It discusses the broader definition, factors causing inflation and how it can be estimated using indicators. This paper also outlines a detailed discussion of the effects inflation with respect to economic…
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It’s a change expressed in percentage and compared over a time period. Economists have defined inflation as the sustained general increase in the price of goods and services1. When the prices goes up more money can only pay for fewer goods and services and the currency is said to have lost its purchasing power as the medium of exchange as well as the unit of account in an economy.
When the prices goes up the situation is said to be price inflation while the money is in large supply the situation is referred to as monetary inflation2. Several other concepts are related to inflation such as deflation which refers to a fall in the price levels generally while disinflation refers to a rate decrease in inflation while hyperinflation is when the price increase is beyond control3. A general belief among economist is that inflation is caused by excess money supply in the economy which pushes demand for both goods and services.
The measure of inflation is done through rating the increase in prices over a specified period of time. Inflation rate is expressed as a percentage and is calculated by working out the change in the price index and more so the consumer price index4. The price index on itself cannot give the rate of inflation but it becomes useful when calculating the inflation rate. This rate is the percentage change rate of price index over a period of time. To calculate the inflation rate the formula below is used
The widely used examples of indices to calculated inflation include consumer price index (CPI) which measures change in prices of goods and services (in a fixed basket) purchased by a consumer5. This fixed basket has goods and services put together and are representative of the economy. The producer price index measures price change on average as received by domestic producers. It measures the price paid by producers. It differs from the CPIs in that
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In the same way, it will provide an analysis into some of the effects of inflation while focusing on the different types of inflation arising from different economic situations. Introduction Inflation is described to be a rate in which the overall price of goods and services is increasing while the purchasing power decreases in an economy (Nicholson 57).
In effect, inflation is the loss or the diminishing of value of money in a given economy (Blanchard 45). In plain language, inflation is the instance where goods and services get expensive or the phenomena where people complain that the price of commodities is rising.
In common usage inflation refers to the state of the economy when the money supply is much higher than the physical quantity of goods available in the economy. According to Keynes, inflation refers to that phase of rise in the general price level after the output in the economy grows beyond the full employment level of output (Frisch, 1983).
The effects of inflation can affect an economy in positive and negative ways or both positively and negatively simultaneously because it affects the differently. In many circumstances, there are different explanations that could be given to the rise of inflation in an economy and which could explain the reasons why a currency can lose its purchasing power as compared to different circumstance in market.
Businesses are reluctant to make investments during periods of volatile inflation. Countries suffer from a tax rate that is based on pre-inflationary periods that are less than the current value. It also causes exports to go down as prices go up resulting in a trading deficit.
In cases where demand increased tremendously and threatened to augment inflation rates and cause large balance of payments deficits-income, instead of monetary policy, was used as the instrument to keep
Inflation refers to increment of price levels in general that is the rise in prices in not on individual commodities but in all areas over a period of time. It’s a change expressed in percentage and compared over
ce, in the 2007, European economies considered improving such conditions; however, the sudden effect of the global credit set in and changed many things including:
4. The ratio of debt to GDP increased- The rise in debt levels and the fall of GDP is a crisis. With increased
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