Inflation
INFLATION
The government control measures, all over the world, keep business cycles under control. What has gone nearly uncontrolled over the time is the problem of almost continuous increase in the general price level (this is the problem of inflation). The problem of inflation got accentuated since the early 1970s. It emerged as the most intractable economic problem for both theoreticians and policy-makeovers all over the world. Inflation has been a common problem of the developed and the developing economies.
“Inflation means generally a considerable and persistent rise in the general level of prices or the cost of living.”
A decline in the value of money.
The general tendency in changes of prices of goods and services over a time is called price level. The sustained rise in general price level is called inflation.
During the period of inflation, purchasing power of money declines.
When the general price level rises, each unit of currency buys fewer goods and services.
Inflation reflects reduction in purchasing power per unit of money
But, falling inflation does not mean falling prices and a slowdown in inflation does not mean deflation, for it to happen inflation has to be negative.
A modern rate of inflation is considered to be desirable for the economy. The limit of desirable inflation varies from country to country and from time to time.
Based on past experience, it is sometimes suggested that 1-2% inflation in developed countries and 4-6% inflation in less developed countries is appropriate and desirable limit of modern inflation.
So as long as:-
The general level of price rises at an annual average rate of 2-3% in developed countries and 4-5% in less developed countries and
Macro-variables are not adversely affected by price rise; policy measures to control inflation are not required because controlling inflation under these conditions may distort the price system and disturb employment and growth process.
A price rise is not considered inflationary
The government control measures, all over the world, keep business cycles under control. What has gone nearly uncontrolled over the time is the problem of almost continuous increase in the general price level (this is the problem of inflation). The problem of inflation got accentuated since the early 1970s. It emerged as the most intractable economic problem for both theoreticians and policy-makeovers all over the world. Inflation has been a common problem of the developed and the developing economies.
“Inflation means generally a considerable and persistent rise in the general level of prices or the cost of living.”
A decline in the value of money.
The general tendency in changes of prices of goods and services over a time is called price level. The sustained rise in general price level is called inflation.
During the period of inflation, purchasing power of money declines.
When the general price level rises, each unit of currency buys fewer goods and services.
Inflation reflects reduction in purchasing power per unit of money
But, falling inflation does not mean falling prices and a slowdown in inflation does not mean deflation, for it to happen inflation has to be negative.
A modern rate of inflation is considered to be desirable for the economy. The limit of desirable inflation varies from country to country and from time to time.
Based on past experience, it is sometimes suggested that 1-2% inflation in developed countries and 4-6% inflation in less developed countries is appropriate and desirable limit of modern inflation.
So as long as:-
The general level of price rises at an annual average rate of 2-3% in developed countries and 4-5% in less developed countries and
Macro-variables are not adversely affected by price rise; policy measures to control inflation are not required because controlling inflation under these conditions may distort the price system and disturb employment and growth process.
A price rise is not considered inflationary