Simply Economy

Everyone stresses on reading the news paper specially The Hindu for GS paper of KAS , IAS or any civil service, But it would seem boring if we do not have the basics cleared, only the Kgs of paper will increase and news reading becomes boring as we find many words as Inflation, deflation, ASI,Purchase power etc etc.

We will deal with these one by one, say Inflation, The Explanation and illustrations may not always be technically perfect, its just for better understanding

Note: Have copied some Pics from Web to make it simpler

Inflation Definition: General raise in the price of goods and commodities,

Why Inflation?

Too much of Liquidity i.e Printing of more currency by Govt or When there is more currency flow in the market
Raise in the production costs or raw materials by manufacturers for Profit sake
Less availability of goods etc i.e when demand for a particular product is more
Tax Raise
Increase in Population
Low Foreign direct investment

Inflation also occurs if Employment rate is high i.e if low unemployment which means purchasing power of people goes up and hence prices go up...

Eg: Because of IT effect in bangalore all Software guys are ready to pay more rent due to good salaries and the real estate spikes up...............
Thus Inflation also depends upon Purchasing power

Liquidity----->
Purchasing power----> is the Peoples Ability to buy goods etc etc


Inflation Some more Ex: Suppose Govt buying oil from Iran, and Iran might increase oil prices for some reasons , if we buy oil for such high prices, will impact in transportation cost, Food and all other things.

If in Agricultural production, for a year onion grown is too less to meet the needs of all the 100 crore people, then onion prices will increase

Or else if everyone has sufficient money to buy onions, then demand for onion will increase , hence the prices of goods depending on onion will go up... all these are just every day happenings and condition is Famously called Inflation

Types of inflation                                                                                     






Cost push inflation  
 As the name itself says occurs when there is increase in the cost of production of goods, subsequently the price of Finished products also increases

Eg: Suppose there is increase in the cost of carrot or onion , all fast food centres increase the price of onion dosa, not even these, even Bhel puri tikki puri prices also will go up

Demand pull inflation
 If the Demand for a particular commodity is more than its supply then occurs the demand pull inflation i.e if there is a limited amount of shirts in a shop and the buyers are more than the available stock, then the strategy to decide who gets the shirts is one who can pay higher than others obviously increasing the price of that shirt than usual.
Demand pull inflation depends on the purchasing power of the people. if People have more money then they will rush to buy the goods which might result in raise price of goods to match the supply, hence resulting in demand pull inflation

Fiscal Inflation
When there is excess Govt spending This type of inflation occurs,Situations like disasters occur and govt has to spend more on recovery and rehabilitation.                   Hyperinflation  This type of inflation occurs during war after war is over ,i.e it is an inflation which is out of control

Measures to Control Inflation

Who does it?

Govt, Central Banks,Monetary authorities or Finance ministries.Methods?
Monetary Measures
Fiscal Measures
Other measuresMonetary measures:

• These are the measures taken by Central Bank i.e RBI in india.
• IT will control the money supply by increasing the Bank rates. When there is more interest rate people will not go for loans , stop spending more inturn savings will increase, Thus the circulation of money is less and hence slowly reduces inflation.
• Reserve ratio will be increased (We will discuss this someother time)
• Central bank will sell the Govt securities and bonds to contract supply of money

Fiscal Measures Will be done by Govt through

• Direct Taxes increase(Eg:income tax)reducing the purchasing power of people decreases and thus demand for goods and services also reduces
• Increase in Public borrowing
• Reduce Public expenditure
• Govt can also make Protectionist measures like banning export of essentials like pulses creals to increase domestic consumption, and Encourage imports by reducing the import duties on import items.

Other measures or long term measures

• Population control, more the people more the demand... hence family planning awareness should be created among people.
• Increase the supply of goods by increasing production specially agricultural and industrial products, so that self sufficiency is maintained apart from exporting and inturn reducing the prices. Encourage agriculture and allied activities then most inflation will be reduced.
• Effective planning is needed to taclke inflation such as Control Illegal activities such as smuggling, say if Rice sugar and oil or any other thing is exported illegally toi get higher prices then causes scarcity and increases prices here.

Egs:
1.In many cases Inflation is created artificially to gain more profits by creating insecurity among people
Eg: Rumours spread like gold price is going to hiked on akshaya tritiya day and all people rush to shops and buy gold, which itself increases prices becuase of shortage in gold... and thus inflation occurs.

2.Insecurity in investors should be removed by maintaining peace and harmony, i.e if the workers go on strikes or dharna , it will stop production , causing demand for goods due to shortage of goods.


Finally Good economic planning will reduce inflation... and helps in developing a healthy economy.

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