Introduction
Two major problems faced by a modern economy are: unemployment and inflation. Both are social evils or public enemies. Inflation is a situation where prices are persistently rising, thereby reducing the value of money. It refers to a phenomenon of constantly rising prices of commodities and factors of production. Inflation is a process in which the price level is rising and money is losing its value.
What can cause inflation?
Inflation can be caused by cost factors, such as a rise in oil prices, which raise input costs at the top and bottom of the diagram and feed into the RPI. Inflation can also be caused by demand factors, for example a rise in consumer spending, which will first affect the retail sector, putting pressure on the market for labour and feeding back through the diagram as higher costs. The economy is always subject to shocks, including price shocks and aggregate demand shocks. By their very nature such shocks cause real GDP to fluctuate around what would otherwise be a smoother long-run growth path. They also cause the inflation rate to fluctuate up and down.
Different types of inflation
There are several types of inflation;
Creeping inflation - it refers to a rise in the price level at a rate of 2 to 3% per annum. This type of inflation does not do much harm and may, in fact, stimulate investment.
Galloping inflation - this type of inflation occurs when the annual rate of increase in the price level climbs to double and triple digits. Inflation rates in the order of 25, 100 and 400% would be classified as galloping inflation.
Hyperinflation - if mind inflation is unchecked for a long period, it is converted into hyperinflation. This type of inflation exists when the price level is rising at rates of 1000% and more.
Open versus suppressed inflation- open inflation is said to occur when the government makes no attempt to control it. However, when prices are controlled by certain administrative measures such as fixation of maximum prices of certain essential commodities and rationing, inflation is said to have been suppressed. Suppressed inflation refers to a situation where demand exceeds supply, but the effects on prices is minimized by the use of such devices as price controls and rationing.
How is inflation measured and managed
You can measure changes in the price level by using price indexes. The price indexes can be used to deflate national income or GDP. National income is expressed at two sets of prices - current price and constant price. The two popular price indexes are the consumer price indexes are the consumer price index (CPI) and the wholesale price index (WPI). Of these two price indexes, the CPI is used most often. The consumer price index measures change in the prices of consumer goods and services. The wholesale price index measures changes in the prices of goods bought by manufacturers.
Conclusion
Most economists generally agree that a moderate rate of inflation is conducive to economic growth and that, in the short run, there is positive relationship between moderate rate of inflation and economic growth.
Two major problems faced by a modern economy are: unemployment and inflation. Both are social evils or public enemies. Inflation is a situation where prices are persistently rising, thereby reducing the value of money. It refers to a phenomenon of constantly rising prices of commodities and factors of production. Inflation is a process in which the price level is rising and money is losing its value.
What can cause inflation?
Inflation can be caused by cost factors, such as a rise in oil prices, which raise input costs at the top and bottom of the diagram and feed into the RPI. Inflation can also be caused by demand factors, for example a rise in consumer spending, which will first affect the retail sector, putting pressure on the market for labour and feeding back through the diagram as higher costs. The economy is always subject to shocks, including price shocks and aggregate demand shocks. By their very nature such shocks cause real GDP to fluctuate around what would otherwise be a smoother long-run growth path. They also cause the inflation rate to fluctuate up and down.
Different types of inflation
There are several types of inflation;
Creeping inflation - it refers to a rise in the price level at a rate of 2 to 3% per annum. This type of inflation does not do much harm and may, in fact, stimulate investment.
Galloping inflation - this type of inflation occurs when the annual rate of increase in the price level climbs to double and triple digits. Inflation rates in the order of 25, 100 and 400% would be classified as galloping inflation.
Hyperinflation - if mind inflation is unchecked for a long period, it is converted into hyperinflation. This type of inflation exists when the price level is rising at rates of 1000% and more.
Open versus suppressed inflation- open inflation is said to occur when the government makes no attempt to control it. However, when prices are controlled by certain administrative measures such as fixation of maximum prices of certain essential commodities and rationing, inflation is said to have been suppressed. Suppressed inflation refers to a situation where demand exceeds supply, but the effects on prices is minimized by the use of such devices as price controls and rationing.
How is inflation measured and managed
You can measure changes in the price level by using price indexes. The price indexes can be used to deflate national income or GDP. National income is expressed at two sets of prices - current price and constant price. The two popular price indexes are the consumer price indexes are the consumer price index (CPI) and the wholesale price index (WPI). Of these two price indexes, the CPI is used most often. The consumer price index measures change in the prices of consumer goods and services. The wholesale price index measures changes in the prices of goods bought by manufacturers.
Conclusion
Most economists generally agree that a moderate rate of inflation is conducive to economic growth and that, in the short run, there is positive relationship between moderate rate of inflation and economic growth.
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