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INFLATION

INFLATION means a rise in the general level of prices of goods and


services over time
Different economists defined inflation as:-
According to
Gregory: “inflation is an increase in the purchasing power”
Coulbourn: “inflation is the stage of too much money chasing too
few goods”.
Keynesian view of inflation
Keynes explains the concept of inflation with reference to the level of
“employment”. He divide it into two parts:-

• Semi-Inflation:
» When there is an increase in the quantity of money
before full employment leads to increase in output
and employment. Also called “Bottleneck inflation”.

• Open or Full Inflation


» When there is an increse in the quantity of money
after full employment leads to general rice in the
price level.

SOURCE: MACROECONOMICS BOOK


Y

FULL EMPOYMENT

P2

P1
OUTPUT/PRICES

PRICE LINE
E
Q2 Q
Q1

SEMI- FULL- INFLATION


INFLATION

M1 F M3 M4 X
O M2

MONEY SUPPLY
TYPES OF INFLATION
There are many types of inflation. It can be classified on the basis of the following:-

• On the Basis of Degree of Government Control


» Open inflation
» Suppressed Inflation

• Classification on the Basis of Time


» War time inflation
» Post-war Inflation
» Peace Time Inflation

• On the Basis of Rate of Inflation


» Creeping Inflation( 3% in prices)
» Walking Inflation (3% to 5% in prices)
» Running (5% to 10% in prices)
» Galloping Inflation (10% to 20% in prices)
Theories of Inflation
There exists two theories relating to the causes of Inflation

• Demand Pull Inflation


» Due to in demand

• Cost Push Inflation

» Due to in cost of production


Demand Pull Inflation
According to this theory , inflation refers to a situation when
Demand >> Supply.

d6
p4
d5
p3
PRICE LEVEL

d4
p2
d3
p1
d1 d2
p

O M M1 M2 M3 M4
OUTPUT
COST PUSH INFLATION
It is the inflation when there is an increase in the cost per unit of production
this is caused due to :-
* lack of raw material
*increase in taxes
* increase in the tariffs on transportation,
raw materials, power, fuels etc.
Inflationary Gap !!!
Is the excess of anticipated expenditure over the available output at base
prices.

particulars Amount(Rs. Crore)


1. National Income paid 1,800
2. Taxes 400
3. Disposable Income 1,400(1,800-400)
4. Gross national output 1,500
5. Govt. expenses 300
6. Available output for public 1,200(1,500-exp300)
7. Inflationary Gap 200(1,400-1,200)
TREND OF INFLATION IN 2008

11 APRIL-7.41%
2 MAY -7.57%
3 MAY -7.82%
4 JUNE-8.24%
5 JUNE-11.05%
6 JULY-11.63%
7 JULY-11.89%
8 AUG-12.01%
14 AUG-12.44%
21 AUG -12.63%
So how does India calculate inflation?

• India uses the Wholesale Price Index (WPI) to


calculate and then decide the inflation rate in the
economy

And how is it calculated in developed countries?

• Most developed countries use the Consumer Price


Index (CPI) to calculate inflation.

SOURCE: REDIFFNEWS
WHOLESALE PRICE INDEX

• PUBLISHED IN 1902

• IS AN INDICATOR TO MEASURE THE CHANGE IN


GENERAL PRICE LEVEL OF GOODS

• BASED ON WEEKELY BASIS

• A TOTAL OF 435 COMMODITIES DATA ON PRICE


LEVEL IS TRACKED THROUGH “WPI”.

SOURCE: REDIFF NEWS


WPI CONT..
• GOVT. WIL ADOPT REVISED WPI.

• 980 COMMODITIES ISTEAD OF 435.

• REVISED BASE YEAR 2004-05 FROM CURRENT

BASE YEAR 1993-94.


CONSUMER PRICE INDEX
• ADOPTED BY DEVELOPED COUNTRIES IN 1970’S

• IS A STATISTICAL TIME SERIES MEASURE OF


WEIGHTED AVERGE OF PRICE OF SET OF GOODS
• FIXED QUANTITY PRICE INDEX(SCALE OF 100)

• IS THE OFFICIAL BAROMETER OF INFLATION IN


COUNTRIES LIKE:-
US,UK,JAPAN,FRANCE,CANADA,SINGAPORE and
CHINA
• BASED ON THE MONTHLY BASIS
WHY NOT CPI IN INDIA????

• there are four different types of CPI indices, and that makes
switching over to the Index from WPI fairly 'risky and unwieldy.' The
four CPI series are: CPI Industrial Workers; CPI Urban Non-Manual
Employees; CPI Agricultural labourers; and CPI Rural labour.

• Secondly, officials say the CPI cannot be used in India because


there is too much of a lag in reporting CPI numbers. In fact, as of
May 21, the latest CPI number reported is for March 2006.
CONTROL MEASURES
• MONETARY MEASURES-

RBI SQUEEZES MONEY SUPPLY


.
INCREASED REPO RATE

INCREASED CRR
CONTROL MEASURES CONT.
• FISCAL MEASURES-

REDUCE IMPORT DUTIES.

BANNED EXPORT OF MANY


COMMODITIES.

BAN OF FUTURE TRADING


CONTROL MEASURES CONT..

• SIZING UP SPECULATORS.
• INVERTING ENERGY SUBSIDIES-(SUGGESTED)

- INCREASE THE USE OF NATURAL GAS.


- CNG PIPED INTO HOMES.
- NEW COAL LIQUEFICATION TECHNOLOGY.
- PRIVITISING OR ATLEAST EXPANDING
THE RAIL NETWORK.
- INTRODUCTION OF GOOD QUALITY AIR
CONDITIONED PUBLIC TRANSPORTATION.
- SHIFTING SUBSIDIES FROM FUEL TO ELECTRIC
HYBRID AND HYDROGEN CARS.
EFFECTS OF INFLATION
• WAGE-PRICE SPIRAL
• REDUCTION IN REAL VALUE OF
SAVINGS
• CONSUMERS AND BUSINESS ON
FIXED INCOME WIL LOOSE OUT
• HIGHER NOMINAL INTEREST RATE.
• DISRUPTION OF BUSINESS PLANING.
• INEFFECIENT ALLOCATION OF
RESOURCES