Written By R!zwan R!zv! University Of The Punjab. Department Of Social Work.

2. My Self
 Rizwan R!zv!
 University Of The Punjab
 Department Of Social Work
 E-Mail.
 rizwanhussainy512@gmail.com

3. INFLATIONINFLATION

4. WHAT IS INFLATION ?
 Inflation is a rise in general level of
prices of goods and services in the
country over a period of time.
 As the cost of goods and services
increase, the value of a currency
declines because you won't be able to
purchase as much with that currency
as you could have last month or last
year.

5. HOW IS INFLATION
MEASURED ?
 Wholesale Price Index ( WPI )
 Consumer Price Index ( CPI )
 GDP Deflator

6. WHOLESALE PRICE INDEX
 The Wholesale Price Index (WPI) was first
published in 1902. It consists of over 2,400
commodities.
 The Wholesale Price Index or WPI is the price of a
representative basket of wholesale goods.
 The Wholesale Price Index focuses on the price of
goods traded between corporations.

7. CONSUMER PRICE INDEX
 CPI is a measure of a weighted average of prices of a
specified set of goods and services purchased by
consumers.
 It is a price index that tracks the prices of a
specified basket of consumer goods and services,
providing a measure of inflation.
 Most developed countries uses this index.

8. WEIGHT EDGE TO WPI
AND CPI

9. GDP DEFLATOR
GDP Deflator refers to the ratio between
GDP at current prices and GDP at constant
prices.
GDP Deflator =

10. CLASSIFICATION OF INFLATION
 CORE INFLATION
 HEADLINE INFLATION

11. CAUSES OF INFLATION
 Demand Pull Inflation
 Cost Push Inflation

12. DEMAND PULL INFLATION
Demand-pull inflation is an inflation that
results from an initial increase in aggregate
demand.
 Demand-pull inflation in short run
 Demand-pull inflation in long run

13. DEMAND-PULL INFLATION IN
SHORT RUN
In the above diagram AD shifts to AD’ because of
increase in demand & that result in increase
of price level from P to P’ & increase of real GDP
from Y to Y’ .

14. DEMAND-PULL INFLATION IN
LONG RUN
 Starting from full employment, an increase in
aggregate demand shifts the AD curve
rightward.

15.  Real GDP increases, the price level rises.
 The higher level of output means that real GDP
exceeds potential GDP.
 The SRAS curve shifts leftward.
 Real GDP decreases back to potential GDP but the price
level rises further.
 Aggregate demand keeps increases and the process just
described repeats indefinitely.
 Demand-pull inflation occurred in the United States
during the late 1960s and early 1970s.

16. COST PUSH INFLATION
Cost-push inflation develops because the higher costs
of production factors decreases in aggregate supply
( the amount of total production ) in the
economy. Because there are fewer goods being
produced (supply weakens) and demand for these
goods remains consistent, the prices of finished
goods increase (inflation)
There are two main sources of increased costs
 An increase in the money wage rate
 An increase in the money price of raw materials, such
as oil.

17. COST PUSH INFLATION IN
SHORT RUN
In the above diagram SRAS shifts to SRAS’
because of decrease in supply & that result in
increase of price level from P to P’ & decrease of
real GDP from Y to Y’ .

18. COST PUSH INFLATION IN
LONG RUN
 A rise in the price of goods decreases short-run
aggregate supply and shifts the SRAS curve leftward.

19.  Real GDP decreases and the price level rises a
combination called stagflation.
 The initial increase in costs creates a one-time rise
in the price level, not inflation. To create inflation,
aggregate demand must increase.
 The increase in aggregate demand shifts the AD
curve rightward. Real GDP increases and the price
level rises again.
 Cost-push inflation occurred in the United States
during 1974–1978.

20. EFFECT OF INFLATION
 Effect on Economic Development : Rapid rise in
prices is detrimental to the process of growth and
development as, it adversely impacts the rate of
saving and investment.
 Effect on Foreign Investment : Price rise has an
adverse effect on the foreign investment in the
country. Foreign investors do not invest in those
countries where the value of money tends to
constantly eroding.
 Adverse Effect on the People with Fixed Income :
Price rise has an adverse effect on the people with
fixed income. On account of rise in price level, the
real value of their monetary income goes down. They
can buy less goods than before. Their standard of
living falls

21.  Increase in Cost : Cost of projects (both private &
public sector) tends to ramp up due to rise in prices.
As a result, plan layouts had to frequently revised to
achieve the stipulated targets. However, when the
planners fail to find additional resources, plan
targets are to be sacrificed.
 Adverse Impact on Balance of Payments : Owing to
inflation, exports become expensive. Domestic goods
lose their competitiveness in the international
market. Exports, therefore, tend to fall. On the
other hand, imports tend to become relatively
cheaper. Accordingly, balance of trade, and
therefore, balance of payments tend to become
unfavorable .

22.  Inequality : A situation of consistent rise in the price
level tends to aggravate inequality in the distribution
of income & wealth. Often, it is observed that during
inflation profits tend to rise faster than wages.
Accordingly, while the capitalists accumulate wealth
and capital, the proletariats suffer deprivation.

23. POLICY OF GOVERNMENT TO
CHECK INFLATION
 Monetary Policy
 Fiscal Policy
 Price Policy

24. MONETARY POLICY
Monetary policy refers to that policy through
which the government or Reserve Bank of India
controls the supply of money , availability of
money and the rate of interest in order to
attain a set of objectives focusing on the price
stability and economic growth of the country.
Monetary measures focuses on controlling the
supply of money as the most patent means of
checking inflation.

25. Instrument of Monetary Policy
 Bank Rate
 Open Market Operation
 Cash Reserve Ratio
 Statutory Liquidity Ratio

26. Bank Rate
Rate of interest or rate of discount that
the Reserve Bank charges from the
member bank on the loans given to them
is called bank rate.

27. Open Market Operations
Open market operations is yet another
technique adopted by the Reserve Bank
for quantitative credit control. This
means that the bank controls the flow
of credit through the sale and purchase of
government securities in the open
market.

28. Cash Reserve Ratio
The Cash Reserve Ratio (CRR) refers to
this liquid cash that banks have to
maintain with the Reserve Bank of India
(RBI) as a certain percentage of their
demand and time liabilities.

29. Statutory Liquidity Ratio
Statutory Liquidity Ratio (SLR) is a term used
in the regulation of banking in India. It is
the amount which a bank has to maintain in
the form of cash , gold or approved
securities.

30. FISCAL POLICY
Fiscal policy is the means by which a
government adjusts its levels of
spending in order to monitor and
influence a nation's economy.

31. Instrument of Fiscal Policy
 Taxation Policy
 Government Expenditure Policy
 Deficit Financing

32. Taxation Policy
Taxation forces the people to save for the
government. The government uses taxation
as a powerful instrument to increase or
decrease the real purchasing power
of the people.

33. Government Expenditure Policy
Aggregate demand is influenced by government
expenditure. On account of increase in
public ( government ) expenditure there is
increase in aggregate demand and vice
versa. Public expenditure can be of two
types:
 Public expenditure incurred to buy goods &
services
 Public expenditure incurred on transfer
payments

34. Deficit Financing
It refers to financing of the deficit in
government budget. When the government
meets its budgetary deficit by borrowing
from the Central Bank, it is called deficit
financing.

35. PRICE POLICY
Price policy refers to the policy of
directing, regulating and controlling the
relative price structure of the economy in
such a manner that it favorably
impacts the macro economic parameters
like ; consumption , saving, investment,
production, etc.

36. Instrument of Price Policy
 Price control
 Administered price
 Procurement price
 Support price
 Dual pricing

37. Price Control
Prices of certain essential goods are
controlled with a view to ensuring their
availability to vulnerable sections of the
society .

38. Administered price
In case of certain public sector enterprises and
departmental undertakings, producing goods
& services of intermediate consumption,
policy of ‘administered price’ is pursued as an
instrument of price policy.

39. Procurement price
It refers to price fixed by the government at
which it procures a part of the farmer’s
produce to run its PDS (Public Distribution
System).

40. Support price
Support price is that price which is offered by
the government to the farmers for the
purchase of their surplus output.

41. Dual pricing
Dual pricing is another important instrument of
price policy in India. It implies sale of certain
commodities (like kerosene oil at present, and
cement and sugar in the recent past) at the
controlled price to vulnerable sections of the
society and at the open market price to the
others.

42. THANK YOU