ECONOMICS NOTES

ECONOMICS NOTES 

Inflation

Definition: A rise in the general level of price in an economy. That is sustained over time.

• The opposite of Inflation in ‘deflation’.
• Inflation, in general, is just a price rise.When the general level of prices is falling over a period of time it is called deflation.
• The rate of inflation is measured on the basis of price indices which are of two kind WPI & CPI
• WPI - Wholesale Price Index
• CPI - Consumer price Index

Rate of inflation (Year x)

• In the index, the total weight is taken as 100 at particular year of the past i.e. Base year (Year of reference)
• Inflation is measured ‘point to point’. It means that the reference dates for the annual inflation are January to January of two consecutive years. This is similar for even weekly inflation.

Types of Inflation: Broadly there are 2 types of inflation.

(a) Demand - Pull Inflation:

• A mismatch between demand & supply pulls up the price.
• Either demand increases over the same level of supply or the supply decreases the same level of demand.
• This is Keynesian idea.

(b) Cost - Push Inflation:-

• An increase factor input costs (i.e. wage & raw materials) push up the prices.
• A price rise which is the result of the increase in the production cost is cost - push inflation.

A measure of check inflation:-

(1) Supply side:            

• Govt may import.
• Govt may increase production.
• Govt may improve storage. Transportation, hoarding etc

(2) Cost side: 

• Govt may cut down production cost by giving tax breaks, cuts in duties etc.
• By adopting Better production process, technological Innovation etc.
• Increasing Income of people also helps in checking inflation.

(3) Other steps:           

•  Tighter monetary policies can be introduced by RBI, this might help in a short run.
• Increasing production with the help of best production practices is a long term solution.

Other types of inflation: In General there are 3 Broad Categories i.e.

(i) Low inflation:- 

•  It is slow & predictable.
•  Takes place in a longer period.
•  The range of increase is usually in single digit.
•  It is also called CREEPING INFLATION

(ii) Galloping Inflation:- 

• It is very high inflation
• Range of increase is usually in double digit or triple digit 
• It is also known as hopping inflation, jumping inflation & Running Runaway inflation. 

(iii) Hyper-Inflation:-

• This type of inflation is large and Accelerating. 
• (This might have annual rates in Millions or even Trillion.
• (Range of increase is very large but increase takes place in a very short span of time. The price shoots up overnight.

Over variants of inflation:-  
(i) Bottleneck inflation:-

• This inflation takes place when supply falls drastically & the demand remains at the same level. 
• Such situation arises due to supply ride accidents, hazards or Mismanagement.
• It is also known as ‘structural Inflation’
• It can be put Under ‘demand-pull inflation

(ii) Core inflation:-

• This nomenclature is based on the inclusion or Exclusion of the good & services while calculating inflation.  
• In India, it was 1st time used in the financial year 2001-02. 
• In India, it means inflation of Manufactured goods.