Measure of Inflation, Cost-Push, and Cost-Pull Inflation - Essay Example

INFLATION Inflation refers to the rate at which the price of the products in terms of services and goods in the market is rising hence affecting the economy of a nation. This is whereby the rise of the prices leads to a condition whereby a certain currency can at that particular moment buy fewer commodities that it could before the rise. Inflation in other wards is the situation whereby the money purchasing power is greatly erodes or decreased, hence there being a great loss of value of the medium of the exchange in the economy of a nation. Inflation causes both negative as well as positive effects in the economy of a nation. It not only affects the nation but also individuals. It may lead to decrease in the number of investors as well as decrease of products saturating the economy. This implies that there shall be a great shortage of commodities in the market. On the other hand, one of the positive effects of inflation is the fact that there shall be a decrease in the debts of a certain nation in terms of the currency value (Barro 200). Measure of Inflation The measure of inflation in a particular economy basing on the commodity should be very keenly considered because there can be commission of a very great mistake. This is because there are other factors that can have brought the change like the decline in the volume and the quality during production. Inflation in prices can be measured by the rate at which the rate of inflation. Usually the price index’s rate of inflation is calculated to be able to estimates it. In addition to that, the price of the purchased goods and services can be measured by the price index of the consumer. Inflation can also be measured by three price indices. The consumer price one, involves measuring the changes in prices of the local producers for the products that they produce. This is experience because the difference is brought by the profits, taxes and price subsidization. The second one is the commodity price one. This is whereby the measure is only done on selected goods. The last one is the indices measure of core price. This is whereby the rate of inflation is measured by considering the price changes of the goods that are not very important. This means that some commodity like food or oil are not considered because they are likely to become very rare incase of inflation. By doing this, then the economists are in a better position to clearly and very accurately measure the rate of inflation as far commodities are concerned. Another very important measure of inflation is the GDP inflator. This is whereby the gross domestic product is measured. Others include; inflation in assets price, historical inflation and regional inflation. Cost-push and Cost-pull inflation It should be noted that inflation would definitely lead to some positive and negative effects. However, this depends on the rate of inflation. If the rate of inflation is very high, then this will definitely be very harmful to the overall economy. This is because of the inefficiencies that are brought about in the market hence causing the companies as well as the individuals have a herd time trying to plan for their budget. Cost-pull inflation This is a form of inflation in which the prices of the commodities are generally increased due the rise in the cost of production. The increase is not only general but also progressive. It should be noted that in this kind of inflation the factors of production are the ones that causes the rise in the production (Hall & John, 100). Therefore, due to the consistence demand of the same commodity, then there is a cost pull kind of inflation. This is whereby there is a need for the producers as a way of taking advantage of the situation to increase the prices. Therefore, the pull is caused by the demand of the products. Cost-push Inflation This is a situation in the economy that occurs when there is a decrease in the total production or the aggregate supply of goods and services in a certain economy. In this kind of inflation, there is a very great or large rise of the cost or price of the most important services and goods. This is very dangerous because they are things, which cannot be replaced. In other words, they are things, which cannot have alternatives. It should be noted that the production of these goods and services is greatly decreased but the demand remains constant. As a result, the prices of their finished products then rises (Hall & John, 180). A very good example of such is the oil crises that happened some times back whereby the economy of the western countries was greatly affected. This inflation was due to the price increase imposed on petroleum by the OPEC member states. Inflation came about because petroleum is a very important product in the industrial sector. This means that the cost of production of the goods and services, which are dependent on petroleum, rose. In other words, this kind of inflation if an important commodity’s price is inflated, then it means that there is a built-up kind of inflation of all the services and goods that are dependent on it for their production (Mankiw, 300). Conflict between the objectives of price stability and full employment Price stability refers to a situation in any given economy whereby the prices of the commodities and services does not change a lot within a long period. This kind of a situation actually shows that a given economy does not encounter price deflations and inflations hence the stability in the prices. However, it should be noted that at times the rate of increase or decrease in the prices though there, should not be more than 2%. One of the objectives of this kind of measure done by the government is to ensure that the inflation in the nation get controlled so as not to go beyond 2%. Other reasons or objectives are to ensure that there is transparency in the monetary policies and enables the public in general to be able to predict the expected price developments in the future. Therefore, it is important to note that price stability is a way of avoiding inflation and the consequences that comes with it (Burdal & Wyplosz, 70). Full employment refers to the government attempt to ensure all the people in the nation are employable. This effort is by either negative or positive means. This means that the employment could be through positive means whereby training courses are involved or through negative means whereby benefit cut. This means that full employment is achieved when all the people in a nation who are able and very much willing at the existing conditions as well as payment are in a position to do it. This also can be termed 0% unemployment. This form of economic measure is put forth for the purposes of controlling inflation (Mankiw, 200). The conflict that exists between the objectives of full employment and price stability is the fact that both ways are to control inflation but the means in which they are done is very conflicting. If all the people are employed, then it means that a number of policies have to be put forth to ensure that there is a balance in the economy like the tax payment. This is because if the prices are constant, then it means the income of the government get affected too. This is because of the value added tax, which cannot be increased. If the two measures are applied, it means there will be a conflict because the workers may get prices at a cheap price but on the other hand be paying a high pay as you earn tax (Blanchard, 204). Stagflation This refers to a situation whereby there is a very slow rate of economic growth in the country. This situation is due to a great rate of unemployment hence a lot of stagnation and increase in the prices of goods and services. This is one of the most difficult conditions, which can befall any give nation because of the combination of unemployment and inflation at the same time. When there is a reduction in the supply of very important products causing shock in the supply, then the prices increases. This means that there is reduction in profit due to the rise in the cost of production. Effects of Stagflation on the demand management policies (monetary and fiscal policies) Stagflation can pose a very great problem on the monetary and fiscal policies. This is because some of the measure, which should be taken towards ensuring there, is not inflation ends up worsening the stagnation in the economy. In addition, this can lead to development of some very inappropriate policies of micro economy. Like the central bank allowing excess money growth and supply in the market and countries. In addition, the government on the other hand can cause more inflation through their regulation of labor markets and goods markets. Therefore, in other words if the policies meant to cause an increase in the economic growth leads to more inflation, then there is a dilemma. Therefore, to increase the economic growth then the rate of interests has to be decreased to encourage more businesses to be set up since many people will be willing to take loans (Barsky & Kilian, 120). This means that a very great consideration should be taken before taking any measure to prevent or even control the situation that is caused by stagflation. This is whereby so much demands that are brought forth on the management of policies especially the monetary and fiscal policies must be taken into consideration to ensure they do not pose a greater danger to the economy of the nation as well as the financial position of the people in future. References Barro, Robert. J. Macroeconomics. Cambridge, Mass: MIT Press, 1997. Barsky, Robert & Kilian, Lutz . A Monetary Explanation of the Great Stagflation of the 1970s. Michigan: University of Michigan , 2000. Blanchard, Olivier. Macroeconomics. New York: Prentice Hall, 2000. Burda, Michael & Wyplosz, Charles. Macroeconomics. Oxford: Oxford University Press, 1997. Hall, Robert & John, Taylor. Macroeconomics: Theory, Performance, and Policy. Norton: Norton press, 1997.  Mankiw, N. Gregory. Macroeconomics. Cambridge: university of Cambridge press, 2002.    price stability Read More