... What is Inflation: Five Types of Inflation Defined Inflation is a situation of sustained and inordinate increase in the prices of goods and services. When there is a rise in general price level for all goods and services it is known as inflation. An inflationary situation could be because of the rise in any single price or a group of prices of related goods and services. Types of Inflation There are no less than five different types of inflation: • Commodity inflation, better known as cost-push inflation • Wage inflation, otherwise known as demand-pull inflation • Monetary inflation, • Fiscal inflation, and • Foreign exchange inflation. Cost-push Inflation: As the name suggests, if there is increase in the cost of production of goods and services, there is likely to be a forceful increase in the prices of finished goods and services. For instance, a rise in the wages of laborers would raise the per-unit costs of production and this would lead to rise in prices for the related products. This type of inflation may or may not occur in conjunction with demand-pull inflation. Demand-pull Inflation This type of inflation occurs when total demand for goods and services in an economy exceeds the supply of the same. When the supply is less, the prices of these goods and services would rise, leading to a situation called demand-pull inflation. This type of inflation affects the market economy adversely during the wartime. Fiscal inflation Fiscal inflation is due to...
Words: 2352 - Pages: 10
...In economics, inflation is a sustained increase in the general price level of goods and srvices in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. The difference between inflation and a change in price of a particular good or service is that inflation reflects a general and overall increase in price across the whole economy In general, Inflation is caused by some combination of four factors. Those four factors are: Supply goes up or Supply of goods and services goes down or Demand for money goes down or Demand for goods and service goes up Inflation affects an economy in various ways, both positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Inflation also has positive effects: * Fundamentally, inflation gives everyone an incentive to spend and invest, because if they don't, their money will be worth less in the future. This increase in spending and investment can benefit the economy. However it may also lead to sub-optimal use of resources. * Inflation reduces...
Words: 9578 - Pages: 39
...hat is inflation? Inflation is an increase in prices for goods and services (What is Inflation?). What are the causes of inflation? Inflation has a variety of possible causes, but they are between the Keynesian and monetarist theories, ranging between demand-pull, cost-push, built-in inflation, and the quantity model. With demand-pull, inflation is caused by aggregate demand being more than supply. With cost-push, inflation is caused when manufacturers and businesses raise prices due to shortages in order to balance increases in production costs. With built-in inflation, inflation occurs due to prior increases in prices caused by demand-push or cost-pull. And with quantity, inflation is caused by having too much money in the economy (What Causes Inflation?). Is inflation desirable and what can be done to control inflation in a market economy? Inflation is desirable when it is low, because low inflation represents price stability which is perfect for productive planning and investment. There are many ways to control inflation in a market economy which varies between a Keynesian and monetarist approach. Using a Keynesian approach, the government would get involved by breaking up monopolies, regulating commodity prices, and controlling wage levels, while using a monetarist approach, the government would make changes in policy in order to control the amount of money in the economy (What Causes Inflation?). 2. What is the Consumer Price Index (CPI)? Consumer Price Index (CPI)...
Words: 306 - Pages: 2
...There is a great controversy over the question whether inflation promotes economic development. A group of economists including Keynes is of the opinion that inflation, in one form or the other, is a factor which helps economic growth. Usually, two main arguments have been advanced in support of the view. Firstly, it is argued that inflation tends to redistribute income and wealth. The redistributive effect of inflation is always in favour of profit-earning class, that is to say, it redistributes income always from the wage-recipient class towards the profit-recipient class in the community. As a result, the saving ratio will increase because the marginal propensity to save of the profit earners is generally high as against the high marginal propensity to consume of the wage- earners because of their near-subsistence level of income. This increased saving, then, can be profitably invested by the entrepreneurial class in productive channels, thereby raising the level of employment, output and income. Thus, the rationale of a policy of "development through inflation" is that inflation raises the ratio of profits to aggregate community income (or national income) and the process continues till profits increase to the extent that entrepreneurs can finance the higher rate of investment from the saving out of their profits without any further recourse to credit, i.e., monetary expansion. Keynes favours mild inflation on the ground that it tends to stimulate business optimism through...
Words: 1320 - Pages: 6
...Inflation: Various measures initiated by RBI for controlling inflation and their impact on Economy. Our dear friend is making our life more dearer, ‘Inflation’. In economic term, inflation is rise in general prices of goods and services in an economy which leads to erosion in the purchasing power of money i.e. each unit of currency buys fewer goods and services. Its effects on the economy are both positive and negative. The task of keeping inflation low or stable is usually given to monetary authorities. Generally these monetary authorities are central banks. ____________ The primary tool used by RBI to control inflation is monetary policy There are broadly two ways of controlling inflation in an economy 1 Fiscal measuresand 2 Monetary measures In economic term, inflation is rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. It leads to erosion in the purchasing power of money. Its effects on the economy are various and can be simultaneously positive and negative. Negative effects of inflation include decrease in the real value of money and other monetary items over time, uncertainty over future inflation which may discourage investments and savings and inflation is rapid enough, shortage of goods as consumers begin hoarding out concern that prices will increase in the future. Positive effects include ensuring central banks can...
Words: 1006 - Pages: 5
...Assignment 2: LASA 1: Inflation and Government Economic Policies http://www.bls.gov/cpi/ 1. What is inflation? What are the causes of inflation? Is inflation desirable and what can be done to control inflation in a market economy? Inflation is the phenomenon of continuously rising prices of commodities and factors of production. There is a rise in the general price level. There are two broad types of inflation: Demand –Pull Inflation and Cost-Push Inflation Demand-pull inflation occurs when the economy attempts to spend beyond its capacity to produce. It means it tries to reach a point outside its production possibilities curve. The firm cannot respond to this excess demand by expanding real output because all the resources have already been fully employed. The excess demand will push up the price of the fixed real output. Cost push Inflation is caused by increase in cost of production. These are independent of aggregate demand. In addition to these two, there are monetary and fiscal factors. The factors of various causes of Inflation are listed below. Inflation is desirable because it sets up a process by which wealth is redistributed in a manner that leaves it more equally divided. This redistribution also removes the social cost of Inflation. As the all the prices do not rise or fall at the same time or in the same proportion, this causes redistribution of income. Inflation helps in reducing consumption due to high prices. This results in compulsory...
Words: 1512 - Pages: 7
...RESEARCH PROPOSAL TOPIC: Rising inflation in Pakistan: Causes and Remedies SUBMITTED BY: NAILA ERUM NATIONAL DEFENCE UNIVERSITY, ISLAMABAD Rising inflation in Pakistan: Causes and Remedies Introduction Pakistan is currently facing unprecedented high Inflation. High inflation is contributing to increase in vulnerability and fall in real income of lower, middle and fixed income segments of the society. It is increasing uncertainty about future scenario of the business environment and instability of the financial system, erosion of business and investors’ confidence, slowing down of real economic activities, investment, economic growth and employment. Inflation is known as a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, there is a decline in the real value of money and purchasing power. Inflation is an indicator of a country’s macro economic stability and provides important insight on the state of the economy and the sound macroeconomic policies that govern it. A stable inflation not only gives a nurturing environment for economic growth, but also uplifts the poor and fixed income citizens who are the most vulnerable in society. A numerous supply side and demand side factors could be responsible for this surge in inflation. Inflation can be a result of shocks to the supply of certain food items and to world...
Words: 2805 - Pages: 12
...2). Inflation in Bangladesh and Policy Responses a). Present State and comparison with some developing countries b).Problems for entrepreneurs and consumers c). Policy prescriptions d). Some specific programs e).Concluding remarks Last date of submission:1st August, 2012 a). Present State and comparison (country wise Scenario) with some developing countries: According to the Bangladesh Bureau of Statistics (BBS), the national inflation in Bangladesh is 8.56% on point-to-point basis in June 2012; whereas the food-inflation hit 7.08% and the non-food inflation hit 11.72% in the same period. The rural inflation is 7.88% on point-to-point basis in June 2012; whereas rural food and non-food inflation knockout to 6.02% and 11.88% consecutively in the same period. The urban inflation is 10.29% on point-to-point basis in June 2012 as well as successive food and non-food inflation for the same period knockout to 9.57% and 11.28%. By observing above data it can say that national inflation is highly influenced by urban inflation and non-food inflation. Table 1: Inflation Rate (Pint To Pint) FY2011-12 (1995-96=100) | | Jul, 11 | Aug, 11 | Sep, 11 | Oct, 11 | Nov, 11 | Dec, 11 | Jan, 12 | Feb, 12 | Mar, 12 | Apr, 12 | May, 12 | Jun, 12 | National | General | 10.96 | 11.29 | 11.97 | 11.42 | 11.58 | 10.63 | 11.59 | 10.43 | 10.1 | 9.93 | 9.15 | 8.56 | | Food | 13.4 | 12.7 | 13.75 | 12.82 | 12.47 | 10.4 | 10.9 | 8.92 | 8.28 | 8.12 | 7.46 | 7.08 | |...
Words: 2195 - Pages: 9
...INFLATION Inflation can be generalized as the sudden or consistent of an upward movement in the general price of commodity. While the price of goods increases, the value of money goes down significantly causing the inflation effect. Therefore, inflation demonstrate, a reduction in the purchasing power per unit of money. Inflation can be categorized into various categories according to the rate of price rise of goods. Mild or creeping inflation occurs when prices rise2% to 3% in a year. This type of inflation does not cause harm to the economy, it's actually outlay benefits to the economic growth of the state. With the mild effect the prices are expected to rise and a results of that, increase in demand of products, as the consumer may prefer to buy the goods now to prevent future rise of prices. drives economic expansion. Random or walking Inflation This is a strong inflation that rises at a rate between 3-10% per annum. It causes harm to the economy and it should be controlled.it causes consumer to purchase more than they need to avoid future price increase. Hyper, runaway or Galloping Inflation occurs when inflation rises to a rate of more than 10% or greater, it completely undermine the economy stability of a country. Currency loses value so fast that business and employee income can't keep up with costs and prices also foreign investors tend to avoid investing in such a country leading to economic instability. Inflation can be caused two main causes; demand pull inflation;...
Words: 625 - Pages: 3
...|Acknowledgements | | | |2 |Introduction | | | |3 |Effects of inflation | | | |4 |Causes of inflation | | | |5 |Controlling inflation | | | |6 |Current situation of inflation in India | | | |7 |Extracts of the Reserve Bank of India’s document released on | | | | |July 28, 2008 | | | |8 |Measures to control inflation | | | |9 |Future inflation | | | |10 |10 nations with...
Words: 13670 - Pages: 55
...Summarization of the article The article I would like to discuss about is “The dollars and sense of inflation” for the Straits Times newspaper written by economics correspondent Aaron Low. In the article, the author discusses about the inflation report in Singapore which came with two indicators. The first was a breakdown of how inflation had affected the various income groups. According to the Department of Statistics (DOS), the top 20 percent of income earners face with a 5.7 per cent inflation rate due to the rising costs of private transport and property rental while the bottom 20 per cent saw prices rise by only 4.7 per cent. Another new indicator by DOS excluded the costs of housing rents. DOS reasoned that since 87.2 per cent of Singaporeans own their own housing, the new indicator was complied “as an additional indicator to track households’ actual expenditures. In this indicator, the inflation rate for the lowest 20 per cent was just 2.2 per cent less than half the rate that the top 20 per cent experienced. The writer mentioned that inflation is just half of the equation calculating the impact of rising prices on the welfare of people and how fast incomes have raised equally matters. The writer argues that the lower income groups may have been hit with lower inflation but their incomes also rise by less than what the top percent enjoys. The writer mentioned that another reason not to worry too much about a rise in the consumer price index is that a large part of...
Words: 1476 - Pages: 6
...PAPER SERIES CAN INFLATION TARGETING WORK IN EMERGING MARKET COUNTRIES? Frederic S. Mishkin Working Paper 10646 http://www.nber.org/papers/w10646 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2004 For presentation in a conference in honor of Guillermo Calvo, held on April 15 and 16, 2004 at the International Monetary Fund in Washington, DC. The views expressed in this paper are exclusively those of the author and not those of Columbia University or the National Bureau of Economic Research.The views expressed herein are those of the author(s) and not necessarily those of the National Bureau of Economic Research. ©2004 by Frederic S. Mishkin. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Can Inflation Targeting Work in Emerging Market Countries? Frederic S. Mishkin NBER Working Paper No. 10646 July 2004 JEL No. E5, F3 ABSTRACT This paper explores issues in emerging market countries to make inflation targeting work for them. It starts by outlining why emerging market economies are so different from advanced economies and then discuss why developing strong fiscal, financial and monetary institutions is so critical to the success of inflation targeting in emerging market countries. Then it discusses two emerging market countries which illustrate what it takes to make inflation targeting work well...
Words: 10638 - Pages: 43
...INFLATION Economists use the term “inflation” to denote an ongoing rise in the general level of prices quoted in units of money. The magnitude of inflation ,the inflation rate is usually reported as the annualized percentage growth of some broad index of money prices. With U.S. dollar prices rising, a one-dollar bill buys less each year. Inflation thus means an ongoing fall in the overall purchasing power of the monetary unit. Inflation rates vary from year to year and from currency to currency. Since 1950, the U.S. dollar inflation rate, as measured by the December-to-December change in the U.S. Consumer Price Index (CPI), has ranged from a low of −0.7 percent (1954) to a high of 13.3 percent (1979). Since 1991, the rate has stayed between 1.6 percent and 3.3 percent per year. Since 1950 at least eighteen countries have experienced episodes of hyperinflation, in which the CPI inflation rate has soared above 50 percent per month. In recent years, Japan has experienced negative inflation, or “deflation,” of around 1 percent per year, as measured by the Japanese CPI. Central banks in most countries today profess concern with keeping inflation low but positive. Some specify a target range for the inflation rate, typically 13 percent. Although economies on silver and gold standards sometimes experienced inflation, inflation rates in such economies seldom exceeded 2 percent per year, and the overall experience over the centuries was inflation of close to zero. Economies on paper-money...
Words: 445 - Pages: 2
...Inflation and Government Economic Policies Inflation is a measure of how prices have changed over time. If prices are changing due to inflation, each dollar spent will buy less. In order to answer the questions below, go to the following website: http://www.bls.gov/cpi/ Questions: 1. What is inflation? What are the causes of inflation? Is inflation desirable and what can be done to control inflation in a market economy? 2. What is the Consumer Price Index (CPI)? How has the CPI behaved since the year 2000? What have been the causes of these changes? In your response, include a graph of the CPI for this period and cite your source. 3. What is the Producer Price Index (PPI)? How has the PPI behaved since the year 2000? What have been the causes of these changes? In your response, include a graph of the PPI for this period and cite your source. 4. What is the Consumer Expenditure Survey (CE)? How has the Survey behaved since the year 2000? What have been the causes of these changes? In your response, include a graph of the CE for this period and cite your source. 5. What do the measures above tell us about consumer behavior? Have incomes changed enough to offset the inflation since 2000? What can we predict about future inflation? 6. What are the implications of these measures for government economic policies? Explained inflation. Identified the causes of inflation. Explained whether or not inflation is desirable...
Words: 473 - Pages: 2
...Inflation rate The overall general upward price movement of goods and services in an economy (often caused by a increase in the supply of money), usually as measured by the Consumer Price Index and the Producer Price Index. Over time, as the cost of goods and services increase, the value of a dollar is going to fall because a person won't be able to purchase as much with that dollar as he/she previously could. While the annual rate of inflation has fluctuated greatly over the last half century, ranging from nearly zero inflation to 23% inflation, the Fed actively tries to maintain a specific rate of inflation, which is usually 2-3% but can vary depending on circumstances. Country | 2000 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | Bangladesh | 5.8 | 3.1 | 5.6 | 6 | 7 | 7.2 | 9.1 | 8.9 | 5.4 | 8.1 | 10.7 | 7.41 | 7.38 | Country | 2000 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | UK | 2.4 | 2.1 | 1.4 | 1.4 | 2.1 | 3 | 2.3 | 3.6 | 2.2 | 3.3 | 4.5 | 2.8 | 2.7 | GDP (Real growth RATE) The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean...
Words: 532 - Pages: 3
