Description
About inflation,type, its causes,measures to control inflation,how inflation is releated to monetory,fiscal,general policy
By: DWARKESH GIRASE (A005) YASIN KACHCHHI (A010)
? One of the most intricate challenges of our present
times is the problem of rising Inflation. Its effect can be felt by each and every person to at least some degree, whether he is an engineer, doctor, lawyer, govt. servant or anybody. Inflation makes no partiality in choosing its innocent victims.
? In a broad sense, inflation is that state in which the
prices of goods and services rise on the one hand and value of money falls on the other ? When money circulation exceeds the production of goods and services, then inflation takes place in the economy
? Inflation- The rise in the general level of prices
? In the long term, inflation erodes consumer purchasing power.
? That means accumulated wealth buys less and less, with the
passage of time. ? Where there is high inflation it is difficult for businesses to plan for the future as there is uncertainty regarding the cost of raw materials
? It is not the rise in the price of my favorite commodity ? e.g. McDonalds Pizza, but the overall rise in the prices
of all the goods and services manufactured and consumed within the territory of a nation. When we say that the monthly rate of Inflation is 12%, what it means is that on an average, the prices of all goods and services have increased by 12% in the period of last one month.
? In India, Inflation is measured using WPI (Wholesale Price
Index). ? India's WPI is a weighted-index of 435 commodities. ? It means price-rise of all commodities will not be treated equally. The price-rise of rice will have more weight-age than price-rise of a Maruti-car. That is because rice is consumed by a very large number of people compared to a Maruti car. ? The weight-age of a Mercedes car will be still lower in the WPI. So when this WPI increases from say 100 to 112, we say that the rate of inflation is 12%.
? This is a more realistic measure because it computes the index
based on the increase in actual price paid by the consumer. On the other hand, WPI considers the rise in the price by the Wholesalers of the goods and services.
? Deflation occurs when the general level of prices is
falling. Deflation have been rare in the late twentieth century.
? Disinflation denotes a decline in the rate of inflation.
? It is a continuous process.
? It refers to a rise in prices in general. ? It involves a considerable increase in prices.
? It causes a decline in the purchasing power of money.
? Inflation results when the macro economy has too much
demand for available production. These alternatives fall under two general categories: ? Demand-Pull Inflation: This inflation occurs when household, business, government, and foreign industries collectively try to purchase more output than the economy is capable of producing. In effect, the demand side of the aggregate market is "pulling" the price level higher. ? Cost-Push Inflation: Cost-push inflation is inflation attributable to decreases in supply, primarily due to increases in production cost
Demand Pull Inflation 2. Cost Push Inflation
1.
? The demand for goods and services increases and
production remains the same or does not increase as fast. The excess demand results in prices being “pulled up”. ? Affected by: I. Greater spending by households(C) (Also because credit has become more readily available). II. Investment spending by firms increases as a result of a drop in interest rates and/or a positive business climate (I). III. Increased government spending (G). IV. Higher earnings from exports (X).
Demand Pull Inflation
Price $
Aggregate Supply
P2
Aggregate Demand 2
P1 Aggregate Demand 1
Q1
Q2
Real GDP ($)
12
12
Causes for Increase in Demand :? Increase in Money Supply ? Increase in Black Marketing ? Increase in Hoarding ? Repayment of Past Internal Debt ? Increase in Exports ? Increase in Income ? Demonstration Effect ? Increase in Black money ? Increase in Credit facilities
? The example of the bread producer, suppose the cost of production of
one piece of bread remains constant at Rs.15. He adds his margin of Rs.5 and charges Rs.20 to each consumer. Now suppose the preference of his bread increases among the consumers, as it becomes more popular. ? This results in an increased demand for bread . ? So sensing more demand for his product, the owner increases the price to Rs.25. ? In our example, let's assume his margin increases Rs.5to Rs.10. Again, in the real world this might not be the case. As for e.g. if we assume competition among many bread-producers, the factors i.e. laborers will also demand a chuck of that margin in the form of increased wages. So, the owner will have to sacrifice some or all of his margin and distribute it to his laborers, otherwise they will stop working for him and work for another bakery-owner who is in competition.
? Caused by an increase in the cost of production.
Increased costs “push up” the price level.
? Affected by: I. Wages (increases in wages and salaries). II. Increase in price of key imported inputs. III. Exchange rate depreciation. IV. Increase in profit margins. V. Decrease in productivity for the same remuneration. VI. Natural disasters.
? In classical economic theory, there used to be only three factors of
production - land, labor and capital. However, in today's complex world, infinite factors are required to produce a single product or commodity e.g. house-rent, electricity, admin-expenses, raw-materials, fuel (petroleum), steel, etc. ? The producer of the commodity (the businessman) will naturally shift this cost to his consumers by raising the cost of his final product. This phenomenon is called Cost-Push Inflation. ? Let us take a simple example. Suppose a bakery owner produces bread by using several factors like wheat, flour, machines, labor, etc. The cost of production of one piece of bread comes to Rs.20. He adds Rs.5 as his profit-margin and sells it to consumers at Rs.25. This continues for several days. Now suppose the price of wheat increases. ? Now the owner recalculates his cost of production. It comes to Rs.20. He now adds his margin of Rs.5 and increases the cost of bread to Rs.25. This directly results in 25% rise in the cost of bread, or in the bread component of the WPI.
Cost Push Inflation
Price $ Aggregate Supply 2
Aggregate Supply 1
P2
P1
Aggregate Demand
Q2
Q1
Real GDP ($)
17
a) b) c) d) e) f) g) h)
Increase in cost of raw materials Shortage of Supplies Natural calamities Industrial Disputes Increase in Exports Increase in Wages Increase in Transportation Cost Huge Expenditure on Advertisement
?
? ?
?
?
BENEFITS DEBTORS ENTREPRENEURS INVESTORS FARMERS UPPER INCOME GROUPS
LOSES ? CREDITORS ? FIXED INCOME GROUPS ? CONSUMERS ? MIDDLE AND LOWER INCOME GROUPS
? Inflation impacts negatively on economic growth.
? Inflation brings about uncertainty in the economy.
? Savings and investment are discouraged. ? Inflation affects the distribution of income.
? Redistributes income from people with fixed incomes
to those with flexible incomes. ? Redistributes income from private individuals to the government.
? Causes fiscal drag and bracket creep: salary increases
move people into higher tax brackets and they could be effectively worse off. ? Inflation has an adverse effect on a country’s balance of payments. ? If India’s rate of inflation is higher than that of our trading partners the result is a loss of international competitiveness. ? Inflation can cause a decrease in the real money value of savings.
? Fiscal Measures
? Monetary Measures
? General Measures
? Increase direct taxes.
? Increase indirect taxes.
? Reduce government spending. ? Introduce measures to increase productivity, e.g. tax
rebates
? Increase interest rates of banks.
? Decrease money supply.
? Decrease availability of credit from banks. ? Decrease currency control.
? ? ? ? ? ?
Increase productivity. Freeze prices and wages. Implement a wage restraint policy. Encourage personal savings. Implement control measures for consumer credit. Import control: make competing imported goods cheaper. ? Introduce price indexation: linking all prices to a particular index, e.g. CPI. ? Inflation targeting.
? The inflation rate in India was recorded at 5.96
percent in March of 2013,which is reported by the Ministry of Commerce and Industry ? In India, the wholesale price index (WPI) is the main measure of inflation. ? The WPI measures the price of a representative basket of wholesale goods. ? In India, wholesale price index is divided into three groups: Primary Articles (20.1 percent of total weight), Fuel and Power (14.9 percent) and Manufactured Products (65 percent).
? Deflation is that state in which the value of goods and ? ? ? ? ?
services falls A sustained decrease in average price level is called deflation Prices fall opposite of inflation Not the same as disinflation, which is a reduction in the rate of inflation The inflation rate measures the trend in the average price level
?
?
? ?
? ?
Govt. withdraws money from circulation Govt. imposes heavy direct taxes or takes heavy loans from the public Central bank sells the securities in open market Central bank controls the credit money and adopts various measures such as increase in CRR, credit rationing and direct action The central bank increases the bank rate State of over-production takes place in the economy
To increase money supply To promote credit creation by the banks Curtailment in taxes so as to increase the purchasing power of the people 4. To increase the public expenditure and to increase the employment opportunities in the economy 5. To increase the money supply in circulation by repayment of old public debts 6. To provide economic subsidy by the govt. to the industrial sector of the economy
1. 2. 3.
doc_685464695.pptx
About inflation,type, its causes,measures to control inflation,how inflation is releated to monetory,fiscal,general policy
By: DWARKESH GIRASE (A005) YASIN KACHCHHI (A010)
? One of the most intricate challenges of our present
times is the problem of rising Inflation. Its effect can be felt by each and every person to at least some degree, whether he is an engineer, doctor, lawyer, govt. servant or anybody. Inflation makes no partiality in choosing its innocent victims.
? In a broad sense, inflation is that state in which the
prices of goods and services rise on the one hand and value of money falls on the other ? When money circulation exceeds the production of goods and services, then inflation takes place in the economy
? Inflation- The rise in the general level of prices
? In the long term, inflation erodes consumer purchasing power.
? That means accumulated wealth buys less and less, with the
passage of time. ? Where there is high inflation it is difficult for businesses to plan for the future as there is uncertainty regarding the cost of raw materials
? It is not the rise in the price of my favorite commodity ? e.g. McDonalds Pizza, but the overall rise in the prices
of all the goods and services manufactured and consumed within the territory of a nation. When we say that the monthly rate of Inflation is 12%, what it means is that on an average, the prices of all goods and services have increased by 12% in the period of last one month.
? In India, Inflation is measured using WPI (Wholesale Price
Index). ? India's WPI is a weighted-index of 435 commodities. ? It means price-rise of all commodities will not be treated equally. The price-rise of rice will have more weight-age than price-rise of a Maruti-car. That is because rice is consumed by a very large number of people compared to a Maruti car. ? The weight-age of a Mercedes car will be still lower in the WPI. So when this WPI increases from say 100 to 112, we say that the rate of inflation is 12%.
? This is a more realistic measure because it computes the index
based on the increase in actual price paid by the consumer. On the other hand, WPI considers the rise in the price by the Wholesalers of the goods and services.
? Deflation occurs when the general level of prices is
falling. Deflation have been rare in the late twentieth century.
? Disinflation denotes a decline in the rate of inflation.
? It is a continuous process.
? It refers to a rise in prices in general. ? It involves a considerable increase in prices.
? It causes a decline in the purchasing power of money.
? Inflation results when the macro economy has too much
demand for available production. These alternatives fall under two general categories: ? Demand-Pull Inflation: This inflation occurs when household, business, government, and foreign industries collectively try to purchase more output than the economy is capable of producing. In effect, the demand side of the aggregate market is "pulling" the price level higher. ? Cost-Push Inflation: Cost-push inflation is inflation attributable to decreases in supply, primarily due to increases in production cost
Demand Pull Inflation 2. Cost Push Inflation
1.
? The demand for goods and services increases and
production remains the same or does not increase as fast. The excess demand results in prices being “pulled up”. ? Affected by: I. Greater spending by households(C) (Also because credit has become more readily available). II. Investment spending by firms increases as a result of a drop in interest rates and/or a positive business climate (I). III. Increased government spending (G). IV. Higher earnings from exports (X).
Demand Pull Inflation
Price $
Aggregate Supply
P2
Aggregate Demand 2
P1 Aggregate Demand 1
Q1
Q2
Real GDP ($)
12
12
Causes for Increase in Demand :? Increase in Money Supply ? Increase in Black Marketing ? Increase in Hoarding ? Repayment of Past Internal Debt ? Increase in Exports ? Increase in Income ? Demonstration Effect ? Increase in Black money ? Increase in Credit facilities
? The example of the bread producer, suppose the cost of production of
one piece of bread remains constant at Rs.15. He adds his margin of Rs.5 and charges Rs.20 to each consumer. Now suppose the preference of his bread increases among the consumers, as it becomes more popular. ? This results in an increased demand for bread . ? So sensing more demand for his product, the owner increases the price to Rs.25. ? In our example, let's assume his margin increases Rs.5to Rs.10. Again, in the real world this might not be the case. As for e.g. if we assume competition among many bread-producers, the factors i.e. laborers will also demand a chuck of that margin in the form of increased wages. So, the owner will have to sacrifice some or all of his margin and distribute it to his laborers, otherwise they will stop working for him and work for another bakery-owner who is in competition.
? Caused by an increase in the cost of production.
Increased costs “push up” the price level.
? Affected by: I. Wages (increases in wages and salaries). II. Increase in price of key imported inputs. III. Exchange rate depreciation. IV. Increase in profit margins. V. Decrease in productivity for the same remuneration. VI. Natural disasters.
? In classical economic theory, there used to be only three factors of
production - land, labor and capital. However, in today's complex world, infinite factors are required to produce a single product or commodity e.g. house-rent, electricity, admin-expenses, raw-materials, fuel (petroleum), steel, etc. ? The producer of the commodity (the businessman) will naturally shift this cost to his consumers by raising the cost of his final product. This phenomenon is called Cost-Push Inflation. ? Let us take a simple example. Suppose a bakery owner produces bread by using several factors like wheat, flour, machines, labor, etc. The cost of production of one piece of bread comes to Rs.20. He adds Rs.5 as his profit-margin and sells it to consumers at Rs.25. This continues for several days. Now suppose the price of wheat increases. ? Now the owner recalculates his cost of production. It comes to Rs.20. He now adds his margin of Rs.5 and increases the cost of bread to Rs.25. This directly results in 25% rise in the cost of bread, or in the bread component of the WPI.
Cost Push Inflation
Price $ Aggregate Supply 2
Aggregate Supply 1
P2
P1
Aggregate Demand
Q2
Q1
Real GDP ($)
17
a) b) c) d) e) f) g) h)
Increase in cost of raw materials Shortage of Supplies Natural calamities Industrial Disputes Increase in Exports Increase in Wages Increase in Transportation Cost Huge Expenditure on Advertisement
?
? ?
?
?
BENEFITS DEBTORS ENTREPRENEURS INVESTORS FARMERS UPPER INCOME GROUPS
LOSES ? CREDITORS ? FIXED INCOME GROUPS ? CONSUMERS ? MIDDLE AND LOWER INCOME GROUPS
? Inflation impacts negatively on economic growth.
? Inflation brings about uncertainty in the economy.
? Savings and investment are discouraged. ? Inflation affects the distribution of income.
? Redistributes income from people with fixed incomes
to those with flexible incomes. ? Redistributes income from private individuals to the government.
? Causes fiscal drag and bracket creep: salary increases
move people into higher tax brackets and they could be effectively worse off. ? Inflation has an adverse effect on a country’s balance of payments. ? If India’s rate of inflation is higher than that of our trading partners the result is a loss of international competitiveness. ? Inflation can cause a decrease in the real money value of savings.
? Fiscal Measures
? Monetary Measures
? General Measures
? Increase direct taxes.
? Increase indirect taxes.
? Reduce government spending. ? Introduce measures to increase productivity, e.g. tax
rebates
? Increase interest rates of banks.
? Decrease money supply.
? Decrease availability of credit from banks. ? Decrease currency control.
? ? ? ? ? ?
Increase productivity. Freeze prices and wages. Implement a wage restraint policy. Encourage personal savings. Implement control measures for consumer credit. Import control: make competing imported goods cheaper. ? Introduce price indexation: linking all prices to a particular index, e.g. CPI. ? Inflation targeting.
? The inflation rate in India was recorded at 5.96
percent in March of 2013,which is reported by the Ministry of Commerce and Industry ? In India, the wholesale price index (WPI) is the main measure of inflation. ? The WPI measures the price of a representative basket of wholesale goods. ? In India, wholesale price index is divided into three groups: Primary Articles (20.1 percent of total weight), Fuel and Power (14.9 percent) and Manufactured Products (65 percent).
? Deflation is that state in which the value of goods and ? ? ? ? ?
services falls A sustained decrease in average price level is called deflation Prices fall opposite of inflation Not the same as disinflation, which is a reduction in the rate of inflation The inflation rate measures the trend in the average price level
?
?
? ?
? ?
Govt. withdraws money from circulation Govt. imposes heavy direct taxes or takes heavy loans from the public Central bank sells the securities in open market Central bank controls the credit money and adopts various measures such as increase in CRR, credit rationing and direct action The central bank increases the bank rate State of over-production takes place in the economy
To increase money supply To promote credit creation by the banks Curtailment in taxes so as to increase the purchasing power of the people 4. To increase the public expenditure and to increase the employment opportunities in the economy 5. To increase the money supply in circulation by repayment of old public debts 6. To provide economic subsidy by the govt. to the industrial sector of the economy
1. 2. 3.
doc_685464695.pptx