INFLATION
Inflation is a situation of
substantial and rapid general increase in the level of prices and consequent
deterioration in the value of money over a period of time.
In simple words inflation is
associated with high prices which causes decline in the purchasing power or
value of money.
As per Prof. Crowther"
Inflation is a state in which the value of money is falling and the general
prices arising". In the opinion of other economists, inflation is caused
because of an increase in demand for goods and services as compared to the
supply.
The above situation is explained as
:- Money supply in the market increases. Since people have more money, they
start demanding goods and services. To meet the increasing demand, supply of
production cannot be increased at the same rate, This lead to rise in price of
products.
FEATURES
OF INFLATION :-
1. Inflation is a long term operating
dynamic process.
2. Inflation is always related with rise in
price.
3. Inflation is a monetary phenomenon i.e.
it is associated with excessive money supply.
4. The
main cause of inflation is increase in the demand for goods and services in the
country and at the same time decrease in the supply of goods and services in
the economy.
5. Inflation may be in the form of demand
pull or cost push.
6. Pure inflation starts after full
employment.
THEORIES
OF INFLATION :-
1.Demand
Pull Inflation
2. Cost
Push Inflation
1. Demand Pull Inflation :- Demand Pull Inflation theory is the
oldest theory of price rise. It refers to a situation in which aggregate demand
at the existing price level far exceeds aggregate supply of goods and services.
According to Shapiro, "According to demand pull inflation, the general
price level rises because the demand for goods and services exceeds the supply
available at existing prices. According to this theory due to full employment
aggregate supply does not increase at the rate of increase in aggregate
demand."
2. Cost Push Inflation :- Cost push inflation theory was
propounded due to peculiar situations arising after 1960 in America and other
developed countries. In such countries, on one hand prices were rising and on
the other production was falling. Therefore, economists concluded that
inflation is also possible in a situation where aggregate demand is falling but
cost of production is rising, called cost push inflation. The rise in cost
could be due to increase in wage rate, increase in profit rate or increase in
the prices of key raw materials.
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