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Notes On Economics

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Published in: Economics
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I may give most interesting topic of economic is inflation its effect on economy.

Akash P / Allahabad

2 years of teaching experience

Qualification: M.Com (University Of Allahabad , Allahabad - 2020)

Teaches: Accountancy, Business Organisation, Business Studies, Commerce Subjects, Economics, Statistics, B.Com Tuition, Financial Management, Taxation

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  1. What is Inflation? Meaning Inflation refers to a continuous rise in general price level which reduces the value of money or purchasing power over a period of time. Inflation Statistically speaking, inflation is measured in terms of a percentage rise in the price index (i .e. percentage rate per unittime) usuallyfor an annum (a year) or for 30-31 days (a month). •Definition of Inflation According to Crowther, "Inflation is a state in which the value of money is failing i.e. the prices are rising." According to Coulbourn, "Inflation is too much of money chasing too few goods." •Features of Inflation The characteristics or features of inflation are as follows :- 2. 3. 4. 5. 6. 7. 8. 9. Inflation involves a process of the persistent rise in prices. It involves risi ng trend in price level. Inflation isa state of disequilibrium. Inflation is scarcity oriented. Inflation is dynam ic in nature. Inflationary price rise is persistent and irreversible. Inflation is caused by excess dem and in relation to supply of all types of goods and services. Inflation is a purely monetary phenomenon. Inflation is a post full employment phenomenon. Inflation is a long-term process.
  2. •Terms Related to Inflation The importantterms related to inflation are as follows :- 1. 2. 3. 4. 5. Deflation : Deflation is a condition of falling prices. It is just the opposite of inflation. In deflation, the value of money goes up and prices fall down. Deflation brings a depression phase of business in the economy. Disinflation : Disinflation refers to lowering of prices through anti-inflationary m easures withoutcausing unem ployment and reduction in output. Reflation : Reflation is a situation of rising prices intentionally adopted to ease the depression phase of the economy. In reflation, along with rising prices, the employment, output and income also increase until the economy reaches the stage of full employment. Staqflation : Paul Samuelson describes Stagflation as the paradox of rising prices with increasing rate of unemployment. Stagnation : Stagnation in the rate of economic growth which may be a slow or no economic growth at all. 6. Statflation : The term 'Statflation'was coined by Dr. P.R. Brahmananda to describe the inflationary situation of India. According to Brahmananda, Rising prices in the middle of a recession is known as Statflation. Types of Inflation This article briefly explains different types of inflation in economics with examples, wherever necessary. It is also supplemented with a hierarchical diagram to help readers sum marize and quickly assim ilate their list. Here are differenttypes of inflation depicted and listed below. Of Image credits O Gaurav Akrani. The list is as follows: 10. Coverage or scope: a. Com prehensive or Economy-Wide Inflation, and b. Sporadic Inflation. 11. Time of occurrence: a. War-Time Inflation, b. Post-War Inflation, and c. Peace-Time Inflation. 12. Government's reaction or control: a. Open Inflation, and
  3. b. Suppressed or Repressed Inflation. 13. Rising prices: a. b. c. d. e. f. g. Creeping, Mild or Low Inflation, Chronic or Secular Inflation, Walking or Trotting Inflation, Moderate Inflation, Running Inflation, Galloping or Jumping Inflation, and Hyperinflation. 14. Different causes: a. b. c. d. e. f. g. h. j. k. ii. m. n. o. p. q. Deficit Inflation, Credit Inflation, Scarcity Inflation, Profitlnflation, Pricing Power, Administered Price or Oligopolistic Inflation, Tax Inflation, Wage Inflation, Build-ln Inflation, Development Inflation, Fiscal Inflation, Population Inflation, Foreign Trade Induced Inflation: Export-Boom Inflation, and 1m port Price-Hike Inflation. Export-Boom Inflation, 1m port Price-Hike Inflation, Sectoral Inflation, Dem and-Pull or Excess Demand Inflation, and Cost-Push (Supply-side) Inflation. 15. Expectation or predictability: a. Anticipated or Expected Inflation, and b. Unanticipated or Unexpected Inflation. Now let's discuss each type of inflation one by one. The types of inflation based on coverage or scope: base O' Image credits O Gaurav Akrani. 7. Comprehensive Inflation: When the prices of all commodities rise in the entire economy, it is known as Com prehensive Inflation. Econom y-Wide Inflation is its another name.
  4. 8. Sporadic Inflation: Time when prices of only a few commodities in some regions (areas) rise, it is called Sporadic Inflation. It is sectional in nature. For example, increase in food prices due to bad monsoon (winds that bring seasonal rains in India). The types of inflation based on the time or period of occurrence: to it rn.vet •ttr•• than WA tip tte• tte• •O tis•e. it 1. 2. 3. Image credits O Gaurav Akrani. War-Time Inflation: Inflation that takes place during the period of a warlike situation is Wartime Inflation. During war, scant productive resources are all diverted and prioritized to manufacture military goods and equipm ents. Overall it results in very limited supply and extreme shortage (low availability) of resources (raw materials) to produce essential com modities. Production and supply of needed goods slow down and can no longer meet the soaring demand from people. Consequently, prices of necessary goods keep on rising in the market, resulting in Wartime Inflation. Post-War Inflation: Inflation that takes place soon after a war is a Post-War Inflation. After the war, governm ent controls are relaxed, resulting in a faster hike in prices than what experienced during the war. Peace-Time Inflation: When prices rise during the peace period, it is known as Peacetime Inflation. It is due to enormous governmentexpenditure or spending on capital projects of a long gestation (development) time. The types of inflation based on the governm ent's reaction or its degree of control: net •tile Vices its Image credits O Gaurav Akrani. 1. 2. Open Inflation: When governmentdoes not attemptto restrict inflation, it is known as an Open Inflation. In a free-market economy, where prices are allowed to take its course, Open Inflation occurs. Suppressed Inflation: When government prevents the price rise through price controls, rationing, etc., it is known as Suppressed Inflation. Repressed Inflation is its another name. However, when government removes its controls, it becomes Open Inflation. It then leads to corruption, black m arketing , artificial scarcity, etc. The types of inflation based on the rising prices:
  5. 1. 2. 3. 4. 5. 6. 7. Image credits O Gaurav Akrani. Creeping Inflation: When prices are gently rising, it is referred as Creeping Inflation. Itis the mildestform of inflation and also known asa Mild Inflation or Low Inflation. According to R.P. Kent, when prices rise by not more than (i.e. Up to) 3% per annum (year), it is called Creeping Inflation. Chronic Inflation: If creeping inflation persists (continues to increase) fora longer period, then it is often called as Chronic or Secular Inflation. Chronic-Creeping Inflation can be either Continuous (which remains consistent without any downward movement) or Interm ittent (which occurs at regular intervals). It is named chronic because if an inflation rate continues to grow for a longer period without any downturn, then it possibly leads to Hyperinflation. Walking Inflation: When the rate of rising prices is more than the Creeping Inflation, it is known as Walking Inflation. Trotting Inflation is its another name. When prices rise by more th an 3%, but less than 1 00/0 per annum (i.e., between 3%, and 10% per annum), it is called as Walking Inflation. According to some economists, we must take Walking Inflation seriously as it gives a cautionary signal for the occurrence of Running inflation. Furthermore, if, not checked in due time, it can eventually result in Galloping Inflation. Moderate Inflation: Prof. Sam uelson clubbed together concept of Creeping and Walking inflation into Moderate Inflation. It happens when prices rise by less than 10% per annum (single digitinflation rate). According to him , it is a stable inflation and nota serious economic problem. Running Inflation: A rapid acceleration in the rate of rising prices is called Running Inflation. It occurs when prices rise by more than 1 00/0 in a year. Though economists have not suggested a fixed range for measuring running inflation, we may consider a price increase between 10% to 20% per annum (double -digit inflation rate) as a Running Inflation. Galloping Inflation: According to Prof. Samuelson, if prices rise by dual or triple digitinflation rates like 30% or 400% or 999% yearly, then the situation can be termed as Galloping Inflation. When prices rise by more than 20%, but less than 1000% per annum (i.e. Between 20% to 1000% per annum) , Galloping Inflation occurs. Jum ping Inflation is its another name. India has been witnessing it from second five -year plan period. Hyperinflation refers to a situation where the prices rise at an alarming high rate. The prices rise so fast that it becomes very difficultto measure its magnitude. However, in quantitative term s, when prices rise above 1000% per annum (quadruple or four-digit inflation rate), it is termed as Hyperinflation. During a worst-case scenario of hyperinflation, the value of the national currency (m oney) of an affected country reduces almost to zero. Paper money becomes worthless, and people start trading either in gold and silver or som etimes even use the old barter system of com merce. Two worst examples of hyperinflation reco rded in the world history are of those experienced by Hungary in the year 1 946 and Zimbabwe during 2004-2009 under Robert Mugabe's regime. Following is a conceptual graph on Creeping, Walking, Running, Galloping, Hyperinflation, and Moderate Inflation.
  6. 1. 2. 3. 4. 5. 6. 7. 8. 9 Image credits O Gaurav Akrani. In the above figure, X-axis represents the time in years or annum. Y-axis im plies percentage (%) increase or rise in price. OA is a Creeping Inflation from Oto 3%. AB is a Walking Inflation from 3 to 10%. BC is a Running Inflation from 10 to 20%. CD is a Galloping Inflation from 20 to 1000%. DE is a Hyperinflation from 1000% and above. 0B is an addition of OA and AB. It is a Moderate Inflation. Note: Graph is not drawn to scale. It is roughly made only to get an understanding of how the actual figure will appear if plotted to scale. The types of inflation based on differentor miscellaneous causes: Image credits O Gaurav Akrani. 1. 2. 3. 4. 5. Deficit Inflation takes place due to deficitfinancing. Credit Inflation occurs due to excessive bank credit or the money supply in the econom y. Scarcity Inflation occurs due to hoarding. Hoarding is an excess accumulation of necessary com modities by unscrupulous traders and black marketers. It is practiced to create an artificial shortage of essential goods like food grains, kerosene, etc. With an intention to sell them only at higher pricesto make huge profits during Scarcity Inflation. Though hoarding is an unfair trade practice and a punishable criminal offense still, some crooked merchants often get themselves engaged in it. Profit Inflation: When entrepreneurs are interested in boosting their profit margins, prices rise. Pricing Power Inflation: Usually, it is referred as Administered Price Inflation. It occurs when industries and business houses increase the price of their goods and services with an objective to boost their profit margins. It does not occur during a financial crisis and econom ic depression, and not seen when there is a downturn in the economy. As Oligopolies have an ability to set prices of their goods and services, it is also called as an Oligopolistic Inflation.
  7. 6. 7. 8. 9. 10. 11. 12. Tax Inflation: Due to the rising indirecttaxes, sellers charge high price to the consumers. Wage Inflation: If the rise in wages in not accompanied by an increase in output, prices rise. Build-In Inflation: Vicious cycle of Build-ln Inflation gets induced by adaptive expectations of workers or em ployees who try to keep their wages or salaries high in anticipation of inflation. Em ployers and Organizations raise the prices of their respective goods and services in anticipation of the workers or em ployees' demands. This overall forms a vicious cycle of rising wages followed by an increase in general prices of commodities. If this cycle continues, then it keeps on accumulating inflation ateach round turn and thereby results in a Build-ln Inflation. Development Inflation: During the process of the developmentof an economy, income increases, causing an increase in demand and rise in prices. Fiscal Inflation: It occurs due to excess government expenditure or spending when there isa budget deficit. Population Inflation: Prices rise due to a rapid increase in population. Foreign Trade Induced Inflation: It has two categories, viz., a. Export-Boom Inflation, and b. Import Price-Hike Inflation. 13. Export-Boom Inflation: Considerable increase in exports may cause a shortage at home (within exporting country) and results in price rise (within exporting country). 14. Import Price-Hike Inflation: If a country imports goods from a foreign country and the prices of these goods increases due to inflation abroad, then the prices of dom estic products using imported goods also rise. For example, India imports oil from Iran at $100 per barrel. Oil prices in the international marketsuddenly increase to $150 per barrel. Now India to continue its oil imports from Iran has to pay $50 more per barrel to get the same amount of crude oil. When the imported expensive oil reaches India, the Indian consumers also have to pay more and bear the economic burden. Manufacturing and transportation costs also increase due to hike in oil prices. It consequently, results in a rise in the prices of domestic goods being manufactured and transported. It is the end-consumer in India, who finally pays and experiences the ultimate pinch of Import Price-Hike Inflation. If the oil prices in the international marketfall, then the Import Price-Hike Inflation also slows down, and vice-versa. 15. Sectoral Inflation: It occurs when there is a rise in the prices of goods and services produced by certain sectors of the industries. For instance, if prices of the crude oil increase, then it will also affectall other sectors or areas (like aviation, road transportation, etc.) which are directly dependent on the oil industry. For example, if oil prices hike, air ticket fares and road transportation cost will increase. 16. Demand-Pull Inflation: Inflation, which arises due to various factors like rising income, exploding population, etc., leads to aggregate demand and exceeds aggregated supply, and tends to raise prices of goods and services. Excess Demand Inflation is its another name. 17. Cost-Push Inflation: When prices rise due to the growing cost of production of goods and services, it is known as Cost-Push (Supply-side) Inflation. For exam ple, if the wages of workers get raised, then the unit cost of production also increases. As a result, the prices of end products and services being manufactured and supplied are consequently, hiked. The types of inflation based on the expectation or predictability:
  8. 1. 2. Image credits O Gaurav Akrani. Anticipated Inflation: If the rate of inflation corresponds to what the majority of people are either expecting or predicting , then is called Anticipated Inflation. Expected Inflation is its another name. Unanticipated Inflation: If the rate of inflation corresponds to what the majority of people are neither anticipating nor predicting , then is call ed Unanticipated Inflation. Unexpected Inflation is its another name.

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