VITALS

Shaher Bano Hashmi Anam Rahna Nyab Zafer Hafiz Saad Umair hassan shah Salman Anser Gull zree Fakhir Nauman

10 34 02 44 55 53 39 47 50 59

TOPIC

Inflation

INFLATIO N as a persistent Inflation is defined

and continuous increase in the general price level. It is a continuous upward movement in general(average) level of prices.

Inflation:
The situation in which too much

money chases too few good. There are 2 main characteristics of Inflation: Rise in prices Persistent rise

Contd
It should be noted that rising general

price level does not mean that all prices are necessarily rising. Even during inflation ,the prices of some goods may remain constant and some may be falling.

Roll

ANSER
no: 39

TYPE S

TYPES
Basically Inflation is divided into 2 types: 1.Demand Pull inflation: That type in which inflation occurs due to the high demand in economy. Aggregate demand exceeds aggregate supply at current price level. The higher demand causes an increase in price level so inflation occurs.

DEMAND PULL INFLATION

Demand-pull inflation
AS

Price level

P2 P1

AD 2 AD 1
O Q1 Q2

National output

2.Cost push Inflation:

that type in which prices tend to increase due to increase in cost of production
Cost-push inflation
AS2 AS1

v l e c i r P

P2 P1

AD
O Q2 Q1 National output

NAUMAN MALIK

ROLL NO:59

OTHER TYPES OF INFLATION

3.Profit Inflation: Rise in price level as a result of greed of businessmen. Dominant monopolists increase the prices of their products as their will so inflation takes place. 4.Income Inflation: The inflation that occurs from high level of incomes. Higher incomes lead to higher demand which results increase in price level and hence inflation takes place.

 5.Deficit inflation: It occurs when revenues of government are less than its expenditures and hence it borrows from external and internal sources to overcome the deficit. This results increase in supply and hence the inflation takes place.

 6.Devaluation Inflation: when the increase in price level is due to decrease in money value,thereis devaluation inflation. When the value of money decreases, the prices of domestic products increase and hence inflation takes place.

 7.Imported inflation: It is that type of inflation which occurs due to increase in prices of imported goods. When the suppliers in foreign market increase the prices of their products, specially the prices of those goods which are used as raw material, there is also increased prices in domestic country and hence inflation takes place.

8.Creeping inflation:

It is that type in which the rise in general price level is at a very slow rate over a period of time o Mild form of inflation. o Sign of healthy and sound degree of predictability in economic system o Price level rises up to rate of 2% per Annam o Encourages domestic investors

Creeping Inflation

9.Hyper Inflation:
Hyperinflation

is inflation that is very high or "out of control", a condition in which prices increase rapidly as a currency loses its value. it is that type in which rate of inflation is higher than the growth rate The rate is usually in 2 figures

Hyper Inflation

GULL ZREE
ROLL NO:

47

CA U SES O F IN F L A T IO N

CAUSES OF INFLATION
An inflation can only occurs only if there is:

1.Increase in velocity of money:

when the velocity of money is increased, it leads to the increased demand and hence inflation takes place

2. Increase in demand:
when the level of demand of goods and

services is more than the level of supply, there will be situation of inflation in the country when there is supply shortage due to any reason the demand automatically increases and hence inflation takes place

3.Decrease in supply:
when there is supply shortage of goods and

services due to dought,flood,or uncertain seasonal situations etc ,the prices of goods and services increase and hence inflation takes place

4. Increase in cost of production:

When the cost of production is increased due to high tax rates, increase in wages of workers or other expensive factors, the prices automatically tends to move upward and hence inflation takes place.

5.Deficit financing:
When the revenues of govt are less than its expenses ,it has to print more new currency notes without any guarantee which is called deficit financing. Such issue of notes lead to the excessive supply of money and hence inflation takes place.

UMAIR HASSAN SHAH

NO: 55

ROLL

6.INCREASE IN INVESTMENT:

When the new investment is made, there is a gestation period between investment time and the time of yielding output. At such situation the velocity of money increases but demand is satisfied a bit later so inflation takes place.

7.FOREIGN ECONOMIC ASSISTANCE:

For social development every country need the investment and to make the new investment a country has to borrow from other developed countries. Such foreign aid increases the supply of money and hence the inflation takes place

8.POPULATION BOMB:

High rate of population growth causes aggregate demand to increase. If aggregate supply fails to respond to increase aggregate demand and remains low, the result is higher inflation.

9.Indirect taxes:
Govt

levy indirect taxes to increase total tax revenue but such increase raises the general price level and inflation takes place.

10.Rise in World Oil Prices:

The

world market price of oil generally effect the price level of those countries which have to import huge amount of oil every year.when the prices of oil increase,inflation also takes place in such countries.

EFFECTSOF INFLATIONON ECONOMY

SALMAN MUKHTAR
ROLL

NO:

53

NEGATIVEEFECTS

1.Reduction in purchasing power:

An increase in the general level of prices implies a decrease in the purchasing power of the currency. That is, when the general level of prices rises, each monetary unit buys fewer goods and services

2.DISCOURAGES SAVINGS:

Inflation discourages the savings. This is because the purchasing power of the amount saved go on diminishing and the saver suffers loss

3.Decrease in the value of money:

Increases in the price level (inflation) reduces the real value of money.

4.Speculation activities:

Infaltion increases the speculative activities. Instead of investing money in genuine production activities people gamble in shares and stock market to make easy money

5.Expensive imports:

Due to the inflation imports become more expensive and their demand decreases which cause absence of equilbrium in balance of payment.

6.Deficit budget:

Inflation effect badly to the government policies.it causes a continuous deficit in budget .hence it induces government to borrow more and country remains under debts.

7.Classs conflict:

Inflation increases the distance among different classes of people. It widens the gap between rich and poor by helping the concentration of wealth in few hands.

SYEDA ANAM RAHNA

ROLL NO:

34

POSITIVE EFFECTS

1.Gain to debtors:
When inflation occurs:

value of money decreases Prices increase Such situation benefits the debtors as their receivables have more value now. So due to inflation debtors gain

2 . I cre a se i n n i ve stm e n t: n

When there is inflation,

the prices are high which stimulates the investors to invest in order to gain high profits. Such investment leads to high economic growth

3.Agricultural gain:
During inflation landlords and producers of

agricultural goods gain. The prices of agricultural goods and products rise and the agricultural revenues increase.

4.Reduction in unemployment:
Inflation indicates to more employed economy. The rate of unemployment decreases during

inflation

5.Increase in exports:
When inflation occurs the value of currency

falls Such devaluation makes the exports cheaper than before in international markets so exports are increased

HAFIZ SAAD NASEER

ROLL NO: 44

MEASUREMENT OF INFLATION

Inflation rate:
Inflation

is usually estimated by calculating the rate of a price index The inflation rate is the percentage rate of change of a price index over time.

1.Cosumer price index:

The Consumer Price Index measures change in prices of goods and services purchased by a "typical consumer". The goods and services may include: Food Clothing House rent Fuel and lightning Education etc

Contd
C.P.I

is also known as cost of living index or retail price index. In Pakistan, the statistical bureau measures the inflation rate under this method. It is measured by 2 methods: The aggregate expenditure method Family budget or house hold budget method

3.Whole sale price indecies:

It

is constructed to measure the change in prices of products produced by different sectors of economy and traded in wholesale markets The sectors covered under this may be: Agriculture Industry etc

5. Core price indices:

The

most statistical agencies suggest a method of 'core inflation such indices remove the most volatile components (such as food and oil) from a broad price index like the CPI. Because core inflation is less affected by short run supply and demand conditions, central banks rely on it to better measure the rate of inflation.

6. GDP deflator:
GDP

deflator is a measure of the price of all the goods and services included in Gross Domestic Product (GDP). It is a measure of the level of prices of all new, domestically produced, final goods and services in an economy.

Contd
It

is defined as its nominal GDP measure divided by its real GDP measure G.D.P deflator= nominal GDP 100

Real GDP

NAYAB ZAFAR
ROLL NO: 02

MEASURES TO CONTROL

(a) DEMAND PULL INFLATION

1.Tight Fiscal Polices:

Fiscal policy is concerned with taxation and govt revenues. In order to control the demand pull inflation taxes should be raised so that: personal dispose able income may fall Consumption is discouraged Fall in demand

2.Reducing investment:
To control inflation,invetment should be reduced so that: Capital flights are discouraged Reduction in aggregate demand Inflation will be eliminated

3.Reduction in govt borrowing:

Govt borrowing should be reduced so that: It will lead to decrease of budget deficit Political establishment Pressure to reduce the unnecessary expenses

4.High interest rate:

Government should increase the interest rate. It will induce people to invest in saving scheme The consumption level will be reduced indicating to low demand Inflation will be eliminated

5.Reduction in foreign aid:

Foreign aid increases the aggregate demand If foreign aid is not allocated properly, it will be a cause of high prices In order to eliminate inflation, foreign aid should be reduced

(b)Cost pull inflation:

1.Control over wages and salaries: Government should establish committees to maintain rates of wages and salaries. Unnecessary increase in wages lead to inflation

2.Control over imports:

Government should take steps to control imports. This will help in maintaining balance of payment besides inflation.

3.Controlling devaluation:

Government should control the rates of devaluation. Devaluation leads to the increase in prices of imports and hence inflation occurs

4.Indirect taxation:

Tax reforms should be made, reducing indirect taxes. Instead of increasing the interest rate, govt should try to broaden the tax base and to bring more people in the tax net.

FAAKHAR

ROLL

NO:

50

(c)Other measures:

1.Credit control:
Central bank should implement a tight monetary policy leading to decrease in credit and hence fall in inflation

2.Controlling growth of money supply:

Government

should implement such policies which will discourage people from demanding more money. Such polices may include: Population control Ban on luxuries Restriction on imports Encouraging savings etc

3.Reducing gestation period:

Gestation

period is the period between demand and production Such period lead to temporary inflation In order to control inflation such period should be curtailed.

4.Rapid industrialization:
Government

should take steps for rapid industrialization It will reduce not only inflation but also cures unemployment

SHAHER BANO HASHMI

10

ROLL NO:

INFLATION IN PAKISTAN:
In Pakistan the rate of inflation is

increasing day by day Unfortunately, the general price level is persistently rising since partition.

A LOOK ON PAST:
Pakistan has sustained a double digit

inflation during the first 7 years of 1990s i-e 9.8% to 13% In last 3 years of 1990s the rate fell to average of 5.7% However with the start of 2000s te rate was averaged at 3.7%

INFLATION IN PAKISTAN:
YEAR 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 C.P.I 3.684 4.41 2.504 3.102 4.568 9.276 7.921 7.771 11.998 20.778

Sources: 1.Federal Bureau of Statistics, Pakistan. (Taking base year 2000) 2.International Monetary Fund- 2009 World Economic Outlook

RESOSONS:
There are several reasons behind the

rapid rate of inflation in Pakistan for the past few years. Rapid monetary expansion Deficit financing Demand for Un productive expenditures Mis use of foreign aid depriciation of rupee against dollar(1:84.6)

RECENT FACTORS:
The rapid increase in inflation for the

past 2 to 3 years is mainly due to: Political instability Shortage of supply population explosion etc

Any question?