"Inflation is an upward movement in the average level of prices. Its opposite is deflation, a downward movement in the average level of prices. The boundary between inflation and deflation is price stability."
Inflation is caused by a combination of four factors:
Factor 1 -> The supply of money goes up.
Factor 2 -> The supply of other goods goes down.
Factor 3 -> Demand for money goes down.
Factor 4 - >Demand for other goods goes up.
Inflation result from decrease in Aggregate Supply (Total value of goods and services produced in country). When supply gets decrease, cost gets increased.
Aggregate Supply gets decrease becuase of increase in production cost (due to increase in cost of wages, raw materials etc).
This scenario where Supply is less i.e Demand is more than Potential Output (K), which is
nothing but Cost Push Inflation.
Where Inflation cuased due to increased in Aggreagate Demand known as Demand Pull Inflation.
Many people ask question like "Why Not Just Print More Money? " to avoid inflation and to get more wealth.
Consider the example here to answer above question.
Consider the case of the United States. Let’s suppose the United States decides to increase the money supply by mailing every man, woman, and child an envelope full of money. What would people do with that money? Some of that money will be saved, some might go toward paying off debt like mortgages and credit cards, but most of it will be spent. I know the first thing I’d do is go down to Walmart and buy an Xbox or PlayStation 2 .
I’m not going to be the only one who runs out to buy an Xbox. This presents a problem for Walmart. Do they keep their prices the same and not have enough Xboxes to sell to everyone who wants one, or do they raise their prices? The obvious decision would be to raise their prices. If Walmart (along with everyone else) decides to raise their prices right away, we’d have massive inflation, and our money is now devalued.
Since we’re trying to argue this won’t happen, we’ll suppose that Walmart and the other retailers don’t increase the price of Xboxes. For the price of Xboxes to hold steady, the supply of Xboxes will have to meet this added demand. If there are shortages, certainly the price will rise, as consumers who are denied an Xbox will offer to pay a price well in excess of what Walmart was formerly charging.
For the retail price of the Xbox not to rise, we will need the producer of the Xbox, Microsoft, to increase production to satisfy this increased demand. Certainly this will not be technically possible in some industries, as there are capacity constraints like machine and wages. Same time wages rate will increase, for more production more labour and over time also needed which increase production cost.
We’ve seen why an increase in the supply of money causes prices to rise. If the supply of goods increased enough, factor 1 and 2 (mentioned above) could balance each other out and we could avoid inflation.
Suppliers would produce more goods if wage rates and the price of their inputs wouldn’t increase. However, we’ve seen they will increase. In fact, it’s likely that they’ll increase to such a level where it will be optimal for the firm to produce the amount they would have if the money supply had not increased.
This may again cuase inflation here..
Subscribe to:
Post Comments (Atom)
3 comments:
A very informative post indeed...
The link below has further information on the economic policies a government could resort to, to control inflation
http://www.tutor2u.net/economics/
content/topics/inflation/
controlling_inflation.htm
Good Article about the inflation. What u said is right one of the reason the inflation occurs when the supply of money goes high? when u see two months back NYSE has bought 5% of stock in NSE. This clearly says there lots of money coming from FII. Following that Gold man sachs and JP Morgan has bought 5 % stock in NSE and 5% stock in SBI too. As a result the market has sudden flow of money from FII. so the inflation has happened. In addition if u see in a normal situation, there are lots of money flowing in the market but without any demand.Like now a days u can get a loan from ICICI car loans with a less interest for buying a Merc or Skoda. This is one situation. so these are the reasons why inflation is occuring. But the Prediction varies from economist to economist. One month ago RBI announced that the inflation is a Demand pull inflation. but some economist say it is cost pull inflation. At last one funny thing is the recent budget has not addressed any inflation issues. Hope so the inflation rate should not rise. but the economic survey says the inflation will keep on rising.
THIS IS INDIA WE HAVE GOOD GDP,HIGHPOVERTY IN ANOTHER END AND HISTORY INFLATION RATE IN ANOTHER END.
SEE THAT IS WHY ECONOMISTS SAY INDIAN ECONOMY IS INTERESTING TO RESEARCH.
According to me, in last few months Supply of money is definately goes up. And also Demand for services also goes up.
Like when person having money, he go to more n more laxarious things. When consumer person having money, them supplier definately ask for more money. And here cost gets increased. e.g. real estates market. But here i dont understand the inflation in Retailer's market. Where Supplier are more than Demander's. still there is inflation in grocery goods like Wheat, Onion. Where big retailers like Subhiksha, RIL, Godrej Bazar try to sell product at min cost and caprture the consumers. Then what type of Inflation this is?
Post a Comment