INFLATION: Problems and Policies

Published by CA.Sachin Kushwaha on

INFLATION: Problems and Policies(inflation notes class 11)


Inflation is the chapter no.16 from the book of class 11th development  of Indian economy!

Inflation– In the common wordings we can say Inflation is a process of increasing general prices. When there is a constant increase of price level in an economy which results a decrease in the purchasing power of money. It is not compulsory, Inflation only leads to increase in the value of goods but it decreases too.

Inflation Rate-A measure in which we may measure price inflation is called inflation rate.

Deflation- it is just the opposite term of inflation which leads a decrement in general price level in the economy.

Indicators of Inflation

  • Index Number of Price

 

  • Wholesale Price Index(WPI)

Wholesale Price Index(WPI) measures changes in the price level of market on weely basis of a consumer who purchased goods and services.

 

  • Consumer Price Index(CPI)

consumer price index (CPI) measures changes in the price level of market on monthly basis of goods and services purchased by households. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected monthly.

 

  • Gross Domestic Product(GDP)

Types of Inflation

  • Demand pull Inflation
  • Cost push inflation

Demand Pull Inflation: Demand-pull inflation arises when there is an excess of demand for goods over their supply. When there is persistent increase in demand and supply does not increase proportionately then prices tend to rise.

Causes of demand pull Inflation-

  • Increase in Govt. expenditure
  • Increase in rate of investment.
  • Increase supply of money.
  • Rise in Population.
  • Rise of black money.
  • Increase in population.
  • Erratic Agricultural growth.
  • Deficit Financing.
  • Credit Expansion.

Cost push inflation: Cost push inflation occurs when rise in price is due to rise in the cost of production. In this type of inflation, demand factor plays a minor and supply factor plays an important role. Once, this type of inflation sets in one industry, it spreads to all other industries of an economy.

Main causes of cost-push inflation

  • Higher wage rate
  • High rate of oil
  • Fall in production
  • Higher profit margin
  • Higher taxes
  • Fall in the availability of basic inputs
  • Administered higher prices of inputs.
  • Agriculture price Policy of Govt.
  • Increase in the rates of Indirect taxes.

 

Causes of inflation

1.) Demand factors

a). Growth of population

  1. Rise in employment and income
  2. Increase in pace of urbanization.

2.) Supply factors

  1. Irregular agricultural supply
  2. Hoarding of essential goods.
  3. Rise in administered prices.
  4. Agricultural price policy
  5. Rising prices of imports
  6. Inadequate growth of industrial production.

3.) Monetary and fiscal factors

  1. Rising levels of government expenditure.
  2. Deficit financing.

Effect of inflation (Problems)

  1. Inflation is one of the biggest obstacle on the path of growth.
  2. It Decreases Purchasing Power
  3. It increases poverty
  4. Decreases Standard of living
  5. Increases black marketing
  6. Policy measures to control inflation
  • Monetary Policy
  • Control on public expenditure
  • Increases in rate of tax
  • Decrease in the supply of credit
  • By Raising cash reserve ratio and statutory liquidity ratio and by Open market operations
  • Increase in Bank Rate
  • Open market Operation( selling of eligible security by RBI)
  • Fiscal Policy
  • A check on the public expenditure
  • Increase in taxes
  • Public borrowings
  • Other Policy
  • Controlling Money wages
  • Increase import

 

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INFLATION: Problems and Policies

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