Inflation

Deflation is like a terrible storm: The damage is often intense and takes far longer to repair than the storm itself. Sadly, some nations never fully recover from the damage caused by deflation. Hong Kong, for example, has yet to fully recover from the deflationary effects that gripped the Asian economy in 2002. Deflation may have any of the following impacts on an economy: 1. Reduced Business Revenues:-  Businesses must significantly reduce the prices of their products in order to stay competitive. As they reduce their prices, their revenues start to drop. Business revenues frequently fall and recover, but deflationary cycles tend to repeat themselves multiple times. Unfortunately, this means businesses need to increasingly cut their prices as the period of deflation continues. Although these businesses operate with improved production efficiency, their profit margins eventually drop as savings from material costs are offset by reduced revenues. 2. Wage Cutbacks and Layoffs:-  When r

DEFINITION When the overall price level decreases so that inflation rate becomes negative, it is called deflation. It is the opposite of the often-encountered inflation. TYPES OF DEFLATION Deflation can be categorized into two types, strategic and circulation deflation. Here is the explanation of each type of deflation: Strategic deflation This type of deflation can occur due to the establishment of monetary policy by the government related to controlling the symptoms of consumption that is considered excessive in the community. Where the occurrence of excessive consumption can suppress the increase of the product price in the market. This policy does not suppress the excessive consumption among the public, but it impacts on the price decline that will make the consumption increase in the public. Strategic deflation is caused by policies implemented by the government and central banks to reduce the interest rates. This policy will make it easy for consumers to get a number of loans fro

Inflation is considered to be a complex situation for an economy. If inflation goes beyond a moderate rate, it can create disastrous situations for an economy; therefore is should be under control. It is not easy to control inflation by using a particular measure or instrument. The main aim of every measure is to reduce the inflow of cash in the economy or reduce the liquidity in the market. The different measures used for controlling inflation are explained below:-  1. Monetary Measures : The government of a country takes several measures and formulates policies to control economic activities. Monetary policy is one of the most commonly used measures taken by the government to control inflation. In monetary policy, the central bank increases rate of interest on borrowings for commercial banks. As a result, commercial banks increase their rate of interests on credit for the public. In such a situation, individuals prefer to save money instead of investing in new ventures. This would re

The following points highlight the six major effects of inflation. The effects are: 1. Effects on Distribution of Income and Wealth: The impact of inflation is felt unevenly by the different groups of individuals within the national economy—some groups of people gain by making big fortune and some others lose. We may now explain in detail the effects of inflation on different groups of people: (a) Creditors and debtors:- During inflation creditors lose because they receive in effect less in goods and services than if they had received the repayments during a period of low prices. Debtors, on other hand, as a group gain during inflation, since they repay their debts in currency that has lost its value (i.e., the same currency unit will now buy less goods and services). (b) Producers and workers:-  Producers gain because they get higher prices and thus more profits from the sale of their products. As the rise in prices is usually higher than the increase in costs, producers can earn mor

The causes of Inflation are as under:-   1) Primary Causes:-  In an economy, when the demand for a commodity exceeds its supply, then the excess demand pushes the price up. On the other hand, when the factor prices increase, the cost of production rises too. This leads to an increase in the price level as well. 2) Increase in Public Spending:-  In any modern  economy , Government spending is an important  element   of the total spending. It is also an important determinant of aggregate  demand .  Usually, in lesser developed economies, the Govt. spending increases which invariably creates inflationary pressure on the economy. 3) Deficit Financing of Government Spending:-  There are times when the spending of Government increases beyond what taxation can finance. Therefore, in order to incur the extra expenditure, the Government resorts to deficit financing. For example, it prints more money and spends it. This, in turn, adds to inflationary pressure. 4) Increased Velocity of Circulati

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. DEFINITION As per Johnson," Inflation is an increase in the quantity of money faster than real national output is expanding." According to Samuelson--Nordhaus, " Inflation is a rise in the general level of prices." TYPES 1) Creeping inflation (1-4%) When the rate of inflation slowly increases over time. For example, the inflation rate rises from 2% to 3%, to 4% a year. Creeping inflation may not be immediately noticeable, but if the creeping rate of inflation continues, it can become an increasing problem. 2) Walking inflation (2-10%) When inflation is in single digits – less than 10%. At this rate – inflation is not a major problem, but when it rises over 4%, Central Banks will be increasingly concerned. Walking inflation may simply be referred to as moderate inflation. 3) Running inflation (10-20%) When inflati