The Influence of Inflation on Economic Development

Topics: Inflation, Money, Economics Pages: 6 (1960 words) Published: April 7, 2014

Inflation, as defined in the English dictionary, is “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency, which is usually measured by the Consumer Price Index (CPI)”. In the context of market economy, prices are showing the application so it can be said that inflation is caused by a “mismatch” between aggregate demand and aggregate supply, signaling economic imbalance. However, in its complexity, inflation is a monetary imbalance caused by increasing the amount of money in the economy and hence the declining purchasing power of the currency. Ludwig von Mises explained the phenomenon using the example of the situation in the economies of European countries in the 16th century, when there was a penetration of large amounts of precious metals (gold, silver, etc.) from U.S., determining the amount of money and also the prices in Europe to increase. Similar to that, when a government increases the quantity of paper money, it results in a decrease of the purchasing power, and increase in prices. Inflation has always been around, and it has always been rising, but experts have different opinions on how it is going to affect the economic development.


Over the years, many economists have tried to define inflation, but none of them managed to fully capture the aspects of this complex phenomenon. It came to the conclusion that the inflation represented a major factor in economic problems. Summarizing the definitions of inflation, it is an imbalance characterized by a generalized increase in prices that comes from increased circulation of money, either due to the budget deficit or due to the excess of purchasing power of consumers in relation to the quantity of goods and services available to them. Therefore, it goes without saying that inflation is not just a monetary phenomenon, but one to which structural changes in the supply and demand contribute to its appearance or development. Given this it is necessary to clarify that inflation as an economic phenomenon that appeared with the division of labor, which meant the growth of exchange relations, and thus with the advent of money in the economy. Exchange relations caused by the division of labor are based on the value attributed to goods that are traded. Therefore, we consider price as a signal of a good assessment given in monetary units. Inflation measures the increase in overall consumer prices, so we can say that any increase in price of a certain asset is considered inflation. However, if there is an increase in the general level of consumer prices while increasing the quantity of goods and services on the market it cannot involve the phenomenon of inflation.


Effects of inflation vary from country to country and from period to period, also delving into account its forms and intensity. Influence has five types of manifestation given on one hand the dimensions of inflation and intensity with which it occurs and on the other the causes which determine its appearance. The first type of inflation is called the “creeping inflation” which is manifested by a permanent increase of prices at a constant rate of 1% - 2%. This type of inflation is also known as the moderate inflation. Under a slow inflation the economy does not seem to suffer, but economic agents undertake different activities, trusting the currency. Also, labor productivity grows faster than wages and as the Gross Domestic Product and Gross National Product have an upward evolution. This level of inflation is considered by some economists as the premise of future economic development. This explanation is given by the fact that limited imbalances arising from a low level of inflation determine a certain internal tension which supplies the ascending force of the economy. The second type of inflation is the...
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