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    Chapter 12 Inflation

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    Chapter 12 Inflation

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    13 views15 pages

    Chapter 12 Inflation

    Uploaded by

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    © All Rights Reserved
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    of 15

    INFLATION

    MEANING,
    MEASURES AND
    EFFECTS
     Persistent, high and continuous Inflation
    emerged during the post Second world war
    period.

     The problem of inflation became even more


    serious since early 1970s.

     Inflation has been a problem for both


    developing as well as developed economies.

     Inflation often refers to as a Continuous


    rise in the general price Level of a country.
    DEFINITION
     Inflation means a continuous and significant
    increase in the general price level.
     According to A.C.Pigou, Inflation exists when
    money income is expanding more than in
    proportion to increase in earning activity.
     According to Coulbourn, “Inflation is a situation
    of too much money chasing too few goods”.
     Crowther defines Inflation as “a state in which
    the value of Money is falling, and pries are
    increasing.
     According to the Modern Economists, Inflation
    means a persistent and appreciable increase in
    the general price level
    PERSISTENT AND APPRECIABLE RISE IN PRICE LEVEL
     Persistent Means Price level continues to
    rise and does not respond to Anti-
    inflationary policies.

     Appreciable is more ambiguous because it


    does not specify as to hat rate of Inflation /
    increase in price level is considered
    appreciable or considerable.

     Whether 5 %, 10%, 30% per month, per


    annum ?
    WHAT RATE OF PRICE RISE IS INFLATION ?
     A persistent, prolonged, sustained, considerable and
    appreciable rise in general price level is inflation.
     Samuelson-Nordhaus said that “Any rise in the general
    price leve over and above the base year level is inflation.

    What is a Desirable Rate of Inflation?


    A moderate rate of Inflation is considered Desirable for
    three reasons:
    1. A moderate rate of Inflation keeps the Economic outlook optimistic,
    promotes economic activities and prevents stagnation.
    2. It is helpful in mobilization of resources by increasing overall rate of
    savings and investment.
    3. Increase in general price level seems to be progressive and dynamic
    in an economy.
    WHAT IS THIS MODERATE RATE OF INFLATION?
     This cannot be answered in specific terms .

     Desirability of Inflation depends upon the need


    and absorption capacity of a country which is
    subject to variation from time to time.

     Based on past experience, Harry Johnson , 1-2


    % inflation in Developed countries and 4-6 %
    inflation in LDCs can be considered appropriate.

     According to Chakravarthy Committee, set up


    by the RBI, 4% inflation in India is socially
    desirable and conducive to economic growth.
    PRICE RISE IN EXCESS OF MODERATE RATE
    MAY NOT ALWAYS BE INFLATIONARY
     Price rise in excess of 2-3 % in Developed countries and
    4-5 % in developing countries may be considered
    undesirable or problematic inflation.

     Price Rise on account of the following factors cannot be


    considered as Inflationary:
    1. Price rise due to change in composition of GDP : High
    industrial goods replacing low farm goods
    2. Price rise due to qualitative improvement in products
    across the board
    3. Price rise due to change in Price Indexing system.
    4. Recovery in price after recession.
    TYPES OF INFLATION
     Moderate Inflation : When the general price level
    rises at a moderate rate over a long period of time. It
    is predictable and generally acceptable.
     Galloping Inflation : Inflation that proceeds at an
    exceptionally high rate. Inflation in double digit or
    triple digit range is called Galloping Inflation. In the
    post 1st world war inflation in Germany, is an example.
     Hyper Inflation: Inflation exceeding 50% per month.
    Here paper currency becomes worthless. Germany
    suffered from Hyper inflation in 1922-23.
     Open Inflation : When there is no control on the
    rising prices and prices are free to find their own level.
     Suppressed Inflation: When price rise takes place at
    a lower than potential rate .
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