Last updated on September 23rd, 2023 at 06:59 am
Do you know what inflation is and what are the main causes of it? In this article, we will discuss the meaning of inflation with its causes types, and effects in brief.
At present inflation rate is the main thing that we all want to know about in order to beat the inflation rate and keep running over by beating inflation confidently.
Let’s jump into the topic and discuss inflation:
Table of Contents
Define what is inflation.
Inflation is a rise in the general level of prices of products in an economy or a country over a period of time. Similarly, when the price level increases, each unit of currency is able to buy fewer goods and services.
In the same way, Inflation is also known as decreasing the value of money. Inflation leads to a loss of the value of money. Another popular definition of inflation is ” too much money chasing too few goods and services”
Thus, Inflation results in a loss of value of money.
What is inflation in simple terms?
In simple terms, Inflation is the rise in the general level of prices of goods and services over a period of time. Inflation is also known as a decrease in the value of money. So, it leads to a loss of value of money.
what are the main types of inflation?
According to modern economic theory, there are three types of inflation i.e. 1. Cost-puss inflation 2. Demand-pull inflation 3. Monetary inflation.
1. Cost-pull inflation
Cost pull inflation occurs due to the increase in wages that causes businesses to raise prices in order to cover higher labor costs. It leads to demand for still higher wages.
2. Demand-pull inflation
Similarly, demand-pull inflation occurs from increasing consumer demand financed by easier availability of credit.
3. Monetary inflation
Monetary inflation occurs due to the printing of more money by a government in order to cover its deficits.
top 10 causes of inflation
Too much money chasing a few goods and services is the main cause of inflation. There are many causes of inflation. we will discuss the main top 10 causes of inflation as follows:
1. Increase in money supply
When the money supply is increasing in the country, it leads to inflation.
2. Size of population
When the population of a country increases, the aggregate demand increases, so it leads to an increase in inflation.
3. Increase in bank credit
Similarly, when bank credit increases, people want to buy more goods and services. In this way, the aggregate demand increases, and inflation also increases.
4. Increase in Government expenditure
In the same way, when the government spends more in the country, the income increases and also leads to a rise in demand.
5. Increase in export
similarly, when export increases, the income of the people also increases leading to an increase in the demand for goods and services.
6. Decrease in the tax rate
In the same way, when the tax rate is decreased, the income of the people increases which leads to more demand and causes inflation.
7. Shortage of goods and services
If there is a shortage of goods and services, the aggregate demand for that product increases which causes inflation.
8. Repayments of past debts by the government
Similarly, if the government repays the public debt, people have enough income which leads to an increase in demand.
9. Rise in money wages
When there is a rise in money wages, it causes businesses to raise prices in order to cover higher labor costs. It leads to demand for still higher wages.
10. Rise in prices of imported raw materials
Cost-push inflation occurs due to the rise in prices of imported raw materials. Thus, it is the transmission of inflation from the country of export to the country of import.
top 10 effects of inflation
Inflation may actually be good for the economy when there are unemployed production resources in the country. Mild inflation will cause an expansion of the money supply in underdeveloped countries which will lead to a slow and gradual rise in prices.
In the same way, a high and uncontrolled inflation rate is very harmful to the economy of a country. It affects producers, consumers, importers, employees, and so on.
Inflation creates a deep impact or effects on production, distribution, and so on.
1. Creates business uncertainty
Inflation discourages entrepreneurs from taking risks involved in production. It will be directly affected on account of business uncertainty.
2. Reduces saving
Similarly, inflation directly affects saving or capital accumulation. When there is more money to buy the same quantity of goods, this reduces the savings.
3. Reduces investment in production
Inflation reduces purchasing power and reduces saving then investment and production.
4. Leads black marketing
The seller holds the essential goods to get higher prices in further. so, inflation leads growth of black marketing.
5. Unequal distribution of income and wealth
Inflation leads to unequal distribution of income and wealth in society. In the same way, inflation robs the poor to enrich the rich.
6. Fixed-income earners
In the same way, renters, bondholders, holders of government securities, past savings, pensioners, and so on are directly affected as their money remains the same.
7. Reduces the volume of export
Similarly, inflation may reduce the volume of exports. Domestic prices of goods and services are higher than international prices.
8. Creates exchange rate difficulties
Inflation creates problems in the determination of the rate of exchange between the currencies of different countries.
9. Economy
Uncontrolled and high inflation directly affects the economy of a nation.
10. farmers
Farmers are the gainers because the price of agricultural product rise and the cost of cultivation lags behind the prices received.
FAQ
Mild Inflation may actually be good for the economy when there are unemployed production resources in the country. Mild inflation will cause an expansion of the money supply in underdeveloped countries which will lead to a slow and gradual rise in prices.
A high and uncontrolled inflation rate is very harmful to the economy of a country. It affects producers, consumers, importers, employees, and so on.
When there is a high inflation rate, the product’s general price level increases, leading to too much money chasing too few goods and services. So, it creates many problems and affects directly the economy of a country.
Yes, war is also the leading cause of inflation. When war occurs there is a shortage of the goods and services produced in that country, which leads to inflation.
Conclusion:
As we discuss inflation in brief i.e. Inflation is the rise in the general level of prices of goods and services over a period of time. Inflation is also known as a decrease in the value of money. So, it leads to a loss of value of money.
According to modern economic theory, there are three types of inflation i.e. 1. Cost-puss inflation 2. Demand-pull inflation 3. Monetary inflation.
there are many causes of inflation such as an increase in money supply, increase in exports, shortage of goods and services, rise in money wages, and so on.
Mild inflation may be good for the economy. However, A high and uncontrolled inflation rate is very harmful to the economy of a country. It affects producers, consumers, importers, employees, and so on.
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