Inflation Effect and its causes for I.com,B.com and for M.A Economics.
INFLATION.
Inflation is important and widely talked about concept in modern economics. In simple words, inflation means a situation in which there is a continuous rise in the general price level. The inflationary situation has three features:
i. There is a continuous rise in price.
ii. It starts when it becomes impossible to satisfy the whole demand for goods at existing prices.
iii. Inflation feeds on itself. After an initial rise in prices, the buyers anticipate a further rise in prices and buy more quantities of goods in a hurry. This induces a further rise in prices and inflation is propagated.
CAUSES OF INFLATION.
The most important cause of rising prices is an excessive increase in the money supply. When people have more money to spend they increase demand. If the output does not grow at the same time, the price moves up.
In broad terms, inflation is of two types:
1- Demand-Pull Inflation,
Some economists believe that this type of inflation arises when total demand for goods (aggregate demand) exceeds supply at current prices.
2-Cost-Push Inflation,
Inflation may originate from rising production costs. When the firms pass on their increased costs to consumers in the form of higher prices of products, inflation takes place.
EFFECTS OF INFLATION
Inflation has both positive and negative effects on the economy. But harmful effects are mostly greater than benefits.
a) ADVERSE EFFECTS.
i. Increase in Cost of living
The working classes are hard hit. Wages do not rise at the rate prices are rising. Those sections of society who have fixed incomes, like the salaried class, find difficulty in buying their daily needs.
ii. Income inequalities increase.
When prices are rising and businessmen and big landlords make huge money, the distribution of income among various classes of society becomes more unequal.
iii. Decrease in Saving.
During rising prices, the savings of common people are adversely affected. A greater part of their income is used to buy consumer goods.
iv. fewer Exports and More Imports.
Local goods become costly for foreigners. They start buying from other countries. So inflation has an adverse effect on the balance of payments position.
b) FAVORABLE EFFECTS
1. Increase in Production.
When prices are rising slowly, the profits of the industrialist and businessmen rise. They try to produce more goods.
2. Increase in Employment.
Because of the rising prices of products, firms try to increase production and employ more workers. If idle resources exist in the economy, they get employment.
3. Increase in Investment.
With the improvement in the prospects of profits, investment activity is boosted.
4. Increase in Economic Development.
Low inflation is helpful for economic development. The government increases resources by increasing the money supply.
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for the desk of
M.A f Saleem Economics.
