Inflation

Views:
 
Category: Entertainment
     
 

Presentation Description

No description available.

Comments

Presentation Transcript

Inflation causes, stages & theories:

Inflation causes, stages & theories By- MUSTFA HUSSAIN Ph.D. (2 nd Sem), CABM, Pantnagar

Inflation; It's impact on economy:

Inflation; It's impact on economy

What Inflation Is? :

Inflation is normally associated with high prices, which cause the decline in purchasing power or value of money. According to the crowflier, “ inflation is stage at which the value of money is falling i.e. increase in price or currency circulation in the excess is called Inflation What Inflation Is?

Features Of Inflation:

The quantity of money is increasing but the production is statistics end not increasing The quantity of money is stable but the production is declining If the quantity of money is declining and the production is also declining but decline in production is higher than the decline in the quantity of money If the quantity of money is increasing & the volume of production is declining If the quantity of money is in excess of demand or requirement If the quantity of money as well as production is increasing but the rate of increase in production is lesser than the rate of the increase in the quantity of money. Features Of Inflation

Stages Of Inflation:

Stages Of Inflation

Stages Of Inflation:

1.Pre Full Employment Stage- this stage of inflation is called partial or semi inflation. So long as full employment is not reached, any increase in the quantity of money is exhausting in raising the employment level and output & not the general prices of output. But after some time, due to law of diminishing return increase in money supply may cause cost & prices to rise more than the expansion of output. Stages Of Inflation

Stages Of Inflation:

2.Full Employment Stage- up to this stage all the resources of production are fully employed. Production is optimum at this stage. The law of constant return is observed production is unable to expand because all the production are fully used. Further employment is not possible with views to expand the production. Stages Of Inflation

Stages Of Inflation:

3. Post Full Employment Stage- after the full employment attained , subsequent increase in the aggregate effective demand due to increase in the quantity of money causes the increase in the general price level. here inflation is caused due to phenomenon of full employment not due to excess of money. It is called true inflation. Stages Of Inflation

Theory Of Inflation:

Market Power Theory- Group/s of sellers (OLIGOPOLY) combine to establish a prices different from competitive level to get the more & more profits without any concern of common man. They raise the prices even there is no increase in demand, trade union also keep pressing for increase in wages & fringe benefits, to secure such increase in prices sellers increased wages rate this happens in entire industry at last inflation occurs. Conventional Pull Demand Inflation- when an economy is operating at full employment equilibrium and there is increase in demand, inflation. Because mostly have got employment will show more demand Theory Of Inflation

Theory Of Inflation:

Structural Theory- it pledges that inflation causes due to maladjustment in economy. A - Mark Up Theory - due to increase in demand as well as increase in cost.(Prof. Gardner Ackley) B- Bottle- Neck Inflation- Prof. Otto Eckstein came to that conclusion, Inflation occurs only due to Capital goods boom & increase in wage rate. bottle neck industries(Steel industries) play important role in this. C- Demand Composition Inflation- Prof. Charles L. schultze said that inflation happens due to change in the composition of demand. Although aggregate demand of consumer for good & service remains same. Theory Of Inflation

Types Of Inflation:

On the basis of rapidity with which prices are increase Creeping - it is mildest form of inflation. When Price rises 10 % over a decade, or 1 % per annum. Walking Inflation- when price rises 3-4 % per annum or 30_40 % over a decade. Running- when price rises 10 % per annum or 100% over a decade Galloping Inflation- in this there is no limit to the height to which price might increase. Price can rises 100% per annum. Types Of Inflation

Types Of Inflation:

On the basis of factors, which influence the money supply & demand for goods. Excess money supply Inflation - when money supply is in the excess as compare to goods available. Cost Inflation- it occurs due to high employment On the basis of War & Pease time War Time Inflation- during war time excess money is used & production does not increase so fast Post War Inflation- This may happens when disposable income of community increases due to taxation rebate after war or public debt is repaid in the post period Peace Time Inflation- when Govt. invests heavily on capital projects for long time it insist to increase the gap b/w money income & real wage rate Types Of Inflation

Effects Of Inflation:

Effects On Production- Distributional Effects- A- effects on Debtors & Creditors – during the inflation debtors gain creditors. B-Business Community- they get profits in inflation because they find that value of their stock & goods is rising continuously. C-Fixed Income Group- they are in the loss. D-Investors-Debentures & bonds( fixed Income bearing securities) will be in loss, while investment in equities will be wise decision in inflation period. Farmers - They will get benefits because during inflation their crops value will be rise Effects Of Inflation

Calculation Of inflation:

Calculation Of inflation

Two methods of calaculation :

WPI (used by India mostly used by developing country) CPI (USA, UK, mostly developed country) Two methods of calaculation

Wholesale Price Index (WPI):

Wholesale Price Index (WPI) WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries by the Consumer Price Index in the 1970s. WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy.

Consumer Price Index (CPI):

Consumer Price Index (CPI) CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. \CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one. Economists Shunmugam and Prasad say it is high time that India abandoned WPI and adopted CPI to calculate inflation. India is the only major country that uses a wholesale index to measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for.

Continue………:

Continue ……… CPI is the official barometer of inflation in many countries such as the United States, the United Kingdom, Japan , France , Canada , Singapore and China. The governments there review the commodity basket of CPI every 4-5 years to factor in changes in consumption pattern," says their research paper. It pointed out that WPI does not properly measure the exact price rise an end-consumer will experience because, as the same suggests, it is at the wholesale level. The paper says the main problem with WPI calculation is that more than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view.

Continue…….:

Continue ……. Take, for example, a commodity like coarse grains that go into making of livestock feed. This commodity is insignificant, but continues to be considered while measuring inflation. India constituted the last WPI series of commodities in 1993-94; but has not updated it till now that economists argue the Index has lost relevance and can not be the barometer to calculate inflation. Shunmugam says WPI is supposed to measure impact of prices on business. "But we use it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the index. And it does not factor in services which have assumed so much importance in the economy," he pointed out.

why is India not switching over to the CPI method of calculating inflation? :

why is India not switching over to the CPI method of calculating inflation? Finance ministry officials point out that there are many intricate problems from shifting from WPI to CPI model. First of all, they say, in India, there are four different types of CPI indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.' The four CPI series are: CPI Industrial Workers; CPI Urban Non-Manual Employees; CPI Agricultural laborers; and CPI Rural labour. Secondly, officials say the CPI cannot be used in India because there is too much of a lag in reporting CPI numbers. In fact, as of May 21, the latest CPI number reported is for March 2006.

Continue..:

Continue.. The WPI is published on a weekly basis and the CPI, on a monthly basis. And in India, inflation is calculated on a weekly basis.

How is WPI (Wholesale Price Index) calculated?:

How is WPI (Wholesale Price Index) calculated? In this method, a set of 435 commodities and their price changes are used for the calculation. The selected commodities are supposed to represent various strata of the economy and are supposed to give a comprehensive WPI value for the economy. WPI is calculated on a base year and WPI for the base year is assumed to be 100. To show the calculation, let’s assume the base year to be 1970. The data of wholesale prices of all the 435 commodities in the base year and the time for which WPI is to be calculated is gathered. Let's calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the price of a kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10

How is WPI (Wholesale Price Index) calculated?:

How is WPI (Wholesale Price Index) calculated? In this method, a set of 435 commodities and their price changes are used for the calculation. The selected commodities are supposed to represent various strata of the economy and are supposed to give a comprehensive WPI value for the economy. WPI is calculated on a base year and WPI for the base year is assumed to be 100. To show the calculation, let’s assume the base year to be 1970. The data of wholesale prices of all the 435 commodities in the base year and the time for which WPI is to be calculated is gathered. Let's calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the price of a kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10

How is WPI (Wholesale Price Index) calculated?:

How is WPI (Wholesale Price Index) calculated? In this method, a set of 435 commodities and their price changes are used for the calculation. The selected commodities are supposed to represent various strata of the economy and are supposed to give a comprehensive WPI value for the economy. WPI is calculated on a base year and WPI for the base year is assumed to be 100. To show the calculation, let’s assume the base year to be 1970. The data of wholesale prices of all the 435 commodities in the base year and the time for which WPI is to be calculated is gathered. Let's calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the price of a kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10

Thank You:

Thank You

authorStream Live Help