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 . Scanned with CamScanner Scanned with CamScanner Scanned with CamScanner Scanned with CamScanner Scanned with CamScanner Scanned with CamScanner Scanned with CamScanner