introduction

Inflation

Inflation

• 1. This is the process by which the price level rises and money loses value.

• There are two kinds of inflation:• a) Demand pull• b) Cost push

UNDERSIRABILITY OF INFLATION

• Fixed Incomes• Net loss• Depreciation

INFLATION GAINERS

2-4• Flexible Incomes• Speculators• Debtors

Hyper inflation• 5. Extremely rapid or out of control inflation. • There is no precise numerical definition to

hyperinflation. • Price increases are so out of control that the

concept of inflation is meaningless. • The most famous example of hyperinflation

occurred in Germany between January 1922 and November 1923.

• By some estimates, the average price level increased by a factor of 20 billion!

Money and Prices During Hyperinflations

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(a) Austria (b) Hungary

Money supply

Price level

Index(Jan. 1921 = 100)

Index(July 1921 = 100)

Price level

100,000

10,000

1,000

10019251924192319221921

Money supply

100,000

10,000

1,000

10019251924192319221921

Demand pull inflation

• 6- 8 pull inflation may be due to :a) Increase in money supplyb) Increase in government purchasesc) Increase in exports

Quantity Theory of Money

• states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. 9.According to QTM, if the amount of money in an economy doubles, price levels also double, causing inflation (the percentage rate at which the level of prices is rising in an economy). The consumer therefore pays twice as much for the same amount of the good or service.

The Theory’s CalculationsIn its simplest form, the theory is expressed as:

• MV = PT (the Fisher Equation)

Each variable denotes the following: M = Money Supply V = Velocity of Circulation (the number of times money changes hands) P = Average Price Level T = Volume of Transactions of Goods and Services

Modern QTM

• Monetarists are a group of economists so named because of their preoccupation with money and its effects. The most famous Monetarist is 10.Milton Friedman who developed much of the Monetarist theory we learn.

Cost push Inflation• 11-12Cost push inflation may arise

because of :a)Increase in money wage ratesb)Increase in money prices of raw

materials.

THE PHILLIPS’ CURVE

• The essence of the 13.Phillips Curve is that there is a short-term trade-off between unemployment and inflation.

MEASUREMENT OF PRICE INCREASES

• Consumer Price Index - CPI14.A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.

• Retail Price Index (RPI)15. Design to measure monthly changes of the prices at which retailers dispose of their good to consumers and end-users.

• Wholesale Price Index (WPI)16.Measures monthly changes in the general price level of commodities that flow into wholesale trade, also measures price changes during trade turnover.

THE MEANING OF THE INDEX

• 17.Is a statistical measure design to show changes in a variable or group of related variables (prices, quantity, value), with respect to time, geographic location, or other characteristics such as income, profession, and the like.

The Base Year18.Is the year which the variables during a given

year are being compared.

19-20PRICE INDEX NUMBERS

1. Price Relative

2. Unweighted Priced Index

3. Weighted Price Index

Unweighted Priced Index

Weighted Price Index

3. Weighted Price Index • A price-weighted index is an index in which

the member companies are weighted in proportion to their price per share, rather than by number of shares outstanding, market capitalization, or other factors