Rise in prices is called inflation. Inflation at very fast rate is Hyper-Inflation, medium is Strato-Inflation and low lever is Creeping inflation. During the recent years the rise has abnormal and it has endangered the stability of our economy nationally and individually. In Pakistan inflation has become an unending disease to our economy. Once a state is caught in the circle of inflation then it will be difficult for that state to get rid of it. There are various factors that contribute to the rise in prices.
Some are natural factors like unfavorable weather conditions which affect the food production and lead to the shortage of commodities in the market. With more money chasing fewer goods, the prices take to the wings.
Besides this natural problem there are man-made problems like hoarding which contribute to the rapid increase in prices. The trading community which senses a shorting of certain commodities, especially the essential commodities, they resort to large scale hoarding.
They release the hoarding products after increase in the prices and make a neat margin over their investment in the hoarded products.
They get so much profit but it waters inflation. The rise of prices in Pakistan can also be attribute to the despicable acts of traders. Their only motive is to get maximum profit and so they try to charge lots of money from the customers as much as possible.
This has created a class of people who are becoming richer day by day and the other class is becoming poorer. Hoarding is also playing a bad role in escalation of prices in the commodities. One of the most important reasons for inflation is the deficit budgeting.
In order to cover the gap Pakistan has been printing more paper currency because foreign aid and taxes can not cover up the deficit. Therefore there will be greater circulation of paper money. There will be hike in prices of domestic used products as the purchasing power of the people has increased. Wrong taxation policy has also been responsible for the rise in prices. But why does aggregate demand rise? Classical economists attribute this rise in aggregate demand to money supply.
If the supply of money in an economy exceeds the available goods and services, DPI appears. This would prompt upward adjustment in price. DPI can be explained in terms of the following figure Fig. In Range 1, total spending is too short of full employment output, Y f. There is little or no rise in price level. As demand now rises, output will rise. The economy enters Range 2 where output approaches full employment situation.
Note that, in this region, price level begins to rise. Ultimately, the economy reaches full employment situation, i. This is demand-pull inflation. Inflation in an economy may arise from the overall increase in the cost of production. This type of inflation is known as cost-push inflation henceforth CPI. Cost of production may rise due to increase in the price of raw materials, wages, etc. Often trade unions are blamed for wage rise since wage rate is not market-determined.
Higher wage means higher cost of production. Prices of commodities are thereby increased. A wage-price spiral comes into operation. But, at the same time, firms are to be blamed also for the price rise since they simply raise prices to expand their profit margins. Thus we have two important variants of CPI: Anyway, CPI stems from the leftward shift of the aggregate supply curve.
If the speed of upward thrust in prices is very low then we have creeping inflation. What speed of annual price rise is a creeping one has not been stated by the economists? To some, a creeping or mild inflation is one when annual price rise varies between 2 p.
If a rate of price rise is kept at this level, it is considered to be helpful for economic development. Others argue that if annual price rise goes slightly beyond 3 p. If the rate of annual price increase lies between 3 p.
When mild inflation is allowed to fan out, walking inflation appears. Walking inflation may be converted into running inflation. Running inflation is dangerous. If it is not controlled, it may ultimately be converted to galloping or hyperinflation.
It is an extreme form of inflation when an economy gets shattered. Inflationary situation may be open or suppressed. Because of ant-inflationary policies pursued by the government, inflation may not be an embarrassing one. For instance, an increase in income leads to an increase in consumption spending which pulls the price level up. If the consumption spending is countered by the government via price control and rationing device, the inflationary situation may be called a suppressed one.
Once the government curbs are lifted, the suppressed inflation becomes open inflation. Open inflation may then result in hyperinflation.
Former leads to a rightward shift of aggregate demand curve while the latter causes aggregate supply curve to shift leftward. There are two theoretical approaches to DPI —one is the classical and the other is the Keynesian. According to classical economists or monetarists, inflation is caused by the increase in money supply which leads to a rightward shift in negative sloping aggregate demand curve.
Given a situation of full employment, classicists maintained that a change in money supply brings about an equi-proportionate change in price level. That is why monetrarists argue that inflation is always and everywhere a monetary phenomenon. Keynesians do not find any link between money supply and price level causing an upward shift in aggregate demand. According to Keynesians, aggregate demand may rise due to a rise in consumer demand or investment demand or government expenditure or net exports or the combination of these four.
Given full employment, such increase in aggregate demand leads to an upward pressure in prices. Such a situation is called DPI. This can be explained graphically. Just like the price of a commodity, the level of prices is determined by the interaction of aggregate demand and aggregate supply. AD 1 is the initial aggregate demand curve that intersects the aggregate supply curve AS at point E 1. The price level thus determined is OP 1. As aggregate demand curve shifts to AD 2 , price level rises to OP 2.
Thus, an increase in aggregate demand at the full employment stage leads to an increase in price level only, rather than the level of output. However, how much price level will rise following an increase in aggregate demand depends on the slope of the AS curve.
DPI originates in the monetary sector. An increase in nominal money supply shifts aggregate demand curve rightward. This enables people to hold excess cash balances. Spending of excess cash balances by them causes price level to rise. Price level will continue to rise until aggregate demand equals aggregate supply.
Keynesians argue that inflation originates in the non-monetary sector or the real sector. Aggregate demand may rise if there is an increase in consumption expenditure following a tax cut. There may be an autonomous increase in business investment or government expenditure. Governmental expenditure is inflationary if the needed money is procured by the government by printing additional money.
In brief, an increase in aggregate demand i. However, aggregate demand may rise following an increase in money supply generated by the printing of additional money classical argument which drives prices upward. Thus, money plays a vital role. That is why Milton Friedman believes that inflation is always and everywhere a monetary phenomenon.
There are other reasons that may push aggregate demand and, hence, price level upwards. For instance, growth of population stimulates aggregate demand. Higher export earnings increase the purchasing power of the exporting countries. Additional purchasing power means additional aggregate demand.
Purchasing power and, hence, aggregate demand, may also go up if government repays public debt. Again, there is a tendency on the part of the holders of black money to spend on conspicuous consumption goods.
Such tendency fuels inflationary fire. Thus, DPI is caused by a variety of factors. In addition to aggregate demand, aggregate supply also generates inflationary process.
As inflation is caused by a leftward shift of the aggregate supply, we call it CPI. CPI is usually associated with the non-monetary factors. CPI arises due to the increase in cost of production. Cost of production may rise due to a rise in the cost of raw materials or increase in wages. Such increases in costs are passed on to consumers by firms by raising the prices of the products. Rising wages lead to rising costs.
Rising costs lead to rising prices. And rising prices, again, prompt trade unions to demand higher wages. Some are natural factors like unfavourable weather conditions which affect the food production and lead to the shortage of commodities in the market.
With more money chasing fewer goods, the prices take to the wings. Compounding this natural problem are other man-made problems like hoarding which contribute to the escalation of prices. The moment the trading community senses a shortage of certain commodities or products, especially the essential commodities; they resort to large scale hoarding.
They release the hoarded commodities after escalation of the prices and make a neat margin over their investment in the hoarded commodities. Though the government has the necessary powers to check hoarding it does not have the necessary manpower to contain the despicable acts like hoarding.
Apart from the natural factors and the man-made factors like hoarding that add to the rise in prices or inflation, the government too contributes its bit to the escalation of prices by imposing higher taxes on raw materials and finished products. With the government nature and hoarders adding their bit to the inflationary trends, is it any surprise then that rise in prices has become a common feature in India?
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INFLATION ( words) OUTLINES: INTRODUCTION LEADING CAUSES OF INFLATION FRAGILE ECONOMIC POLICES HOARDING, DISHONEST ATTITUDE OF TRADERS STEPS TO CHECK INFLATION CONCLUSION Inflation refers to a continuous, general increase in the price of goods and services.. words) OUTLINES: INTRODUCTION; LEADING CAUSES OF INFLATION.
Essays and revision note on all aspects of inflation. Definition, causes of inflation, costs of inflation. Trade-offs with other macroeconomic objectives and how to reduce inflation. Different views Keynesian/monetarist. This article discusses the inflation, the current situation, the causes and the means to control inflation in India. Inflation refers to the rise in the price of goods and fall in the value of money. Inflation refers to the problem of rising prices.
Sep 03, · Essay on Inflation Inflation and Inflation United Kingdom Inflation United Kingdom Inflation Rate The inflation rate in the United Kingdom was recorded at percent in December of There is hardly a thing or commodity whose price has not gone up in the recent times. Rise in prices has become a common feature in India and the people are reconciled to this fact. Rise in prices is called inflation.