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What’s the Difference Between Inflation and Cost of Living?

❶Thus, an increase in aggregate demand at the full employment stage leads to an increase in price level only, rather than the level of output.

Essays on Effects of inflation

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When the Going Gets Expensive

Interest rates are decided in the U. In the long term, stocks and precious metals are good protection against inflation. Inflation is a serious problem for fixed income investors. Inflation-indexed securities offer protection against inflation but offer low returns.

Inflation is less dramatic than a crash, but it can be more devastating to your portfolio. Understanding the risks and likely rate of inflation can help investors craft a strategically, well-diversified retirement portfolio. Learn the underlying theories behind these concepts and what they can mean for your portfolio. Inflation can devour a once secure nest egg. Such increases in costs are passed on to consumers by firms by raising the prices of the products.

Rising wages lead to rising costs. Rising costs lead to rising prices. And rising prices, again, prompt trade unions to demand higher wages. Thus, an inflationary wage-price spiral starts. This causes aggregate supply curve to shift leftward. This can be demonstrated graphically Fig. Below the full employment stage this AS curve is positive sloping and at full employment stage it becomes perfectly inelastic.

Now, there is a leftward shift of aggregate supply curve to AS 2. With no change in aggregate demand, this causes price level to rise to OP 2 and output to fall to OY 2. With the reduction in output, employment in the economy declines or unemployment rises. Thus, CPI may arise even below the full employment Y f stage. It is the cost factors that pull the prices upward. One of the important causes of price rise is the rise in price of raw materials.

For instance, by an administrative order the government may hike the price of petrol or diesel or freight rate. Firms buy these inputs now at a higher price. This leads to an upward pressure on cost of production. Not only this, CPI is often imported from outside the economy. Increase in the price of petrol by OPEC compels the government to increase the price of petrol and diesel.

These two important raw materials are needed by every sector, especially the transport sector. As a result, transport costs go up resulting in higher general price level. Again, CPI may be induced by wage-push inflation or profit-push inflation.

Trade unions demand higher money wages as a compensation against inflationary price rise. If increase in money wages exceeds labour productivity, aggregate supply will shift upward and leftward. Firms often exercise power by pushing up prices independently of consumer demand to expand their profit margins.

Fiscal policy changes, such as an increase in tax rates leads to an upward pressure in cost of production. For instance, an overall increase in excise tax of mass consumption goods is definitely inflationary. That is why government is then accused of causing inflation. Finally, production setbacks may result in decreases in output. Natural disaster, exhaustion of natural resources, work stoppages, electric power cuts, etc.

In the midst of this output reduction, artificial scarcity of any goods by traders and hoarders just simply ignite the situation. Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Thus, inflation is caused by the interplay of various factors. A particular factor cannot be held responsible for inflationary price rise.

When they act as buyers they want prices of goods and services to remain stable but as sellers they expect the prices of goods and services should go up. The old people are in the habit of recalling the days when the price of say, meat per kilogram cost just 10 rupees.

Today it is Rs. This is true for all other commodities. When they enjoyed a better living standard. Imagine today, how worse we are! This goes unusually untold. When price level goes up, there is both a gainer and a loser. To evaluate the consequence of inflation, one must identify the nature of inflation which may be anticipated and unanticipated.

If inflation is anticipated, people can adjust with the new situation and costs of inflation to the society will be smaller. In reality, people cannot predict accurately future events or people often make mistakes in predicting the course of inflation. In other words, inflation may be unanticipated when people fail to adjust completely.

This creates various problems. During inflation, usually people experience rise in incomes. But some people gain during inflation at the expense of others. Some individuals gain because their money incomes rise more rapidly than the prices and some lose because prices rise more rapidly than their incomes during inflation.

Thus, it redistributes income and wealth. Though no conclusive evidence can be cited, it can be asserted that following categories of people are affected by inflation differently: Borrowers gain and lenders lose during inflation because debts are fixed in rupee terms.

When debts are repaid their real value declines by the price level increase and, hence, creditors lose. An individual may be interested in buying a house by taking a loan of Rs. The borrower now welcomes inflation since he will have to pay less in real terms than when it was borrowed.

Lender, in the process, loses since the rate of interest payable remains unaltered as per agreement. However, if in an inflation-ridden economy creditors chronically loose, it is wise not to advance loans or to shut down business.

Never does it happen. Rather, the loan- giving institution makes adequate safeguard against the erosion of real value. These people suffer a reduction in real income when prices rise. Similarly, beneficiaries from life insurance programmes are also hit badly by inflation since real value of savings deteriorate. People who put their money in shares during inflation are expected to gain since the possibility of earning business profit brightens.

Higher profit induces owners of firms to distribute profit among investors or shareholders. Anyone earning a fixed income is damaged by inflation. Sometimes, unionized worker succeeds in raising wage rates of white-collar workers as a compensation against price rise.

But wage rate changes with a long time lag. In other words, wage rate increases always lag behind price increases. Naturally, inflation results in a reduction in real purchasing power of fixed income earners. On the other hand, people earning flexible incomes may gain during inflation. The nominal incomes of such people outstrip the general price rise. As a result, real incomes of this income group increase. It is argued that profit-earners gain from inflation. Profit tends to rise during inflation.

Seeing inflation, businessmen raise the prices of their products. This results in a bigger profit. Profit margin, however, may not be high when the rate of inflation climbs to a high level.

However, speculators dealing in business in essential commodities usually stand to gain by inflation. Black marketeers are also benefited by inflation. Thus, there occurs a redistribution of income and wealth. It is said that rich becomes richer and poor becomes poorer during inflation. However, no such hard and fast generalizations can be made.

It is clear that someone wins and someone loses from inflation. These effects of inflation may persist if inflation is unanticipated. However, the redistributive burdens of inflation on income and wealth are most likely to be minimal if inflation is anticipated by the people. The two major causes are demand pull and cost-push inflation. Demand pull on inflation is when the demand for the product is so high that the producer contemplates of increasing the price of the product in order to earn abnormal profits.

Cost-push inflation occurs when the cost of production increases for most of the products in the county. Cost-push inflation is normally caused by the action of the government. For instance there are 2 things which will cause the increase in the cost of production for everything being produced in the country. The first one is the fuel price and the second thing is electricity tariff. This is the real reason prices of the things fluctuate every week and it has made impossible for the people to manage their personal budget.


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Essay on the Types of Inflation: As the nature of inflation is not uniform in an economy for all the time, it is wise to distinguish between different types of inflation. Such analysis is useful to study the distributional and other effects of inflation as well as to recommend anti-inflationary policies.

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Inflation is defined as a continuous process of raising prices, or whatever it is, a continued decline in value of money. Money loses value when the can not buy the same quantity of goods than before. 2. Lessons From Inflation. Overheating.- It is said that there is overheating in the economy when there is a slight increase in prices.

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- Objective: The effect of inflation on the job market The Effects of inflation on the Job Market In the major industrial countries, low unemployment usually creates inflationary pressures. But during the recent economic expansion in the United States, prices have held steady despite low unemployment. dissertation sociologie exemple Buy Essay On Inflation Effects writing an admission essay junk food argument essay about abortion.

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The effects of inflation on the labor market Essay. Objective: The effect of inflation on the job market The Effects of inflation on the Job Market In the major industrial countries, low unemployment usually creates inflationary pressures. Sep 03,  · Essay on Inflation Inflation and Total Factor Productivity The lowering of overall price levels. Demand-pull inflation: Occurs when consumers want to buy more goods and services than producers supply. Cost-push inflation: Occurs when producers and Secondary Effects; Economics Essay Notes - Words; The Universe - .