They, therefore, set prices and wages on the basis of mark-up over costs and relative incomes. For example, in India, huge amount of resources were used for investment in basic heavy industries started in the public sector. In such a situation, expectations may be disappointed year after year. We will explain this cause of inflation in the Monetarist Theory of Inflation. This will lead to increase in aggregate demand C + I + G. Governments of both developed and developing countries are providing more facilities under public utilities and social services, and also nationalising industries and starting public enterprises with the result that they help in increasing aggregate demand. According to Friedman and other monetarists, the reaction of the people would be to spend the excess money supply on goods and services so as to bring money supply in equilibrium with the demand for money.
If the Central Bank of a country wants to prevent the fall in the private investment, it will expand the money supply to keep the interest constant. There is unjustified transfer of income and wealth from the poor to the rich. Rise in Wages: The basis cause of cost-push inflation is the rise in money wages more rapidly than the productivity of labour. On the other hand, when domestic prices rise relatively to prices of foreign goods, imports of foreign goods increase. Inflation is like a hydra-headed monster which should be fought by using all the weapons at the command of the government. Published on 2018-09-12 India Prices Last Previous Highest Lowest Unit 2.
First, rise in oil prices and other commodity prices along with adverse changes in the terms of trade, second, the steady and substantial growth of the labour force; and third, rigidities in the wage structure due to strong trade unions. But the prices of consumer goods rise rapidly. For when prices are rising, business activities expand which increase profits of companies. But those who invest in debentures, securities, bonds, etc. In other words, it provides a guideline to the authorities about the rate of inflation which can be tolerated with a given level of unemployment. Therefore, the theory of demand-pull inflation is associated with the name of Keynes.
. Besides, resources gap in the private sector due to inadequate voluntary savings and underdevelopment of the capital market have led to their larger borrowings from the banking system which has created excessive bank credit for it. They further argue that the real national income or aggregate output i. It is also characterised as hyperinflation by certain economists. Inflation in India has remained high and persistent in the last six years.
First, due to foreign exchange shortage domestic availability of goods in short supply could not be increased which led to the rise in their prices. The shocks arose from a shortfall in food-grain and non-food grain commodities vegetables, fruits, protein-based foods - pulses, milk, eggs, meat and fish. Lastly, suppressed inflation leads to black marketing, corruption, hoarding and profiteering. Read More: Inflation in Indian Context Inflation is no stranger to the Indian economy. Then we discuss the effects of inflation since questions are often asked in Prelims on the effects of inflation on different economic segments.
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 so that inflation in them cannot be reasonably explained in terms of aggregate demand and aggregate supply. Inflation is a significant economic indicator for a country. A fall in savings means a lower rate of capital formation. In our example aggregate demand can persistently increase if a government has a large persistent budget deficit that it finances by borrowing from the Central Bank or alternatively borrowing from the market year after year. Inflation of this type is called demand-pull inflation. Thus the inflationary gap leads to inflationary pressures in the economy which are the result of excess aggregate demand.
Other Measures : The other types of measures are those which aim at increasing aggregate supply and reducing aggregate demand directly: a To Increase Production: The following measures should be adopted to increase production: i One of the foremost measures to control inflation is to increase the production of essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc. However, wage increase may lead to an increase in productivity of workers. This leads to rise in prices. While there is sufficient evidence in the industrialised countries such as the U. But there is an important difference between the monetarist view of demand-pull inflation and the Keynesian view of it. According to them, one should go deeper into the question as to why aggregate output, especially of food grains, has not been increasing sufficiently in the developing countries to match the increase in demand brought about by the increase in investment expenditure and money supply.
Further, the rise in prices and the cost of living under the influence of rising aggregate demand prompts the workers and their unions to demand higher wages to compensate them for the rise in the prices. When mild inflation is allowed to fan out, walking inflation appears. Then the producers sell their products in the black market which increase inflationary pressures. However, in recent years fiscal deficit in India is financed mainly through borrowing by the Government through sale of its bonds which are generally purchased by banks, insurance companies, mutual funds and corporate firms. If the rate of increase in money wage rates is higher than the growth rate of labour productivity, prices will rise and vice versa. When there is depression and prices fall abnormally low, the monetary authority adopts measures to put more money in circulation so that prices rise.
These costs have to be incurred on spending on petrol if car is used for making trips, more wear and tear of car, the time spent for making a trip. Compared to the developed economies, the cost may rise up more in India because of inflation. The Social Costs and Effects of Inflation : Having discussed the so called inflation fallacy we proceed to explain in detail the social cost and effects of inflation. To discourage such speculative hoarding of goods in short supply monetary policy of high interest rates can be helpful. Cost-Push Inflation Spiral : Let us consider Figure 22A. Open inflation may then result in hyperinflation.