Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

1. INFLATION

2. Topics to be discussed
 Introduction & meaning of inflation
 Theories of inflation
 Causes of Inflation
 Measures of Inflation
 Effects of inflation

3. Inflation: Basic Definition
Inflation is a term used in
economics to describe
increases in prices. In simpler
terms inflation is a decline in
the purchasing power of
money for goods and
services.

4. Inflation: Advanced Definition
Inflation (as accepted by many
economists) technically speaking
should be defined as the increases
and decreases of the money
supply (i.e. currency)

6. Theories of Inflation

7. Demand Pull
Inflation

8.  DEMAND PULL INFLATION OCCURS WHEN TOTAL DEMAND FOR
GOOD AND SERVICES EXCEEDS TOTAL SUPPLY. THIS TYPE OF
INFLATION HAPPENS WHEN THERE HAS BEEN EXCESSIVE GROWTH IN
AGGREGATE DEMAND AND THERE IS AN INFLATIONARY GAP.
 DEMAND PULL INFLATION IN OFTEN MONETARY IN ORIGIN BECAUSE
THE AUTHORITIES ALLOW THE MONEY SUPPLY TO GROW FASTER THAN
ABILITY OF ECONOMY TO SUPPLY GOODS AND SERVICES.
 THE PHRASE THAT IS OFTEN USED IS THAT THERE IS TOO MUCH
MONEY CHASING TOO FEW GOODS.
 DEMAND PULL INFLATION CAN B ILLUSTRATED GRAPHICALLY BY
USING AGGREGATE DEMAND AND AGGREGATE SUPPLY

9. Graphical Representation of
Demand Pull Inflation

10. STRUCTRULIST THEORY
OF INFLATION

11.  Structuralist theory of inflation explains inflation in the
developing countries. Structural theory of inflation has
been put forward as an explanation of inflation in the
developing countries especially of latin america.
Myrdal and streeten, well known economists have
argued that it is not correct to apply highly
aggregative demand supply model for explaining
inflation in the developing countries. According to
them, there is a lack of balanced integrated structure
in them where substitution possibilities between
consumption and production and inter sectoral flows
of resources between different sectors of the economy
are not quite smooth and quick smooth so that the
inflation in them can not be reasonably explained in
terms of aggregate demand and aggregate supply.

12. To explain the origin and propagation of inflation in the
developing countries , the forces which generate these
bottlenecks or imbalances of various types in the process
of economic development need to be analyzed.
These bottlenecks are of three types.
 Agricultural bottlenecks
 Resources gap or governments budget constraint
 Foreign exchange bottleneck

13.  Agricultural Bottlenecks:-
The first bottleneck faced by the developing countries relate to
agriculture and they prevent supply of food grains to increase
adequately of special mention of the structural factors are
disparities in land ownership, defective land tenure system
which act as a disincentives for raising agricultural production in
response to increasing demand for them arising from increase
in peoples incomes , growth in population and urbanization.
 Resources Gap or Governments Budget
Constraint:-
This bottleneck relate to lack of resources for financing
economic development. In the developing countries planned
efforts are being made by the government to industrialize their
economies. This requires large resources to finance public sector
investment in various industries.

14.  Foreign Exchange Bottleneck :-
The other bottleneck which the developing countries have to
encounter is the shortage of foreign exchange for financing
needed Imports for development. In the developing countries
ambitious programme of industrialization is being undertaken.
Industrialization requires heavy imports of capital goods,
essential raw materials and in some cases, as in India, even food
grains have been imported.

15. MEASURES OF
INFLATION

16. FISCAL MEASURES
 Fiscal policy is based on the theory of British
economist John Keynes (1883-1946) also known as
Keynesian Economics. This theory states that
Government could change economic performance
by adjusting tax rates and government spending.
This influence in turn, curbs inflation increase
employment and maintains a healthy value of
money. Fiscal policy is important to the economy.TO
illustrate how Govt. could try to use fiscal policy to
affect the economy, consider an economy that’s
experiencing a recession. The Govt. might lower tax
rates to try to fuel economic growth..

17.  If people are paying less in taxes, they have more
money to spend or invest. Another possibility is that the
Govt. might decide to increase its own spending –say by
building more highways. The idea is that the additional
Govt. spending creates job and lowers the
unemployment rate. Thus, in period of inflation the Govt.
should curb its own spending and increase tax rates to
reduce private spending. It is a good thing to plan for a
budget surplus during inflationary period

18. Monetary Policy

19. Monetary Policy
 The best remedy for fighting inflation is to
reduce aggregate spending. Monetary
policy can help in reducing the pressure of
demand

20. Mechanics of Monetary policy are
 Rising bank Rate
 Directly controlling credit creation
Rising bank Rate:
 Rise in the bank rate will be followed by rise in other
market rates of interest. Rise in the rate of interest will
reduce the amount of aggregate spending. For the
following reasons.
 1- borrowing becomes more costly then before the
potential borrowers will postpone their investment plan.
They would wait till interest rate forms to their normal
level

21.  2- It reduces consumer spending.
 3- it also effects on business. It is a red signal to the
businessmen that bad times are ahead

22. CAUSES OF
INFLATION

23. INCREASE IN PUBLIC
EXPENDITURE
PUBLIC EXPENDITURE HAS RISEN FORM 18.6% OF GDP IN
1961 TO AROUND 29% IN 2009_10.WITH A RISE IN NATIONAL
INCOME AND ALSO RAPID GROWTH OF POPULATION AN
INCREASE IN PUBLIC EXPENDITURE IS UNAVOIDABLE BUT
THIS RISE IS NOT JUSTIFIABLE APPROX. 45% OF GOVT.
EXPENDITURE IN INDIA IS ON NON DEVELOPMENT
ACTIVITIES, BY PUTTING PURCHASING POWER INTO THE
HANDS OF ITS EMPLOYEES, CREATES DEMAND FOR GOODS
N SERVICES BUT IT DOES NOTHING WHERE BY THEIR SUPPLY
COULD INCREASE. UNDER THESE CIRCUMSTANCES D
GENERAL PRICE LEVEL SHOWS N INEVITABLE TENDENCY TO
RISE.

24. ERATIC AGRICULTURAL
GROWTH
THE INDIAN AGRICULTURE LARGELY DEPENDS ON
MONSOONS AND THUS CROP FAILURES DUE TO DROUGHT
HAVE BEEN REGULAR FEATURE OF AGRICULTURE IN
COUNTRY.IN D YEARS OF SCARCITY OF FOOD GRAINS NOT
ONLY PRICE OF FOOD ARTICLES INCREASES BUT THE
GENERAL PRICE LEVEL ALSO RISES.

25. AGRICULTURAL PRICE POLICY OF
GOVERNMENT
THE GOVT. HAS BEEN PURSUING A POLICY OF PRICE TO
SUPPORT THE AGRICULTURISTS. FOR THIS IT ANNOUNCES THE
PRICE AT WHICH IT WOULD BE BUYING AGRICULTURAL
PRODUCTS. IS ENSURES CERTAIN MINIMUM PRICE TO THE
FARMERS. THIS POLICY BENEFITED FARMERS IN INDIA BUT DIS
HAS BEEN A MAJOR CONTRIBUTORY FACTOR TO
INFLATIONARY PRICE RISE IN COUNTRY.

26. UPWARD REVISION OF
ADMINISTERED PRICES
THERE ARE A NUMBER OF IMPORTANT COMMODITIES FOR
WHICH PRICE LEVEL IS ADMINISTERED BY THE GOVERNMENT.
MANY OF THESE COMMODITIES ARE PRODUCED IN THE
PUBLIC SECTOR. THE GOVERNMENT KEEPS ON RAISING
PRICES FROM TIME TO TIME IN ORDER TO COVER THE LOSSES
IN THE PUBLIC SECTOR WHICH OFTEN ARISE DUE TO
INEFFICIENCY AND UNIMAGINATIVE PLANNING. THIS
POLICY RESULTS IN COST PUSH INFLATION

27. OTHER FACTORS
FAILURE OF GOVT. TO FULLY BRING WITHIN THE AMBIT OF
TAXATION D INCREASING INCOME OF D PEOPLE LARGE
SCALE TAX EVASION N AVOIDANCE, BLACK MARKING AND
HOARDING OF ESSENTIAL COMMODITIES,
INFRASTRUCTURAL BOTTLENECK AND RISING PRICES OF
IMPORTS.

28. Thank You
MADE BY AHSAN AHMAD BABA