INFLATION:
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ü
Inflation
is the continuous rise in the prices of commodities over a period of time.
Ø Reasons for Inflation:
·
Increase
in Government expenditure
·
Low
food production
·
Black
Money
·
Poor
Infrastructure
·
Increase
in oil prices
·
Hoarding
of essential commodities
·
Taxation
policies
·
Rumors
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Ø Types of Inflation.
·
Demand
Pull Inflation: Too much money chasing limited goods. In simple terms demand
is increasing than the supply.
Hence what happens?
The prices will increase.
·
Cost Push
Inflation: When the cost goes up the companies increase prices to maintain
their profit margins.
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Ø What happens with this? (Consequences)
1.
The
prices of commodities increase
2.
The
Purchasing power decreases
3.
Cuts
down the consumption levels
4.
Reduces
the standard of living
5.
Leads
to hoarding
6.
Increase
wages
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Ø How the Inflation is measured?
·
By the
changes in Whole Sale Price Index (WPI)?
·
By the
changes in Consumer Price Index (CPI)?
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Market
Basket: The numbers of goods that are representatives of the economy are
grouped together into what is called Market Basket.
Price
Index: The cost of this Basket is compared over years and this result in Price
index.
The
change in percentage over year/years gives the inflation.
Ø Whole Sale Price Index:
·
First
published in India in the year 1902.
·
The
first base year was 1952-53.
·
Revised
roughly every decade.
·
Revised
on the recommendations given by a committee appointed by the government.
·
So far
5 times revised.
·
The
Present base year is 2004-05.
·
The
revision was recommended by a working group committee under the chairmanship of Prof/Abhijit Sen.
(member Planning Commission)
·
This
consists of over 240 commodities
·
Currently
it consists of 676 items in the market basket.
·
The WPI
figures are released every Thursday
·
The
Price movement is calculated individually
·
This is
released by office of the Economic advisor under the Ministry of Commerce and
industry.
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Ø CONSUMER PRICE INDEX (CPI)
·
Introduced
in the year 1970.
·
There
are four series in this
1.
CPI
(UNME) Urban Non-manual employees
(This is published
by Central Statistical Organization, which is a part of the Ministry of
Statistics and program Implementation).
2.
CPI
(AL) Agricultural Labourer
3.
CPI
(RL) Rural Labour
4.
CPI
(IW) Industrial Worker
CPI (AL, RL, IW)
are published by the department of Labour.
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Note:
ü It has its worst impact on
consumers.
ü High prices of day-to-day
goods make it difficult for consumers to afford even the basic commodities in
life.
ü This leaves them with no
choice but to ask for higher incomes.
ü Hence the government tries
to keep inflation under control.
ü Contrary to its negative effects, a moderate level of
inflation characterizes a good economy.
ü An inflation rate of 2 or 3% is beneficial for an economy as
it encourages people to buy more and borrow more, because during times of lower
inflation, the level of interest rate also remains low.
ü Hence the government as well as the central bank always
strives to achieve a limited level of inflation.
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Deflation:
ü This
is opposite to inflation
ü This
happens when the inflation falls below the level of zero percent.
ü The
value of the currency increases.
ü The
reason may be reduction of money supply or reduction in spending
ü The
other reason may be large scale unemployment
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Stagflation:
ü This
is a situation where the rate of economy growth is very slow and other side the
prices are increasing.
ü The
effects are increased unemployment and also inflation
ü This
generally happens internationally when the oil prices shoot up very sharply.
This happened during 1970s
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Hyperinflation:
ü This
is a situation of sharp increase in the prices
ü It
happens when there is too much money flow into the market
ü There
is huge imbalance in money supply and demand
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