Price Ceiling i. Illegal Exchange Like any law, a legally mandated price ceiling
Result of Price Ceiling
i. Illegal Exchange
Like any law, a legally mandated price ceiling can be violated. Some buyers and sellers are
inclined to undertake illegal exchanges at prices above the legal maximum. The result of
such illegal trades is termed a black market.
In fact, the motivation might be so powerful that buyers are willing to engage in illegal
trades, to enter into a black market exchange. On the other side of the exchange, sellers are
always inclined to accept more than the minimum supply price for a good. If the buyers
offer more than 30 cents, then sellers are willing to listen. The price, however, must be high
enough to compensate the sellers for the risk of punishment. If the risk is slight, the price
need not be much higher than 30 cents. If the risk is greater, then so too must be the price.
ii. Shortage of supply
iii. low quality of products will be sold
iv. Unauthorized product
v. Disproportionate amount of product in term of purchase
Policy options / course of actions
To reduce this gap, created by price ceiling, govt. have to take some policy options.
These are:
i. Supply material at the declared price
Govt. must have to be ready to supply required material at the earlier declared price
from its production plant.
ii. Import the required material
Govt. can import the required quantity of goods of its own production set up, from
the foreign under its own mechanism and distribute the product in the market on
this price.
iii. Urge the indigenous people
Govt. can urge the indigenous people to set up production plant under some benefit
packages given by the govt.
Benefit packages:
 Giving khash land with fair price
 Imposing little tariff
 Providing tax free income

Reducing rate of current plant

Giving subsidiary

By offering these benefit packages, people become interested to set up production plant.

plant  Giving subsidiary By offering these benefit packages, people become interested to set up production
plant  Giving subsidiary By offering these benefit packages, people become interested to set up production

iv. Urge the private importer or entrepreneur Govt. can urge the private importer or private entrepreneur to supply required quantity of goods, by importing those items in the market. Govt. at first offer some benefit packages and then make these packages to urge entrepreneur for importing goods.

Benefit packages:  Reduce margin ratio  Imposing little tariff Disadvantage:  Dishonesty occurs by
Benefit packages:
 Reduce margin ratio
 Imposing little tariff
Disadvantage:
 Dishonesty occurs by remaining product price same
 Govt. is deprived of tax
v. Use Buffer-Stock
Govt. can supply the required quantity of goods in the market at the early declared
price from the buffer stock. Buffer stock is established to reduce the price
fluctuation problem.
Buffer stock:
At the time of setting minimum price (floor price), the govt. purchase products from
the farmer. These products are known as ‘Buffer stock’.
Disadvantage:
 This does not work properly as the purchase centre of govt. is not open regularly
or show some excuses.
Application of Price Ceiling
1. MRP: Maximum Retail Price
2. MRP: Minimum Retail Price
4. Other Measures
The other types of measures are those which aim at increasing aggregate supply and
reducing aggregate demand directly.
i. To Increase Production:
The following measures should be adopted to increase production:

One of the foremost measures to control inflation is to increase the production of essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc.

If there is need, raw materials for such products may be imported on preferential basis to increase the production of essential commodities.

raw materials for such products may be imported on preferential basis to increase the production of

Efforts should also be made to increase productivity. For this purpose, industrial peace should be maintained through agreements with trade unions, binding them not to resort to strikes for some time.

The policy of rationalization of industries should be adopted as a long-term measure. Rationalization increases productivity and production of industries through the use of brain, brawn and bullion.

 All possible help in the form of latest technology, raw materials, financial help, subsidies,
 All possible help in the form of latest technology, raw materials, financial help,
subsidies, etc. should be provided to different consumer goods sectors to
increase production.
ii.
Rational Wage Policy:
Another important measure is to adopt a rational wage and income policy. Under
hyperinflation, there is a wage-price spiral. To control this, the government should
freeze wages, incomes, profits, dividends, bonus, etc. But such a drastic measure
can only be adopted for a short period and by antagonizing both workers and
industrialists. Therefore, the best course is to link increase in wages to increase in
productivity. This will have a dual effect. It will control wage and at the same time
increase productivity, and hence production of goods in the economy.
iii.
Rationing:
Rationing aims at distributing consumption of scarce goods so as to make them
available to a large number of consumers. It is applied to essential consumer goods
such as wheat, rice, sugar, kerosene oil, etc. It is meant to stabilize the prices of
necessaries and assure distributive justice. But it is very inconvenient for consumers
because it leads to queues, artificial shortages, corruption and black marketing.
Keynes did not favor rationing for it "involves a great deal of waste, both of
resources and of employment."
From the various monetary, fiscal and other measures discussed above, it becomes clear
that to control inflation, the government should adopt all measures simultaneously.
Inflation is like a hydra-headed monster which should be fought by using all the weapons
at the command of the government.
Incidentally, Keynes mentions the following four related terms while discussing the concept
of inflation:
 Deflation
 Disinflation
 Reflation

Stagnation

Deflation It is a condition of falling prices accompanied by a decreasing level of employment, output and income. Deflation is just the opposite of inflation. Deflation occurs when the total

level of employment, output and income. Deflation is just the opposite of inflation. Deflation occurs when
level of employment, output and income. Deflation is just the opposite of inflation. Deflation occurs when

expenditure of the community is not equal to the existing prices. Consequently, the supply of money decreases and as a result prices fall. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. However, each and every fall in price cannot be called deflation. The process of reversing inflation without either creating unemployment or reducing output is called disinflation and not deflation. Therefore, some perceive deflation as an underemployment phenomenon.

 Basic theme  Lower price  Low supply of money  Low aggregate demand
 Basic theme
 Lower price
 Low supply of money
 Low aggregate demand
 Aggregate supply is high
 Problems
 Economic depression
 Unemployment
 NY is nag
 Economic will collapse
 Value of money will be low
Disinflation
When prices are falling due to anti-inflationary measures adopted by the authorities, with
no corresponding decline in the existing level of employment, output and income, the result
of this is disinflation. When acute inflation burdens an economy, disinflation is implemented
as a cure. Disinflation is said to take place when deliberate attempts are made to curtail
expenditure of all sorts to lower prices and money incomes for the benefit of the
community.
Reflation
Reflation is a situation of rising prices, which is deliberately undertaken to relieve a
depression. Reflation is a means of motivating the economy to produce. This is achieved by
increasing the supply of money or in some instances reducing taxes, which is the opposite of
disinflation. Governments can use economic policies such as reducing taxes, changing the
supply of money or adjusting the interest rates; which in turn motivates the country to
increase their output. The situation is described as semi-inflation or reflation.

Stagflation Stagflation is a stagnant economy that is combined with inflation. Basically, when prices are increasing the economy is decreasing. Some economists believe that there are two main reasons for stagflation. Firstly, stagflation can occur when an economy is slowed by an unfavorable supply, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable. In the 1970's inflation and recession occurred in different economies at the same time. Basically, what happened was that there was plenty of liquidity in the system and

in different economies at the same time. Basically, what happened was that there was plenty of

people were spending money as quickly as they got it because prices were going up quickly. This gave rise to the second reason for stagflation.

Bangladesh, with its population of 140 million, is one among the few major importing countries.
Bangladesh, with its population of 140 million, is one among the few major importing
countries. Most of the consumer- and intermediate goods for manufacturing and
production sectors are imported. Consumption goods, including the goods of necessities,
are also imported.
Generalized increase in prices worldwide has been persistent. Rising prices of goods and
service worldwide and in India have certainly increased the import price and prices of
consumption goods and goods of necessities in Bangladesh. Rising import prices of energies
and oil in particular and other intermediate goods, consumer goods, including goods of
necessities, have clearly caused inflation in Bangladesh.
The International Monetary Fund (IMF) does not want to agree about the reverse effect of
stagflation due to tight money and higher interest rate of the recent past but would like to
blame the recent lack in business confidence. Most economists have agreed that rising
energy prices and cost of production in combination with that tight monetary policy and
higher interest rate and the recent lack of confidence in business are responsible for the
decrease in the productivity, and creation of a supply-side problem, thereby causing a
double-digit inflation.
At last, we can say that it would not have been possible for us to complete the report, but
for the help of our respectable teacher Dr. Sameer Kumar Sheel.

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