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Understanding Inflation and Deflation: Causes, Effects, and Examples

Explore the concepts of inflation and deflation, their causes, effects on production and distribution, and their impact on the economy. Learn about different types of inflation, stagflation, and the external effects of inflation.

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Understanding Inflation and Deflation: Causes, Effects, and Examples

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  1. UNIT - 14 INFLATION & DEFLATION

  2. Inflation: Inflation is a rise in the general level of pricesof goods and services in an economy over a period of time. This is the state in which the value of money is falling i.e. prices are rising. Inflation is statistically measured in terms of percentage increase in the price index, as a rate percent per unit of time – usually a year or a month. Change in Price Percentage rate of inflation = * 100 Price

  3. Types of Inflation: • Creeping inflation (less than 3%) • Walking inflation (3% to 7%) • Running inflation (10% to 20%) • Hyper inflation (20% to 100%) • Demand pull inflation • Cost push inflation

  4. Cause of Inflation: Demand Side • Increase in money supply • Increase in disposable income • Increase in exports • Existence of black money • Increase in population • High rate of taxes • Reduction in the level of savings

  5. Supply Side • Shortage in the supply of factors of production • Holdings by traders and speculators • Holdings by consumers • Role of trade union • Role of natural calamities • War • International factors

  6. Effect of Inflation: EFFECTS ON PRODUCTION • Low inflation rate stimulates economics growth • Disturbs the working of price – mechanism • Adverse effects on investment and production • Adverse effects on savings • Creates business uncertainty • Reduce production • Develops a sellers market • Encourages speculative activities

  7. EFFECT ON DISTRIBUTION • Leads to unequal distribution in income and wealth • It creates hardship for fixed income earner • Debtors gain and creditors lose • Entrepreneurs and business community gain • Effects on investors • Effects on farmers

  8. Social and political effects of inflation • Moral and ethical effects • Political effects • Social effects

  9. External effects of inflation • Reduce the volume of exports • Create exchange rate difficulties • Discourage the inflow of foreign capital • Decline the international competitiveness

  10. The inflationary gap: Inflationary Gap is “excess of aggregate expenditure over the available output at the base price”. Example: Gross National Income 20,000 Less Taxes 5,000 Personal Income 15,000 Less Savings 3,000 Disposable Income 12,000 Gross National Product 15,000 Government Expenditure 6,000 Output Available 9,000 Inflationary Gap 3,000

  11. Stagflation: Stagflation is a period with a high rate of inflation combined with unemployment and economic recession. Deflation: Deflation is that state of economy where the value of money is rising or the prices are falling.

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