FINAL inflation tenzing

Inflation impact on economy:

Inflation impact on economy

Major outlines:

Major outlines Introduction Definition Factors affecting inflation Types of Inflation Causes of Inflation Effects of Inflation

INTRODUCTION:

INTRODUCTION Situation of rapid general increase in price level. Decline in the value of money .

Definitions::

Definitions : According to Crowthers “ Inflation means a state in which the value of money is falling i.e.… prices are rising”. According to Pigou “ Inflation arises when money income is expanding more than proportionate to income earning activity”.

Definition::

Definition: According to Crowthers “ Inflation means a state in which the value of money is falling i.e.… prices are rising”. According to Pigou “ Inflation arises when money income is expanding more than proportionate to income earning activity”.

IN SIMPLE WORDS INFLATION MEANS:

IN SIMPLE WORDS INFLATION MEANS Inflation is a continuous rise in the price level. People who can’t raise their prices or wages are hurt by inflation. If people can raise their wages or prices and still keep their jobs or sell their goods, inflation doesn’t hurt them.

Factors affecting inflation:

Factors affecting inflation Increase in the money supply. Decrease in the demand for money. Decrease in the of goods and services. Increase in the for goods and services.

TYPES OF INFLATION:

TYPES OF INFLATION Creeping Walking Running Galloping Hyper

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.     :

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. CREEPING INFLATION

WALKING INFLATION:

WALKING INFLATION When the rise in prices becomes more pronounced as compared to a creeping inflation, there exists walking inflation in the economy. Roughly, when prices rise by more than ten percent and within a range of 30 percent to 40 percent over a decade, or 3 to 4 percent a year, walking inflation is the outcome. Walking inflation presents a warning signal for the occurrence of running and galloping inflation.

RUNNING INFLATION:

RUNNING INFLATION When the movement of price accelerates rapidly, running inflation emerges. Running inflation may record more than 100 percent rise in prices over a decade. Thus, when prices rise by more than 10 percent a year, running inflation occurs.

GALLOPING INFLATION:

GALLOPING INFLATION In the case of hyperinflation, prices rise every moment, and there is no limit to the height to which prices might rise; therefore, it is difficult to measure its magnitude, as prices rise by fits and starts. If, within a year, the prices rise by 100 percent, it is a case of hyperinflation or galloping inflation.

HYPER INFLATION:

HYPER INFLATION Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless.

‘Good’ Inflation:

‘Good’ Inflation 14 CPIo GDPo Goods and Services Produced Goods and Services Purchased CPI1 GDP1 Growth Aggregate Demand Aggregate Supply Government stimulus works and consumers buy more goods and services Inflation Demand higher than Supply: Inventories Drop, prices rise Unemployment drops

Bad Inflation:

Bad Inflation 15 CPIo GDPo Goods and Services Produced Goods and Services Purchased CPI1 GDP1 Aggregate Demand Aggregate Supply Recession Firms can not get loans Inflation Unemployment increases Demand higher than Supply: Inventories Drop, prices rise

CAUSES OF INFLATION:

CAUSES OF INFLATION DEMAND PULL INFLATION COST PUSH INFLATION Increases in money supply. Expansion of bank credit. Deficit financing. Black money. Scarcity. Taxes. Population growth.

Demand-pull inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing too few goods More accurately, it should be described as involving "too much money spent chasing too few goods", since only money that is spent on goods and services can cause inflation. The term demand-pull inflation is mostly associated with Keynesian economics. :

Demand-pull inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply . It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve . This is commonly described as " too much money chasing too few goods More accurately, it should be described as involving " too much money spent chasing too few goods ", since only money that is spent on goods and services can cause inflation. The term demand-pull inflation is mostly associated with Keynesian economics . DEMAND PULL INFLATION

According to Keynesian theory, the more firms will employ people, the more people are employed, and the higher aggregate demand will become. This greater demand will make firms employee more people in order to output more. Due to capacity constraints, this increase in output will eventually become so small that the price of the goods will rise. At first, unemployment will go down, shifting AD1 to AD2, which increases Y by (Y2 - Y1). :

According to Keynesian theory , the more firms will employ people, the more people are employed, and the higher aggregate demand will become. This greater demand will make firms employee more people in order to output more. Due to capacity constraints, this increase in output will eventually become so small that the price of the goods will rise. At first, unemployment will go down, shifting AD1 to AD2, which increases Y by (Y2 - Y1).

At first, unemployment will go down, shifting AD1 to AD2, which increases Y by (Y2 - Y1).This increase in demand means more workers are needed, and then AD will be shifted from AD2 to AD3, but this time much less is produced than in the previous shift, but the price level has risen from P2 to P3, a much higher increase in price than in the previous shift. This increase in price is called inflation.:

At first, unemployment will go down, shifting AD1 to AD2, which increases Y by (Y2 - Y1).This increase in demand means more workers are needed, and then AD will be shifted from AD2 to AD3, but this time much less is produced than in the previous shift, but the price level has risen from P2 to P3, a much higher increase in price than in the previous shift. This increase in price is called inflation .

Aggregate Demand increasing faster than production:

Aggregate Demand increasing faster than production

Cost-Push Inflation:

Cost-Push Inflation Cost-push inflation is an inflation that results from an initial increase in costs. The two main sources of cost-push inflation are: an increase in the money wage rate an increase in the money prices of raw materials

CONTINUED….:

CONTINUED…. In a cost-push inflation, initially short-run aggregate supply decreases real GDP decreases below potential GDP and the price level rises the economy could become stuck in this stagflation situation for some time.

Slide 23:

The following figures show a cost-push inflation. Initially, a factor price rises.

Slide 24:

Short-run aggregate supply decreases and the SAS curve shifts leftward

Slide 25:

Real GDP decreases and the price level rises in a stagflation.

Slide 26:

With no subsequent change in aggregate demand, the price level eventually falls.

Slide 27:

There is no inflation. For cost-push inflation to take hold, aggregate demand must increase.

Slide 28:

An increase in the money supply increases aggregate demand and the AD curve shifts rightward.

Slide 29:

Real GDP increases and the price level rises .

Slide 30:

This process repeats to create an unending cost-price inflation spiral.

Who wins and who loses from inflation?:

Who wins and who loses from inflation? Debtors win Borrowers pay back loans with inflated dollars (dollars that are worth less) Creditors lose Lenders are paid back with inflated dollars (dollars that are worth less)

More winners and losers of inflation:

More winners and losers of inflation Those on fixed incomes lose Income does not keep up with prices - standard of living goes down. Exception – if fixed income is INDEXED to inflation (CPI) Savers often lose If prices rise faster than the rate of interest they are getting from their savings (investment) then they lose purchasing power

Slide 33:

Government sometimes wins Government wins – Biggest debtor in the World (Debtors WIN!) Government loses – surplus in savings, increase in salaries and other prices paid Menu costs of inflation Individuals and business must allocate resources to keep up with changing prices – increases transaction costs Inflation and uncertainty Do I spend today, or save? Prices going up or not? What is happening to my purchasing power ?

Impact of food inflation on Indian consumer:

Impact of food inflation on Indian consumer

INFLATION RATE OF INDIA:

INFLATION RATE OF INDIA YEAR HIGHEST RATE LOWEST RATE 2008 10.45% 5.47% 2009 14.97% 8.03% 2010 16.22% 8.33% The inflation rate of the country reached an historical high of 34.68 percent during the month of September in the year of 1974. The lowest was recorded in the month of May in the year of 1976. It was reported to be as low as -11.31

Food Inflation in India:

Food Inflation in India

A country with a GDP per capita of $765 dollars or less is defined as a low-income or poor country. You may wonder why poor countries remain poor. Some interrelated factors like geography, industrialization, colonialism, education, resources, infrastructure, overpopulation, investment, government and debt make poor countries remain the heavy foot of poverty. :

A country with a GDP per capita of $765 dollars or less is defined as a l ow-income or poor country . You may wonder why poor countries remain poor. Some interrelated factors like geography, industrialization, colonialism, education, resources, infrastructure, overpopulation, investment, government and debt make poor countries remain the heavy foot of poverty .

1-Ethiopia (per capita $700):

1- Ethiopia (per capita $700) E thiopia ranks 170 out of 177 the poorest countries on the Human Development Index (UNDP HDI 2006). Half of its GDP depends on agricultural activity.

2-Nigeria (per capita: $700) :

2-Nigeria (per capita: $700) Niger with a population of 12.5 million is one of the ten poorest countries in the world. Drought is a common natural calamity in Niger . It often undergoes a phase of severe food crisis. 63% of its total population lives on below $1 a day.

3-Republic of the Congo(per capita:$300):

3-Republic of the Congo(per capita:$300 ) Republic of the Congo in Central Africa is the last at the bottom of the economic heaps.

4-Republic of Liberia(per capita: $500):

4-Republic of Liberia(per capita: $500) Republic of Liberia on the west coast of Africa is one of the ten poorest economies across the globe. A decline in the export of commodities, the flight of many investors from the looting and war profiteering during the civil war in 1990 brought the economy of the country to its knees.

5- Republic of Zimbabwe(per capita: $500):

5 - Republic of Zimbabwe(per capita: $500) 6-The Solomon Islands (per capita: $600) 7-Republic of Somalia(per capita:$600) 8-Union on Comoros(per capita:$600) 9-Guinea-Bissau(per capita:$600) 10-Central Africa Republic(per capita:$700)