Inflation

Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time.

  1. The index number of prices: an increase in the index number of prices reflects the condition of inflation in an economy.
    a. Wholesale price index: WPI refers to the index that measures the changes in the price of goods at the wholesale market.
  2. Consumer price index (CPI): consumer price index measures changes in the price level of a market basket of consumer goods and services purchased by household.
  3. GDP deflator: it measures the average level of prices of all the goods and services that makes up GDP. the rate of inflation increases with increase in the value of GDP deflator.
Inflation

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Causes of inflation

  • Increase in population: the rate of increase in population is far beyond the rate of increase in the supply of goods increasing population increases the level of demand in the economy which ultimately increase the general price level and creates the condition of inflation.
  • Deficit financing: it refers to the printing of new notes of The Reserve Bank of India to meet the deficit of the government. Printing of new currency increases the level of supply of money in the economy which ultimately reduces the purchasing power of the currency and has created the condition of inflation.
  • Increase in government expenditure: an increase in government expenditure increases the amount of money in the hand of the general public. As the expenditure of government means the income of the general public more money in the hand of the general public leads to increase in demand of goods and services in the economy and results in a rise in pricing.
  • Ease in Finance: the easy availability of finance for credit in the purchase of consumer goods increase the demand for such goods which ultimately results in an increment of General public level and hence creates the condition of inflation.
  • The rising price of imports: an increase in the price of imports increase the pressure of demand on domestic units which will increase the general price level in the economy and has created the condition of inflation.

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