Team 5: Nikhil Nag Pavithra Ramashesh Athri Rana Debnath Shalini H. S

Team 5: Nikhil Nag Pavithra Ramashesh Athri Rana Debnath Shalini H. S.

INFLATION & DEFLATION MEANING CAUSES EFFECTS CONTROLLING METHODS  MEASURING AND CALCULATION

MEANING The rate at which the general level of prices for

goods and services is rising, and, subsequently, purchasing power is falling. "

Rising prices Loss of value of currency Purchase power of money “Inflation is too many dollars

chasing too few goods “

CAUSES OF INFLATION The supply/ volume of money goes up. The supply of goods goes down. Demand for money goes down. Demand for goods goes up.

EFFECTS UNCERTANITY REDISTRIBUTION INTERNATIONAL TRADE CHANGE IN PRICES

CONTROLLING METHODS WAGE AND PRICE CONTROL RESTRICTIONS OF EXPORT RAISING INTEREST RATES REDUCING LIQUIDITY IN MARKET CAPPING CREDIT GROWTH AND TIGHTENING

LENDING TO CONSUMERS FISCAL POLICY: INCREASING TAXATION, REDUCING GOVT SPENDINGS

MEASURING CONSUMER PRICE INDEX PRODUCER PRICE INDEX WHOLE SALE PRICE INDEX COMMODITY PRICE INDEX GDP DEFLATOR

CALCULATION IN INDIA WHOLESALE PRICE INDEX :- measures the

average of the changes of goods and services price on the basis of wholesale price. Presently 435 commodities price level is

being tracked through whole sale price index in India. The 435 commodities are divided into different groups & sub groups

PRIMARY ARTICLES: Weightage 22.02525% - 98

commodities includes article, minerals.

food articles , non food

FUEL ,POWER ,LIGHT AND LUBRICANTS : Weightage

14.22624% 19 articles

MANUFACTURED PRODUCTS :weightage: 63.74851%

318 Articles ie, Food Products, Beverages, Tobacco & Tobacco Products, Textiles, Wood & Wood Products, Paper & Paper Products, Leather & Leather Products, Rubber & Plastic Products, Chemicals & Chemical Products, and Non-Metallic Mineral Products, Basic Metals. Alloys & Metals Products, Machinery & Machine Tools, Transport Equipments &Parts, Other Misc. Manufacturing Industries.

DEFLATION- MEANING  Deflation is a contraction in the volume of money and credit relative to available goods.  Money- socially accepted medium of exchange, value storage and final payment.  Credit- a right to access money.  Deflation is falling pricesmisunderstanding.  Deflation and Disinflation?

Deflation in Japan Deflation started in the early 1990s. Systemic reasons for deflation in Japan can be said to

include: 1.Fallen asset prices. There was a rather large price bubble in both equities and real estate in Japan in the 1980s (peaking in late 1989). When assets decrease in value, the money supply shrinks, which is deflationary 2. Insolvent companies

3.Insolvent banks: Banks with a larger percentage of

their loans which are "non-performing“ 4.Fear of insolvent banks 5.Imported deflation

Deflationary spiral A deflationary spiral is a situation where

decreases in price-lower production-lower wages and demand-further decreases in price. Since reductions in general price level are

called deflation, a deflationary spiral is when reductions in price lead to a vicious circle, where a problem exacerbates its own cause.

CAUSES The supply of money goes down. The supply of goods goes up. Demand for money goes up. Demand for goods goes down

EFFECT OF DEFLATION A fall in the aggregate level of demand Price of goods will fall  Decrease sales and economic activity by making

essentials available, there by reducing severity and duration of recession Deflation is related to risk In monetarist theory, deflation is related to a sustained reduction in the velocity of money or number of transactions Causes unemployment  Discourages investment and spending

PAULSEN Good deflation Bad deflation

Good deflation good deflation" as occurring when businesses

are "able to constantly produce goods at lower and lower prices due to cost-cutting initiatives and efficiency gains". "GDP growth to remain strong, profit growth to surge and unemployment to fall without inflationary consequence."

Bad Inflation "bad

deflation has emerged because even though selling price inflation is still trending lower, corporations can no longer keep Up with cost reductions and/or efficiency gains."

Counteracting deflation Until the 1930s, it was commonly believed by

economists that deflation would cure itself. The government can always stimulate the economy by simply printing money and financing its deficit. Governments and central banks had to take

active measures to boost demand through tax cuts or increases in government spending.

Contd… Expanding demand by lowering interest rates (i.e.,

reducing the "cost" of money). Sustained low real rates can be the direct cause of higher asset prices and excessive debt accumulation. Therefore lowering rates may prove only a temporary measure. Depreciate home currency – The Central Bank in coordination with government can take measures to depreciate the home currency. This would lead to more expensive imports and lead to higher inflation.

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