Inflation &Recession

Presented By :-

Group 7 (Section A)

SringarikaSomendra

RamAmitAjit

Under the Guidance of Garima Mam & Divya Mam

Inflation

 

Inflation is a general rise in prices of goods and services. Inflation results in loss of value of money. If some commodity demands a price of 10 rupees 10 years ago, it now demands Rs. 50. This means there is loss in value of rupee by about five times w.r.t. to that commodity. So in general all commodities appreciate over time. 

Inflation can be defined as a sharp increase in the rate of change of a price index above an acceptable level that lasts over a time period long enough to create expectations of its future persistence.

 Inflation is the rise in the general level of prices of goods and services in an economy over a period of time.

Levels Of Inflation

 Deflation – a fall in the general price level. Deflation occurs when the inflation rate falls below

0% (a negative inflation rate )  Disinflation – a decrease in the rate of inflation

Hyperinflation – an out-of-control inflationary spiral

Stagflation – a combination of inflation, slow economic growth and high unemployment; and

Measures for calculating inflation

Wholesale Price Index (WPI)

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market.

INDIA uses WPI for calculating inflation.

Consumer Price Index (CPI)

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers

Most of the developed nation use CPI for calculating inflation.

1. Over-expansion of money supply i.e. excess liquidity in the economy leads to inflation because “too many money would be chasing too few goods”.

2. Expansion of Bank Credit Rapid is also responsible for the inflationary trend in a country.

3. Deficit Financing: The high doses of deficit financing which may cause reckless spending, may also contribute to the growth of the inflationary spiral in a country.

4. A high population growth leads to increase in demand and money income and cause a high price rise.

5. Excessive increase in the price of fuel or food products due to political, economic or natural reasons will lead to inflation for short- as well as long-term.

Causes Of Inflation

Effects Of Inflation

An increase in the general level of prices implies a decrease in the purchasing power of the currency .

 

Inflation adds inefficiencies in the market, and make it difficult for companies to budget or plan long-term.

Higher Income tax rates.

Inflation can lead to massive demonstrations and revolutions. For example, inflation and in particular food inflation is considered as one of the main reasons that caused the 2010–2011 Tunisian revolution and the 2011 Egyptian revolution,

Impact of Inflation

Economic Impacts The impact of Inflation on the economic system may be classified into 3 kinds –

1) Effects on production (that is changes in the routine of

economic activity)

2) Effects on income distribution (that is , re-distribution of income and wealth)

3) Effects on the consumption and welfare .

Inflation Affecting The Common Man

Fuel Hike Food Price HikeIn times of rising inflation,

this means that increased cost of living for the population. Commodity prices increases significantly.

The foremost effect of inflation in the world economy is seen in prices of fuel . The rising prices of Crude Oil & LPG affects a common man from all sides.

Impact of Inflation on Indian Economy

Right from the beginning, inflation adds to inequalities of income and wealth.

Inflation leads to a shift in the asset preference of wealth holders. 

Inflation leads to balance of payments problems. 

Inflation distorts the financial system of the country.

Steps taken by the Government

The Government said that liberalization of imports, banning exports and a cut in excise and customs duties are among the steps taken by the Government to control inflation in the country.

The Government has directed the Reserve Bank of India (RBI) to take monetary measures and to put down interest rates to control Inflation.

The Central Government of India has directed the Chief Ministers of all the states in India to take preventive measures to control Inflation like cutting down of sales tax , custom and excise duties .

Some of the state Governments have taken up the initiative to provide lower priced ration goods for the Below Poverty Line (BPL)

masses because they are the ones who are the mostly effected .

Positive Impact of Inflation

Very few know that there are some positive impacts of inflation as well. However, the beneficial effects of inflation are limited to only its initial phase when the price rise is sufficiently mild. During that period, there is a favourable impact upon both output and employment.

Inflation is unjust because it affects different classes of people in the society in different ways and in different degrees. If inflation were to affect everyone in the society in exactly the same manner and to the same the degree, it would not alter the economic and social relationships in the community. But inflation takes away wealth from some people and transfers it to others on a random basis without taking into consideration the sound maxim of social equality.

Is Inflation Unjust ?

Facts about Inflation

The Zimbabwean dollar bank note holds the record for the greatest number of zeros shown (100,000,000,000,000). Hungary holds the record for the largest banknote ever issued, but its bank note did not depict all the zeros—the amount was spelled out .

The post-WWII hyperinflation of Hungary holds the record for the most rapid monthly inflation increase ever: 41,900,000,000,000,000% for July 1946, which means prices were .doubled every 14th hour.

* Ref.: Zimbabwe Inflation Hits 11,200,000 Percent CNN. August 19, 2008. Accessed: Aug 28 , 2012. every 13.5 hours .

A dollar from 1950 is now worth only $0.12.

Facts about Inflation in INDIA Current inflation rate in India , as per July 2012, is 6.87%.

Period Inflation(in India) june 2012 - 10.053 %

june 2011 - 8.621 % june 2010 - 13.725 %

* Source- http://the-finance-blog.blogspot.in/2012/03/inflation-rates-of-india-2012.html

A Recession is the contraction phase of the business cycle.

A general definition of recession is “Gradual Decline in Economic activity lasting over for at least two successive quarters “

National Bureau of Economic Research (NBER) is an non-profit organization that defines the economy ‘s state of recession.

They define recession as :

“significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real

income, employment, industrial production, and wholesale-retail sales”.

Recession

Indicators Of Recession GDP is a good indicator of economy and it can be used to predict whether economy is in recession or not.

Other indicators could be;

Unemployment Rate,Consumption Rate,Actual Personal IncomeEtc..

Source- www.STRATFOR.com

Causes Of Recession

A situation in which the supplyexceeds the nation’s ability to consume what has been produced;

Supply > Demand

OVER PRODUCTION

Word of mouth

Assignable Cause

LOW CONFIDENCE

LEVEL

The main causes of recession are :1)Over Production

2)Low Confidence Level

Low Confidence Level

of Millions of consumers and producers after

theyhear many job cuts, Demand comes

down,Problems of

Companies’ bankruptcy , etc

Consumers are fearing that they may

lose their jobs; So, they have less

confidence to spend money and buy

goods. This will result in reduction

in demand in the market . Consumers

start saving money instead of spending

money ,& this is a downward spiral in

the economy .

Word Of Mouth

Assignable CausesNatural Calamities , Terrorist Attacks etc.

Impacts Of Recession

Impacts of Recession can be of following two types :

1) Positive Impacts:Positive Impacts which are visible are :a) Lower Inflation Rate.b) Decrease In Import.c) Decrease In Crude Oil Rate.

2) Negative Impacts : Negative Impacts of Recession are :

a) Decline in Export.b) Unemployment.c) Decrease in GDP.d) Decrease in Foreign Investments.

It is unhealthy for any nation to be in Recession,So, Government need to take certain countermeasures to eliminate or reduce the Effect of recession for turnaround.

Important Point: Today, it is a market Economy

ProducersCan produce and sell at their prices

ConsumersCan decide to

buy or not

Both Producers and Consumers are free to act; Not a forced action

How to overcome recession?

Government has 2 plans

Fiscal Policies(By Govt.)

Monetary Policies(By RBI)

Hence, Government does not have direct control on Producers’ & theConsumers’ behavior .But, they can influence millions of Producers &Consumers with Government’s policies .

Government influences the economy by changing howit (Government) spends and collects money

RBI manipulates the available supply of money in the country

Conclusion

To conclude it can be said that both inflation and recession are part of business cycle which we can

not fully control , we can only take preventive measures and monitor their impacts and invest

wisely.

References

http://www.topcatcoaching.com/article/article/show/33

http://facts.randomhistory.com/inflation-facts.html

http://www.inflation.co.in/

http://www.tradingeconomics.com/india/inflation-cpi

http://www.preservearticles.com/201102073974/7-most-harmful-effects-of-inflation-on-different-aspects-of-a-developing-country-like-india.html

www.investopedia.com/terms

Thanks !