Sunday, 5 August 2012

Define Inflation or write a note on the different forms of inflation

Kent says " Inflation is nothing more than a sharp upward movement in the price level.

Keynes says " Any rise in the price level after the level of full employment has been achieved."

So we conclude that indicator of inflation is the rising of prices and not the high prices.

1. Demand Induced Inflation :-
When the aggregate demand of the public increases due to increase in their income, but the supply of goods and services remains constant. The price level rises and we say that it is demand induced inflation.

2. Cost Push or Cost Induced Inflation :-
If the cost of production goes up, the prices will rise. Foe example wages play very important role in rising the prices level. Taxes and rise in the imported material price may also increase the cost of production. So this inflation will be called cost push inflation.

Cost push inflation is more difficult to control than the demand push inflation. Because the labour unions never agree to reduce the wages and employment.

3. Mixed Demand Cost Inflation :-
We can explain it by following example. Suppose due to any reason the demand of any particular industry goods increases. The profit and prices of that industry goods rises. The industry expands the out put by employing the extra labour on high rates. The worker of other industry will also insist for higher wages according to the first industry. In this way general prices level will rise. Higher prices induced the workers to demand higher wages. " Wages and prices always chase each other and in this way general prices level rises" and we will say that it is mixed inflation.

4. Hyper Inflation :-
When prices rise to such heights that holding of money foe a single day or for a few hours creates a huge loss for the holder, it is called hyper inflation. The change in general price level is so quick that wages have to be adjusted with the rising prices daily.
Saving in money terms is completely stopped. In 1920, hyper inflation occurred in Germany, Russia and Austria. In 1940 it was found in China, Romania and Hungry.
When a country is in a grip of hyper inflation people hold the money in the stable foreign currency. The only remedy to end this inflation is to replace the old currency with a new one.

5. Deflation :-
It is just the opposite of inflation. Deflation is said to exist when there is persistent downward movement in the price level. In other words, deflation, therefore can be called falling of prices and not low prices.

6. Reflation :-
The depression of 1929, 1933 has shaken the foundation of capitalistic system. Income, employment and economic activity decreased. The cost and price balance disturbed. The prices decreased then cost and production stopped.
"The process of bringing prices and costs into equilibrium is called as reflation in economics."
Cole says, "Inflation is deliberately undertaken to relieve the depression."

7. Dis-Inflation :-

The process through which the prices are brought down without causing unemployment is called dis inflation. It is very popular term which is used in every country. In every country the prices are rising up and people are loosing faith in value of money. It id the desire of the Govt. to bring down the prices at the reasonable level. So in this way various kinds of fiscal and monetary measures are adopted to bring down the price without causing unemployment in the country. We call it dis-inflation.

8. Stagflation :-
It is a situation where unemployment and inflation coexist side by side. In other words the rate of unemployment and rate of inflation is too high then the accepted standard.

It means to depreciate the value of domestic currency interms of foreign currencies.
For example the rate of exchange between Pakistan and USA is 60 Rs. = 1 Dollar. If Pakistan readjusts the exchange rate and offer Rs. 70 = 1 Dollar the Pakistani currency will be said to have been devalued or depreciated.
Devaluation policy is adopted to encourage the exports and discourage the imports. So this policy is considered very effective to make the balance of payment favourable.
There are three objectives of devaluation :
1. To encourage Exports.
2. To discourage imports.
3. To make the balance of payment favourable.


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