Measurement causes and consequences of inflation

The PPI actually combines a series of smaller indices that cross many industries and measure the prices for three types of goods: Thus the burden of the debt is reduced and debtors gain.

But such a drastic measure can only be adopted for a short period and by antagonising both workers and industrialists. Pensioners get fixed pensions. So the natural rate of unemployment can be reduced by shifting the long-run vertical Phillips Measurement causes and consequences of inflation to the left.

As there is already full employment, the increase in money wages leads to proportionate rise in prices.

Inflation: Types, Causes and Effects (With Diagram)

At point A on the short-run Phillips curve SPC1 in Figure 7, people expect this rate of inflation to continue in the future.

As a result, production is hindered.

Inflation: Meaning, Causes and Effects Effects of Inflation

Broadly speaking, there are two economic groups in every society, the fixed income group and the flexible income group. Persons who hold shares or stocks of companies gain during inflation.

Inflation is socially harmful. On the other hand, the landless agricultural workers are hit hard by rising prices. If labour productivity continues to grow at 2 per cent per annum, the price level will also rise at the rate of 2 per cent per annum at OS in the figure. This is because the poor hold what little wealth they have in monetary form and has few debts, whereas the very rich hold a substantial part of their wealth in bonds and have relatively few debts.

Therefore, public policy should improve the institutional structure to make the labour market responsive to changing patterns of demand. As a result, production is hindered. Inflationary tendency have to be fought on the production front.

Agriculturists are of three types, landlords, peasant proprietors, and landless agricultural workers.

Inflation: Meaning, Types, Causes, Effects and Remedies

Causes of Inflation. Higher export earnings increase the purchasing power of the exporting countries. The original Phillips curve was an observed statistical relation which was explained theoretically by Lipsey as resulting from the behaviour of labour market in disequilibrium through excess demand.

But which income group of society gains or losses from inflation depends on who anticipates inflation and who does not. But there is an important difference between the monetarist view of demand-pull inflation and the Keynesian view of it.

On the other hand, the middle income groups are likely to be heavily in debt and hold some wealth in common stock as well as in real assets. On the whole, the wage earners are in the same position as the white collar persons.

Therefore, employment above the natural rate can be reached at the cost of accelerating inflation, if monetary policy is adopted. Cost-push inflation If there is an increase in the costs of firms, then businesses will pass this on to consumers.

Given that savings are important, inflation eats away at your purchasing power more if you just put your savings under your mattress than if you had invested it.

Others argue that if annual price rise goes slightly beyond 3 p. The government, in turn, levies less taxes to service and retire its debt.

What is Inflation, How It's Measured and Its Impact on Your Investments

The price level, thus, determined is OP1. For Tobin, there is a wage-change floor in excess supply situations. Impact of Inflation Inflation and Your Investments Inflation is greatly feared by investors because it grinds away at the value of your investments.

Aggregate demand may rise if there is an increase in consumption expenditure following a tax cut. This makes his position unclear. According to Friedman, there is no need to assume a stable downward sloping Phillips curve to explain the trade-off between inflation and unemployment.

Cost-push inflation can be caused by many factors 1. Consequently inflation also reflects erosion in the purchasing power of money. The main causes of inflation are either excess aggregate demand economic growth too fast or cost push factors supply-side factors.In this lesson we will take a look at inflation and its importance.

We will discuss the types and causes of inflation, as well as look at the effects of inflation. Causes of Inflation. There are two main causes of inflation: cost push and demand pull. Cost-Push Inflation occurs when general prices of commodities increases due to increase in production cost.

Demand-Pull Inflation is the result of. There are two ways to measure the effects of inflation on the redistribution of income and wealth in a society.

Inflation: How Is It Measured?

First, on the basis of the change in the real value of such factor incomes as wages, salaries, rents, interest, dividends and profits.

Short revision video on the consequences of inflation Many governments have set their central banks a target for a low but positive rate of inflation. They believe that persistently high inflation can have damaging economic and social consequences.

Hyper Inflation - Hyperinflation is caused mainly by excessive deficit spending (financed by printing more money) by a government, some economists believe that social breakdown leads to hyperinflation (not vice versa), and that its roots lie in political rather than economic causes.

Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate demand (economic growth too fast) or cost push factors (supply-side factors).

Download
Measurement causes and consequences of inflation
Rated 5/5 based on 12 review