PREPARED BY:- SHAGUN,SACHIN,DIVYA, SOUMYA &

MEHJABI

PROJECT ONTHEORIES OF INFLATION

INFLATIONINFLATION “Inflation is a state of generally rising

prices and falling value of money”

It is a rise in general level of prices of goods and services in an economy over a period of time and subsequently, the purchasing power is falling.

It is an increase in the quantity of money which is growing faster than real national output is expanding.

THEORIES OF INFLATIONTHEORIES OF INFLATION

Cost-Push Inflation Theory In the words of J.C Ranlert, “The basis of

cost push theory of inflation is that organised groups, both business and labour, establish higher prices for their products or services than would prevail in perfectly competitive markets.”

Thus → cost-push inflation is caused by an

increase in cost of production that results in a fall in aggregate supply.

Figure showing the cost-push inflation Y S

P2 D E2

P1 E1

P S2 E

S1

D

S

O Q1 Q2 Q X

Causes of Cost-Push Inflation

Wage - Push inflation→ cost inflation stemming from trade union pressure on wage rate

Profit - Push inflation→ inflation caused due to business monopoly power

Material - Push inflation → Increasing raw materials prices

THEORIES OF INFLATIONTHEORIES OF INFLATION SECTORIAL INFLATIONSECTORIAL INFLATION It refers to the rise in prices occurring in different

commercial sectors of a country. With the rise in prices of different raw materials, the prices of the finished products in diverse sectors increase simultaneously.

Factors and the fulfilment of certain conditions, are listed below:

Demand-Pull Inflation: This kind of inflation takes place when the total

demand for goods and services surpasses the available supply. Hence, the prices of such commodities increase in a market economy.

THEORIES OF THEORIES OF INFLATIONINFLATION(Contd)..Cost-Push Inflation: Cost-Push Inflation involves the causes

and cost of production to escalate for some reason or the other, leading to the forceful rise in the prices of finished goods and services.

Pricing Power Inflation: Such inflation occurs when the commercial

sector of a country becomes determinant to increase the prices of their finished products for enhancing their profit margins.

Figure showing sectorial inflation

(A) (B)

Y D1 S Y S11 S Y S1 D D

P1 E1 D1 S

E P1 E1 P P E S D D1 S1 S D1 D O Q Q1 X O Q1 Q X

STRUCTURAL INFLATION STRUCTURAL INFLATION THEORYTHEORY “STRUCTURAL” inflation arise due to unstable

and slower growth rate of export in the economy which is inadequate to support the required growth rate of the economy.

A uniform rate of growth of money wages throughout the economy must lead to permanent cost pressures in the service sector, which is assumed to have the lower productivity growth.

Thus, structural inflation results from supply inelasticies leading to rise in agricultural prices and costs.

Figure showing structural inflation Y S

E1 P1 P S1 E

S D1 O D Y1 Y

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