Inflation, Causes and Solutions
INFLATION :
A sustained rise in the prices of commodities that leads to a fall in the purchasing power of a nation is called inflation. Although inflation is part of the normal economic phenomena of any country, any increase in inflation above a predetermined level is a cause of concern.
How is inflation measured
Inflation in India is measured through a WPI ( wholesale price index ) . In India, the wholesale price index (WPI), rate consisted of three main components - primary articles, which included food articles, constituting 22% of the index; fuel, constituting 14% of the index; and manufactured goods, which accounted for the remaining 64% of the index
Today this is around 8 % in india which is very high . Last year this touched double digit figures at 10% .
Cause of inflation - General theory * printing of more money by the government, * a rise in production and labor costs, * high lending levels, * a drop in the exchange rate Demand Pull theory a rise in prices due to * increase in demand in excess of the supplies * An increase in the quantity of money in circulation relative to the ability of the economy to supply leads to increased demand, thereby fuelling prices. The case is of too much money chasing too few goods. * An increase in demand could also be a result of declining interest rates, * a cut in tax rates or increased consumer confidence.
The Cost Push theory, Inflation occurs due to increase in production cost . The cost of production can rise because of * rising labor costs * when the producing firm is a monopoly or oligopoly and raises prices * cost of imported raw material rises due to exchange rate changes, * external factors, such as natural calamities * an increase in the economic power of a certain country. * An increase in indirect taxes
A classic example of cost-push or supply-shock inflation is the oil crisis that occurred in the 1970s, after
A sustained rise in the prices of commodities that leads to a fall in the purchasing power of a nation is called inflation. Although inflation is part of the normal economic phenomena of any country, any increase in inflation above a predetermined level is a cause of concern.
How is inflation measured
Inflation in India is measured through a WPI ( wholesale price index ) . In India, the wholesale price index (WPI), rate consisted of three main components - primary articles, which included food articles, constituting 22% of the index; fuel, constituting 14% of the index; and manufactured goods, which accounted for the remaining 64% of the index
Today this is around 8 % in india which is very high . Last year this touched double digit figures at 10% .
Cause of inflation - General theory * printing of more money by the government, * a rise in production and labor costs, * high lending levels, * a drop in the exchange rate Demand Pull theory a rise in prices due to * increase in demand in excess of the supplies * An increase in the quantity of money in circulation relative to the ability of the economy to supply leads to increased demand, thereby fuelling prices. The case is of too much money chasing too few goods. * An increase in demand could also be a result of declining interest rates, * a cut in tax rates or increased consumer confidence.
The Cost Push theory, Inflation occurs due to increase in production cost . The cost of production can rise because of * rising labor costs * when the producing firm is a monopoly or oligopoly and raises prices * cost of imported raw material rises due to exchange rate changes, * external factors, such as natural calamities * an increase in the economic power of a certain country. * An increase in indirect taxes
A classic example of cost-push or supply-shock inflation is the oil crisis that occurred in the 1970s, after