DOCSLIB.ORG

MODULE I: (B) MACROECONOMICS: MONEY 2. INFLATION After Reading

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
MODULE I: (B) MACROECONOMICS: MONEY 2. INFLATION After Reading MODULE I: (B) MACROECONOMICS: MONEY 2. INFLATION After reading this unit you should be able to understand: Inflation Kinds of inflation INTRODUCTION Inflation and unemployment are the two most significant problems of the Indian economy. These two are the big problems that plague all the economies. Almost everyone is sure that he knows what inflation exactly is, but it remains a source of great deal of confusion because it is difficult to define it unambiguously. One primary macroeconomic concern in market economies is the maintenance of stable prices, or the control of inflation. Inflation is a situation where prices are persistently rising, thereby reducing the value of money. It refers to a situation of constantly rising prices of commodities and factors of production. The opposite situation is known as deflation—a situation of constantly falling prices of commo- dities and factors of production. Inflation is an increase in the general level of prices. It does not mean that prices are high, but, rather, that they are increasing. For example, assume that over the past 2 years the price of a particular combination of consumer goods in country A has been stable at Rs. 100. Assume that in country B the price of that same combination of consumer goods has gone up from Rs. 10 to Rs. 30 over the last 2 years. Country B, not country A, faces a problem with inflation. Inflation refers to price movements, not price levels. With inflation, the price of every good and service does not need to increase because inflation refers to an increase in the general level of prices. An inflation rate of 7% does not mean that all prices are increasing by 7%; it means that, on average, prices are going up by that amount. Also, the mere existence of an increase in the general level of prices is not necessarily a matter of concern in an economy. An inflation rate of 2% to 3% per year would not present a policy problem. However, when prices increase by a larger percentage, such as 8% to 10% or more per year, inflation is a serious issue. It is a process in which the price level is rising and money is losing value. There are two features of this definition. Firstly, it is a monetary phenomenon. It is the price level and, therefore, the value of money that is changing, not the price of some particular commodity. For example, if the price of oil rises but prices of computer fall so that the price level is constant, there is no inflation. When the rate of inflation jumps the planned levels it have serious consequences. The rate at which the general level of prices increases can vary. Hence there are several types of inflation according to the rate of increase: 1. Creeping Inflation: If the speed of upward thrust in prices is low but small then we have creeping inflation. It refers to a rise in the price level of a rate of 2 to 3% per annum. If the rate of price rise is kept at this level it is considered to be helpful for economic development. This type of inflation does not do much harm and may, in fact, stimulate investment. 2. Moderate (mild) Inflation: It refers to a rise of 4 to 5% inflation per annum and this rate is high enough to have undesirable effects. If the price level goes up by just 2 to 3% per annum, the situation is one of mild inflation. 3. Rapid Inflation: It refers to an annual rise of 6% or more in the general price index. It is definitely harmful and has undesirable effects on incomes, imports and exports, savings and consumption. 4. Hyperinflation (Recessionary Inflation): If mild inflation is left unchecked for a long period, it is converted into hyperinflation. Hyperinflation is a phenomenon that usually accompanies war and its aftermath. It is a consequence of an attempt to finance government expenditure through printing of paper money. At first, the government deficit may be slight and the addition to the price level insignificant. However, as the price level starts rising, the government must spend greater and greater nominal amounts of currency to obtain the same quantity of real resources. Meanwhile, consumers and investors come to anticipate further price rise and intensify their bidding for real goods and services. The climax of hyperinflation appears when the flight from money is such that the velocity of circulation approaches infinity. Hyperinflation is runaway inflation during which prices rise very fast. The value of money falls daily, or even hourly. People lose confidence in the currency and the monetary (currency) system ultimately breaks down. People refuse to accept payments in money. Commodities are preferred to money in most transactions. At the end, the currency ceases to function as money and has to be abandoned. Thus the money economy yields place to barter economy. This type of inflation occurred in the then West Germany in 1923. 5. Open vs. Suppressed Inflation: Open inflation is said to occur when the government makes to attempt to control it. However, when prices are controlled by certain administrative measures such as fixation of price-ceilings, rationing or otherwise, inflation is said to have been suppressed (or repressed). Suppressed inflation also goes by the name repressed inflation. Suppressed inflation refers to a situation where demand exceeds supply, but the effect on prices is minimised by the use of such devices as price controls and rationing. It may be noted that price controls do not deal with the cause of inflation; they merely seek to suppress the symptoms. The excess demand still exists and it will tend to show itself in the form of waiting lists, queues, and, almost inevitably, in the form of black markets. Thus prices are held in check in the controlled sector but there is disproportionate rise in prices in the uncontrolled sector. This happens due to the fact that private cash holding as also holding of bank balances increase during a period of suppressed inflation. 6. Galloping Inflation: When inflation proceeds very fast or at a very rapid rate, it is called galloping inflation. Walking inflation may be converted into running inflation. Running inflation is dangerous. If it is not controlled, it may ultimately be converted to galloping or hyperinflation. It is an extreme form of inflation when an economy gets shattered.”Inflation in the double or triple digit range of 20, 100 or 200 p.c. a year is labelled “galloping inflation” 7. Sellers’ Inflation: Nowadays, sellers often add a margin (mark-up) to cost before fixing up price. This causes mark-up inflation or sellers’ inflation. 8. Partial vs. True Inflation: According to some economists, any continuous rise in the price level must not be taken for inflation. Whenever the price level increases, the producers reap larger profits and necessarily tend to produce more. As a result of this, unemployed inputs are put into use, unemployed workers get jobs, unused land and capital goods are made use of. And, because of this, the volume of production also increases. So long as this happens, it can only be termed as partial inflation. Thus, partial inflation rises if the price level is accompanied by increase in the volume of production of goods and services. But partial inflation cannot continue for long. A time comes when all the factors become fully employed. In this condition of full employment no further increase in production can be envisaged. On the other hand, as a result of competition among the producers the factor-prices rent, wages interest and profit tend to rise. Since factor prices are also factor-incomes incomes of the suppliers of the factors of production, people have larger income than before. Larger incomes mean more expenditure and, necessarily, more pressure of purchasing power upon goods and services. For, in the situation of full employment, production cannot increase any further. It is tins situation which has been called true inflation by modern economists. Thus true inflation implies a situation of continuously rising price level without any possibility of corresponding increase in production. Reference: http://egyankosh.ac.in/handle/123456789/19337 http://egyankosh.ac.in/bitstream/123456789/13597/1/Unit-4.pdf . .
Load more

Recommended publications
  • Principles of Agricultural Economics Credit Hours: 2+0 Prepared By: Dr
    Study Material Course No: Ag Econ. 111 Course Title: Principles of Agricultural Economics Credit Hours: 2+0 Prepared By: Dr. Harbans Lal Course Contents: Sr. Topic Aprox.No. No. of Lectures Unit-I 1 Economics: Meaning, Definition, Subject Matter 2 2 Divisions of Economics, Importance of Economics 2 3 Agricultural Economics Meaning, Definition 2 Unit-II 4 Basic concepts (Demand, meaning, definition, kind of demand, demand 3 schedule, demand curve, law of demand, Extension and contraction Vs increase and decrease in demand) 5 Consumption 2 6 Law of Diminishing Marginal Utility meaning, Definition, Assumption, 3 Limitation, Importance Unit-III 7 Indifference curve approach: properties, Application, derivation of demand 3 8 Consumer’s Surplus, Meaning, Definition, Importance 2 9 Definition, Importance, Elasticity of demand, Types, degrees and method of 4 measuring Elasticity, Importance of elasticity of demand Unit-IV 10 National Income: Concepts, Measurement. Public finance: Meaning, Principle, 3 Public revenue 11 Public Revenue: meaning, Service tax, meaning, classification of taxes; 3 Cannons of taxation Unit-V 12 Public Expenditure: Meaning Principles 2 13 Inflation, meaning definition, kind of inflation. 2 Unit-I Lecture No. 1 Economics- Meaning, Definitions and Subject Matter The Economic problem: Economic theory deals with the law and principles which govern the functioning of an economy and it various parts. An economy exists because of two basic facts. Firstly human wants for goods and services are unlimited and secondly productive resources with which to produce goods and services are scarce. In other words, we have the problem of allocating scarce resource so as to achieve the greatest possible satisfaction of wants.
    [Show full text]
  • How to Hedge Against in Ation Risk in Vietnam
    How to Hedge Against Ination Risk in Vietnam T. Thanh-Binh Nguyen ( [email protected] ) Chaoyang University of Technology Research Keywords: asymmetric cointegration, gold price, ination hedge, MSI-VAR(1) model, the US dollar, Vietnam. Posted Date: August 2nd, 2021 DOI: https://doi.org/10.21203/rs.3.rs-753285/v1 License: This work is licensed under a Creative Commons Attribution 4.0 International License. Read Full License How to Hedge Against Inflation Risk in Vietnam T.Thanh-Binh, Nguyen＊ Department of Accounting, Chaoyang University of Technology, 168 Jifong E. Road, Wufong District, Taichung City, 41349, Taiwan E-mail: [email protected] ＊ Corresponding author; Tel.: +886-4-2332-3000 ext 7804. E-mail address: [email protected] How to Hedge Against Inflation Risk in Vietnam Abstract Vietnam has experienced galloping inflation and faced serious dollarization since its reform. To effectively control its inflation for promoting price stability, it is necessary to find efficacious leading indicators and the hedging mechanism. Using monthly data over the period from January 1997 to June 2020, this study finds the predictive power and hedge effectiveness of both gold and the US dollar on inflation in the long-run and short-run within the asymmetric framework. Especially, the response of inflation to the shocks of gold price and the US dollar are quick and decisive, disclosing the sensitiveness of inflation to these two variables. Keywords: asymmetric cointegration, gold price, inflation hedge, MSI-VAR(1) model, the US dollar, Vietnam. JEL classification codes: C22, L85, P44 2 I. Introduction One of the most vital responsibilities of policymakers in several countries is to control inflation for promoting two long-run goals: price stability and sustainable economic growth since inflation connects tightly to the purchasing power of currency within its border and affects its standing on the international markets.
    [Show full text]
  • European University Institute. Digitised Version Produced by the EUI Library in 2020
    EUROPEAN UNIVERSITY INSTITUTE, FLORENCE DEPARTMENT OF ECONOMICS Repository. Research Institute 320 University European Institute. E U I WORKING Cadmus, on INSTABILITY AND INDEXATION IN A LABOUR- MANAGED ECONOMY - A GENERAL EQUILIBRIUM University QUANTITY RATIONING APPROACH Access by it ick European Will Bartlett and Gerd Weinrich Open Author(s). Available içit The 2020. European University Institute University of Western Ontario © Badia Fiesolana Department of Economics in 50016 S. Domenico di Fiesole Social Science Centre Italy London, Canada N6A 5C2 Library EUI This paper was written while the second author was a Jean Monnet Fellow the at the European University Institute and presented at the Fourth Inter­ by national Conference on the Economics of Self-Management in Liège, Belgium, July 15-17, 1985. produced version BADIA FIESOLANA, SAN DOMENICO (FI) Digitised Repository. Research Institute University European Institute. Cadmus, on University Access European Open Printed in Italy in September 1985 Printed Italy September 1985 in in (C) Weinrich Will Gerd Bartlett and (C) reproduced in any form without without any reproduced form in No part may No part be of paper this European University Institute University European Institute - 50016 San Domenico (FI) Domenico - - San 50016 (FI) Author(s). Available permission of of author. permission the All rights All rights reserved. The 2020. Badia Fiesolana Badia Fiesolana © in Italy Library EUI the by produced version Digitised Repository. Research Institute University European managed economy based upon the general equilibrium quantity ra­ may lead to highly perverse and unstable price dynamics, as en­ Abstract households seek to maximize utility in consumption and leisure cient level of activity.
    [Show full text]
  • Types and Strains of Inflation
    RESERVE BANK OF FIJI ECONOMIC FOCUS `Types and Strains of Inflation Inflation is the general increase in prices of will not make investments that yield returns goods and services. As prices go up, the same that are below the inflation rate. amount of money buys fewer goods and services. The rate at which money loses its Inflation in Fiji value depends on the rate of inflation. According to the International Monetary Fund, % there are three levels of inflation: low-to- 10 moderate, galloping and hyperinflation. 8 Low-to-moderate inflation is when the prices of 6 goods and services rise slowly over time. As a 4 result, people are more willing to save their 10 year average = 2.8 money because the value of their savings is not 2 eroded by high inflation. At the same time, businesses prefer to enter into long-term 0 contracts because they do not expect prices to 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 rise quickly in the future. Source: Bureau of Statistics Fiji experiences low-to-moderate inflation. A more extreme case of increase in prices is (See graph). Since around 60 percent of goods known as hyperinflation. At this level, inflation and services are imported, our domestic prices stands at the rate of a thousand, a million or even are affected directly or indirectly through a billion percent per year. Prices can be rising changes in the prices of our imports. Fiji’s low even during the day. Hyperinflation is inflation environment is supported by two disastrous to an economy.
    [Show full text]
  • Types, Causes and Effects 1. Meaning of Inflation
    Inflation: Types, Causes and Effects Inflation and unemployment are the two most talked-about words in the contemporary society. These two are the big problems that plague all the economies. Almost everyone is sure that he knows what inflation exactly is, but it remains a source of great deal of confusion because it is difficult to define it unambiguously. 1. Meaning of Inflation: Inflation is often defined in terms of its supposed causes. Inflation exists when money supply exceeds available goods and services. Or inflation is attributed to budget deficit financing. A deficit budget may be financed by the additional money creation. But the situation of monetary expansion or budget deficit may not cause price level to rise. Hence the difficulty of defining ‘inflation’. Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods. G. Ackley defined inflation as ‘a persistent and appreciable rise in the general level or average of prices’. In other words, inflation is a state of rising prices, but not high prices. It is not high prices but rising price level that constitute inflation. It constitutes, thus, an overall increase in price level. It can, thus, be viewed as the devaluing of the worth of money. In other words, inflation reduces the purchasing power of money. A unit of money now buys less. Inflation can also be seen as a recurring phenomenon. While measuring inflation, we take into account a large number of goods and services used by the people of a country and then calculate average increase in the prices of those goods and services over a period of time.
    [Show full text]
  • INFLATION and ITS CONTROL Everett E
    INFLATION AND ITS CONTROL Everett E. Peterson, Extension Economist, University of Nebraska, and Richard G. Ford, Extension Economist, Federal Extension Service' The authors of the many speeches and writings on inflation can be divided roughly into two opinion groups. One group argues that a little inflation is good because it stimulates economic growth and bene- fits most people and that steps can be taken to care for those few who are injured. The second group holds that any inflation is bad, that creeping inflation will get out of hand, and that stable prices are con- sistent with full empoyment and economic growth. The following quotations are typical of current writings on inflation: Let us not minimize the explosive potentials of this economic outlaw. In its exaggerated form-when inflation shifts from a creep to a gallop- it has bred dictators, toppled governments, ruined nations. And, when it gets so out of hand, it can kill the goose that lays the golden eggs of eco- nomic growth by discouraging the savings with which we buy the machines to increase our productivity. Even in its creepiest form, inflation robs the needy by decreasing the purchasing power of money. The things that a pension or small salary will buy shrink with each creep forward of an inflationary movement. Thus, schoolteachers, pensioners, and those elder citizens who live upon income from a fixed amount of capital, find themselves poorer and poorer. The savings upon which so many of our people rely for their support in old age, or to gain earlier independence, are constantly diminished in value.
    [Show full text]
  • Q: What Is Inflation? What Are Its Types? Explain. Ans: Inflation Is the Rate
    Q: What is inflation? What are its types? Explain. Ans: Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. It measures the average price change in a basket of commodities and services over time. According to Peterson, “The word inflation in the broadest possible sense refers to any increase in the general price-level which is sustained and non-seasonal in character.” Broadly, inflation can be of three types based on its rate, which are as follows: (a) Moderate Inflation: When the prices of goods and services rise at a single digit rate annually, then moderate inflation takes place. This inflation is also termed as creeping inflation. When an economy passes through moderate inflation, the prices of goods and services increase but at moderate rate. Under this type of inflation, the rate of increase in prices vary from country to country. Moderate inflation is a type of inflation which can be anticipated; therefore, individuals hold money as a store of value. (b) Galloping Inflation: When the prices of goods and services increase at two-digit or three-digit rate per annum, then galloping inflation takes place. Galloping inflation is also known as jumping inflation. In the words of Baumol and Blinder, “Galloping inflation refers to an inflation that proceeds at an exceptionally high.” Galloping inflation has adverse effect on middle and low income groups in the society. As a result, individuals are not able to save money for future. This kind of situation requires strict measures to control inflation.
    [Show full text]
  • Unit 4 Inflation
    UNIT 4 INFLATION Structure Objectives Introduction Meaning of Inflation Types of Inflation 4.3.1 Demand-Pull Inflation 4.3.2 Cost-Push Inflation Effects of Inflation Control of Inflation Let Us Sum Up Key Words Answers to Check Your Progress Terminal Questions 4.0 OBJECTIVES After studying this unit, you should be able to : explain the meaning and defmition of inflation explain the types of inflation outline the concept of inflationary gap describe the demand-pull and cost-push inflation comprehend the effects of inflation suggest' how inflation can be controlled. 4.1 INTRODUCTION The modem economies in general have been facing the problem of inflation more severely in recent years. These economies, therefore, concentrate on the study of specific causes of price rise and designing of policies to promote price stability. Earlier, only the underdeveloped economies of the world faced the serious problem of persistent price rise. But lately even the developed countries have fallen victim to this problem. In this unit we will discuss the meaning and nature of inflation, types of inflation, effects of inflation and various methods available to overcome this problem. 4.2 MEANING OF INFLATION According to Pigou inflation takes place "when money income is expanding relatively to the output of work done by the productive agents for which it is the payment". At another place he says that "inflation exists when money income is I expanding 'more than in proportion to income earning activity". RC. Hawtrey associates inflation with "the issue of too much currency". T.E. I Gregory calls it a state of "abnormal increase in the quantity of purchasing power".
    [Show full text]
  • Volume XI, 2015
    ISSN 2380-3525 (Print) ISSN 2380-3517 (Online) Critical Review A Publication of Society for Mathematics of Uncertainty Volume XI, 2015 Editors: Paul P. Wang John N. Mordeson Mark J. Wierman Florentin Smarandache Publisher: Center for Mathematics of Uncertainty Creighton University Critical Review A Publication of Society for Mathematics of Uncertainty Volume XI, 2015 Editors: Paul P. Wang John N. Mordeson Mark J. Wierman Florentin Smarandache Publisher: Center for Mathematics of Uncertainty Creighton University We devote part of this issue of Critical Review to Lotfi Zadeh. The Editors. Paul P. Wang Department of Electrical and Computer Engineering Pratt School of Engineering Duke University Durham, NC 27708-0271 [email protected] John N. Mordeson Department of Mathematics Creighton University Omaha, Nebraska 68178 [email protected] Mark J. Wierman Department of Journalism Media & Computing Creighton University Omaha, Nebraska 68178 [email protected] Florentin Smarandache University of New Mexico 705 Gurley Ave., Gallup, NM 87301, USA [email protected] Contents Florentin Smarandache 5 Neutrosophic Systems and Neutrosophic Dynamic Systems Kalyan Mondal, Surapati Pramanik 26 Tri-complex Rough Neutrosophic Similarity Measure and its Application in Multi-attribute Decision Making Partha Pratim Dey, Surapati Pramanik, Bibhas C. Giri 41 Generalized Neutrosophic Soft Multi-attribute Group Decision Making Based on TOPSIS Vladik Kreinovich, Chrysostomos D. Stylios 57 When Should We Switch from Interval-Valued Fuzzy to Full Type-2 Fuzzy (e.g.,
    [Show full text]
  • Price Indices, Monetary Analysis, and Inflation: a Macro-Theoretical
    PRICE INDICES, MONETARY ANALYSIS, AND INFLATION A MACRO-THEORETICAL INVESTIGATION Sergio Rossi University College London Department of Economics Ph.D. Thesis 2000 ProQuest Number: U643111 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. uest. ProQuest U643111 Published by ProQuest LLC(2015). Copyright of the Dissertation is held by the Author. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. Microform Edition © ProQuest LLC. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 ABSTRACT This thesis investigates inflation from a macro-theoretical point of view. It originates in a critical appraisal of traditional inflation analysis, where the latter phenomenon is identified with an ongoing increase in the level of aggregate prices because ‘too much money is chasing too few goods’. It argues that the prevalent idea of money and output being two separate and autonomous objects can neither explain the value of money nor its variations over time. It also argues that output as a whole cannot be measured in this widely-shared analytical framework. A new theory is called for. The problem of inflation in the alternative framework developed in the thesis reveals its essentially macroeconomic nature. It is argued that to gain an understanding of inflation it is necessary to focus analysis on the formation of national income and not on its distribution.
    [Show full text]
  • The Great Inflation
    This PDF is a selecon from a published volume from the Naonal Bureau of Economic Research Volume Title: The Great Inflaon: The Rebirth of Modern Central Banking Volume Author/Editor: Michael D. Bordo and Athanasios Orphanides, editors Volume Publisher: University of Chicago Press Volume ISBN: 0‐226‐006695‐9, 978‐0‐226‐06695‐0 (cloth) Volume URL: hp://www.nber.org/books/bord08‐1 Conference Date: September 25‐27, 2008 Publicaon Date: June 2013 Chapter Title: The Great Inflaon in the United States and the United Kingdom: Reconciling Policy Decisions and Data Outcomes Chapter Author(s): Riccardo DiCecio, Edward Nelson Chapter URL: hp://www.nber.org/chapters/c9172 Chapter pages in book: (p. 393 ‐ 438) 8 The Great Infl ation in the United States and the United Kingdom Reconciling Policy Decisions and Data Outcomes Riccardo DiCecio and Edward Nelson 8.1 Introduction In this chapter we study the Great Infl ation in both the United States and the United Kingdom. Our concentration on more than one country refl ects our view that a sound explanation should account for the experience of the Great Infl ation both in the United States and beyond. We emphasize further that an explanation for the Great Infl ation should be consistent with both the data and what we know about the views that guided policymakers. Figure 8.1 plots four- quarter infl ation for the United Kingdom using the Retail Price Index (RPI), and four- quarter US infl ation using the Consumer Price Index (CPI). The peaks in infl ation in the mid- 1970s and 1980 are over 20 percent in the United Kingdom, far higher than the corresponding US peaks.
    [Show full text]
  • The Great Inflation in the United States and the United Kingdom: Reconciling Policy Decisions and Data Outcomes
    The Great Inflation in the United States and the United Kingdom: Reconciling Policy Decisions and Data Outcomes Riccardo DiCecio Edward Nelson Federal Reserve Bank of St. Louis Federal Reserve Bank of St. Louis [email protected] [email protected] September 15, 2008 Abstract We argue that the Great Inflation experienced by both the United Kingdom and the United States in the 1970s has an explanation valid for both countries. The explanation does not appeal to common shocks or to exchange rate linkages, but to the common doctrine underlying the systematic monetary policy choices in each country. The nonmonetary approach to inflation control that was already influential in the United Kingdom came to be adopted by the United States during the 1970s. We document our position by examining official policymaking doctrine in the United Kingdom and the United States in the 1970s, and by considering output from a structural macroeconomic model estimated on U.K. data. Prepared for the NBER Great Inflation Conference, Woodstock, VT, September 25−27, 2008. Faith Weller provided research assistance. We thank Christopher Neely and pre- conference participants for useful comments on an earlier draft, and Frank Smets and Rafael Wouters for providing the estimation code for Smets and Wouters (2007). The views in this paper are those of the authors and should not be interpreted as those of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. 1. Introduction In this paper we study the Great Inflation in both the United States and the United Kingdom.
    [Show full text]