INFLATION AND CONTROL MEASURES

BY

K.VIGNESH

MFT 15078 (FEC)

DEPARTMENT OF FISHERIES ECONOMICS

SYNOPSIS

INTRODUCTION

DEFINITION

TYPES OF INFLATION

CAUSES OF INFLATION

EFFECTS OF INFLATION

HOW IS INFLATION MEASURED

CONSEQUENCES OF INFLATION

MEASURES OF INFLATION

INTRODUCTION

• An increase in the general level of prices in an economy that

is sustained over a period of time is called inflation.

• When the level of currency of a country exceeds the level of

production, inflation occurs.

• Value of money depreciates with the occurrence of inflation.

• When demand is more than the supply that may lead to

inflation.

DEFINITION

According to C.CROWTHER, “inflation is state in which the value of money is falling and the prices are rising.”

In economics “ too much money chasing too few commodities is termed as inflation”

IMPORTANT TERMS RELATED TO INFLATION

Deflation: is the opposite of inflation when fall in prices occurs.

Disinflation: is process of bringing down prices moderately from their high level.

Stagflation: is a term in macroeconomics used to describe a period of high inflation combined with low incomes, unemployment, or economic stagnation.

MEASURING INFLATION

• Inflation is rate of change in the price level.

• If the price level in the current year is p1 and in the previous year p0.

• The inflation for the current year is

[(p1 - p0) / p0] x 100

TYPES OF INFLATION

Open inflation -:

The rate where costs rise due to economic trends of spending products and services.

Suppressed inflation -:

Existing inflation disguised by government price controls or other interferences in the economy such as subsidies. Such suppression, nevertheless, can only be temporary because no governmental measure can completely contain accelerating inflation in the long run. It is also called repressed inflation.

• Galloping Inflation -: Very Rapid Inflation which is almost impossible to reduce.

• Creeping Inflation -: Circumstance where the inflation of a nation increases gradually,

but continually, over time. This tends to be a typically pattern for many nations. Although the increase is relatively small in the short-term, as it continues over time the effect will become greater and greater.

• Hyper inflation -:

Hyperinflation is caused mainly by excessive deficit spending (financed by printing more money) by a government, some economists believe that social breakdown leads to hyperinflation (not vice versa), and that its roots lie in political rather than economic causes.

CAUSES OF INFLATION

Inflation due to monetary expansion (monetary inflation)

Inflation due to rise in real aggregate demand (real inflation)

Inflation due to contraction in aggregate supply

Factors on demand side

Increase in population

Increase in money supply

Increase in disposable income

Increase in exports

Foreign exchange reserves

Factors on supply side

o Deficiency of capital equipment

o Increase in exports

o Decrease in imports

o Natural disasters

o Inadequate industrial growth

CONSEQUENCES OF INFLATION

• They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term.

• Uncertainty about the future purchasing power of money discourages investment and saving.

• Higher income tax rates.

• Inflation rate in the economy is higher than rates in

other countries; this will increase imports and reduce

exports, leading to a deficit in the balance of trade.

Adverse effect on production

Adverse effect on distribution of income

Obstacle to development

Changes in relative prices

Adverse effect on the B.O.P

MEASURING INFLATION

• The 2 ways of measuring inflation are -: Consumer price index , Producer price index & GNP deflator

CONTROL MEASURES

Monetary policy

Fiscal policy

other measures

Monetary policy• Credit control

• Demonetization of currency

• Issue of new currency

Fiscal policy• Reduction in unnecessary expenditure

• Increase in taxes

• Increase in savings

• Surplus budgets

OTHER MEASURES• Price control

• To increase production

• Rational wage policy

Thank you