INFLATION

WHAT IS INFLATION ?

Common Man: Rise in price Economics: Slow and stead rise in price o!er a period o" time# $o%r mone won&t '% as m%c( toda as it wo%ld esterda

)EFINITIONS

Monetar in"lation: Increase in t(e mone s%ppl *rice in"lation: Rise in t(e price le!el

)EFINITIONS

MONE$ S+**L$ ,Monetar In"lationo *ro" .emmerer: Too much currency in relation to the physical volume of business o *ro" /re0or : Abnormal increase in the quantity of purchasing power o *ro" /olden Wiser: Volume of money actively bidding for goods and services increase faster then the available supply of goods o Milton Friedman: Inflation is always everywhere a monetary phenomenon. Produced only by a rapid increase in the quantity of money than output. o Co%l'orne: Too much money chasing too few goods o *ro" Hawtre : Too much currency

)EFINITIONS
JR Hicks: Our present trouble is not of monetary character

*RICE INFLATION : Inflation is defined as rise in the general level of prices of goods and services in an economy over a period of time

)EFINITIONS

o *ro" Crowt(er: State in which the value of money is falling prices are rising o Sam%elson: Inflation occurs when general level prices and costs are rising Increase in cost will lead to increase in price o 1M .e nes: Increase in price after the level of full employment is reached is true inflation

o Edward S(apiro: Inflation is a persistent and appreciable rise in the general level of prices o /ardner Ac2le : A persistent and appreciable rise in the general level of o 3roman: Inflation is a continuing increase in general price level prices

T$*ES OF INFLATION
TYPES OF INFLATION %ASIS OF SPEE$ TI#E PE!IO$ SCOPE OF CO E!A"E "O E!N#ENT !EACTION %ASIS OF IN$&CE#ENT ACCO!$IN" TO CA&SE

3ASIS OF S*EE)
CREE*IN/ INFLATION4 RE) LINE WAL.IN/ INFLATION4 /REEN LINE R+NNIN/ INFLATION4 3L+E LINE /ALLO*IN/5H$*ER INFLATION4 $ELLOW LINE

HYPER INFLATION
T(e 0eneral price le!el wit(in an econom rapidl increases as t(e c%rrenc 6%ic2l loses real !al%e. o T(e central 'an2 prints mone in lar0er denominations as t(e smaller denomination notes 'ecome wort(less o *eople lac2 con"idence in its a'ilit 7 to retain its !al%e

IN GERMANY
*rintin0 'an2notes Ta8in0 people more (ea!il F%nded war entirel ' 'orrowin0 E""ects: World war 9

IN :IM3A3WE
o !estruction of productive capacity in civil war o "onfiscation of private farms o #and reforms intended to redistribute land o $armers had no e%perience or training in farming. &ffects Sharp drop in food production The ban'ing sector collapsed farmers unable to obtain loans for capital development. $ood output capacity fell unemployment rose.

ACCOR)IN/ TO TIME *ERIO)

*eace time in"lation ,)e!elopmentWar time in"lation ,Weapons "or war*ost war in"lation ,Re(a'ilitation-

ACCOR)IN/ TO SCO*E AN) CO;ERA/E

Compre(ensi!e in"lation ,All incl%si!eSporadic in"lation ,Few commodities(

ACCOR)IN/ TO /O;ERNMENT REACTION

Open in"lation ,A%tomatic ad<%stment or Mar2et Mec(anismS%ppressed In"lation ,/o!ernment inter"eres-

ON THE 3ASIS OF IN)+CMENT

Wa0e Ind%ced In"lation *ro"it Ind%ced In"lation )e"icit Ind%ced In"lation C%rrenc In"lation Credit In"lation Sectoral In"lation Internationall /enerated In"lation

ACCOR)IN/ TO CA+SE
T(eories o" In"lation:
Classical T(eor : 3 Ir!in0 Fis(er: ,W(en t(e s%ppl o" mone increases Neo classical T(eor : 3 Cam'rid0e economists ,Increase in t(e demand "or mone .e nesian T(eor : Ca%sed ' an e8cess o" e""ecti!e )emand#

MO)ERN THEORIES OF INFLATION

It is a s nt(esis o" classical and .e nesian t(eories# In"lation is ca%sed ' demand and s%ppl side "actors# )emand *%ll in"lation It occ%rs w(en a00re0ate demand ,Spendin0- is in e8cess o" a00re0ate s%ppl 'eca%se o" monetar and real "actors. Increase in Mone S%ppl o )overnment Spending o "ut in ta% rates o "redit creation Too m%c( mone c(asin0 too "ew 0oods#

)emand *%ll in"lation

MO)ERN THEORIES
Cost p%s( In"lation or S%ppl side In"lation *hen wages or other costs rise and those costs are passed along in the form of higher prices. Prices are pushed by rising costs. It emer0es in t(e econom in t(e a'sence o" e8cess demand d%e to press%re o" !ario%s "actors w(ic( s(i"t t(e a00re0ate s%ppl "%nction# Three common elements: o Wa0e p%s( d%e to %nion monopol power# o *ro"it p%s( d%e to '%siness monopol power o Material p%s( d%e to increasin0 raw materials

Cost p%s( in"lation

H+MAN EMOTIONS
*rice rise: +n(app

*rice low: A lot o" (app people

'uotes
(Inflation is brin)in) us true *emocracy+ For the first time in history, lu-uries an* necessities are sellin) at the same price. Robert Orben (Inflation is the one form of ta-ation that can be impose* /ithout le)islation. Milton Friedman (I continue to belie0e that the people ha0e a lo0e1hate relationship /ith inflation+ They hate inflation but lo0e e0erythin) that causes it. William E !imon

THAN. $O+