Scribd
Upload
10 views14 pages

Inflation

This document outlines the topic of inflation, defining it as a continuous rise in general prices and explaining its measurement through the consumer price index (CPI) and production price index (PPI). It discusses the effects of inflation, including economic, social, and political consequences, as well as the redistribution of wealth and income. Additionally, it distinguishes between demand-pull and cost-push inflation, detailing their causes and impacts on the economy.

Uploaded by

Katlego Molefe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
10 views14 pages

Inflation

This document outlines the topic of inflation, defining it as a continuous rise in general prices and explaining its measurement through the consumer price index (CPI) and production price index (PPI). It discusses the effects of inflation, including economic, social, and political consequences, as well as the redistribution of wealth and income. Additionally, it distinguishes between demand-pull and cost-push inflation, detailing their causes and impacts on the economy.

Uploaded by

Katlego Molefe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 14

ECONOMICS 512

Inflation

SEMESTER 2: 2024
LECTURER: Mihlali Mfeya

| 1
Chapter Outcomes

• After studying this topic, you should be able to:


• Define Inflation
• Explain why inflation is a problem
• Describe how inflation is measured
• Analyse the effects and costs of inflation
• Distinguish between demand-pull and cost –push inflation.
• Explain some policy measures to combat stagflation
Inflation
• Definition:
• A continuous and considerable
rise in price in general
• Neutral definition:
• increase of goods and services
from year to year
• Inflation as a Process:
• increase of goods and services
from year-to-year Inflation is
concerned with a considerable
increase in prices.
• Inflation refers to an increase in
priced in general
• The commonly used indicator of general price level is the consumer price index
(CPI)

Measuring
• To calculate inflation, we use the percentage change in the CPI from the one period
to the next.

Inflation: CPI year.


• Inflation is expressed as an annual rate although the period is not restricted to a

(a) Month on the Same Month during Previous Year


• For example. DEC 1993 =163.3 DEC 1992 =148.6
• Answer: (163.3 – 148.6)/148.6 x 100
(b) Annual Average on
Annual Average:
• when the inflation rate has
to be calculated for a
calendar year.

• Example: 1994: CPI = 157.0


and 1993 CPI = 144.1
• Answer: (157.0 –144.1)/144.1
x 100 = 9.0
Measuring
Inflation: PPI
• This price index called
production price index (PPI).
• The price of imported
goods is measured at the
where they enter the
country and not where
they are sold.
• The PPI includes capital
and intermediate goods
PPI excludes services
• PPI measures cost of
production rather than cost of
living
Effects of Inflation
Distribution effects
• Inflation benefits debtors at the expenses
of creditors.
• Difference between the nominal interest
rate and inflation rate is called the interest
rate.
• Redistribution applies to all assets of
which nominal values are fixed.
• Old people tend to have relatively fixed
nominal incomes; inflation tends to
redistribute income and wealth from the
elderly to the young.
• Apart from the redistribution between
private lenders & private borrowers there
is also a significant redistribution from the
private sector to the government.
Effects of Inflation
Economics Effects
• Inflation has various economic effects, which may
result in lower economic growth and higher
unemployment.
• Private Sectors tend to become more concerned
with anticipating inflation than with profitable new
production opportunities.
• Inflation also stimulates speculative practices
that do not add to the country production
capacity.
• By reducing values of existing savings, inflation
may also discourage saving.
• One of the serious economic effects of inflation is
that it can produce balanced of payments
problems.
• Inflation increases export costs and prices.
Thus, it reduces exports.
Effects of Inflation
Social and Political
Effects
• Inflation also has social and
political consequences,
which can further
undermine the
performance of the
economy.
• Price increases make
people unhappy.
• When a general price
level increase, it does
not mean that all prices
are increasing.
Causes of • Demand – Pull Inflation

Inflation • Cost – Push Inflation


Demand - Pull vs Cost – Push
Inflation
Demand – Pull Inflation Cost – Push Inflation

• Increased consumption • Increase in wage and salaries


spending by household • Cost of imported capital and
• Increased investment spending intermediate goods
by firms • Increases in profit margins
• Increased Government spending • Decrease and productivity Natural
disaster for example flood
• Increase in Export earnings
• Demand-pull inflation is the
result of increases in the money
supply
Demand-Pull
•
Inflation
An increase in aggregate
demand leads to an increase
in the price level (P) and
increase in production income
(Y)
• Demand-pull has a positive
impact on production income
and employment
• When the economy is at full
employment further increases
in aggregate demand simply
leads to price increases.
• Increase of goods and
services results in a rightward
shift
Cost-Push
•
Inflation
An increase in the cost of
production results in an
increase in the price level and
a decrease in production and
income.
• Cost-push has a negative
impact on production, income
and employment which is
called stagflation.
• Total production (Y) increases
and is illustrated by an
upward (leftward) shift of the
AS curve from AS1 to AS2.
• Price increases and level of
income fall.
THANK
YOU

| 14

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy