Economics-Inflation

Apurva Sahay
06.07.2019
 Inflation
• What is inflation?
– Significant rise in price in sustainable manner
– Excess of demand over supply which leads to price rise.

• Reasons for Inflation

– Quantity theory of money: increase in quantity of money
led to price increase

– Excess demand theory: Inflation is caused when total

demand for goods exceeds total supply goods at current
prices

– Cost Push: Cost inflation is not due to excessive aggregate

demand, but is caused by an increase in production costs.
 Demand Pull inflation
– Increase in demand
• Increase in private & public expenditure
• Increase in exports
• Decrease in tax
• Population growth
• Hoarding by consumers

– Decrease in supply
• Shortage of factors of production (land, labour, capital)
• Hoarding by traders
• Increase in export
 Cost Push inflation
– Increase in cost of production
– Increase in wages
– Increase in taxes in raw materials & finished goods
– Increase in profit
 Stages of Inflation
• Pre-full employment stage: increase in money supply
leads price increase which encourages production and
increases employment

• Full employment stage: increase in money leads to

price increase but production becomes stagnant. Price
increase is at same rate as supply of money

• Post-full employment stage: If money supply continues

to increase even after full employment, then the rate
of price increase is much higher than the increase in
money supply.
 Effects of Inflation
• Mild or creeping inflation: positive for economy
as it results in increase in capital investment ,
production, income and employment

• Prolonged & High inflation

– Depreciation of value of money
– Reduced savings & capital accumulation
– Reduced foreign capital
– Reduced investment, therefore production suffers
– Leads to re-distribution of wealth in favour of affluent
classes
 Control of Inflation
– Monetary measures
• Increase in rates by central bank (RBI)
• Increase in Reserve Ratio
• Sale of government securities by central bank
– Fiscal measures
• Government reduces expenditure
• Increase in tax rates
• Increase in public borrowing
– Other measures
• Increasing production
• Wage control
• Price control and rationing
 Inflation measurement-India
• Wholesale Price Index (WPI):
– prices are quoted from wholesalers
– Base year 2011-12
– 697 commodity prices are taken to calculate WPI

• Consumer Price Index (CPI):

– prices quoted from retailers
– Base year 2011-12
– 448 (rural) and 460 (urban) commodities taken