Economics Presentation

Topic : Inflation, Everyones illusion of money.

Team : Abhinav Duggal & Vikesh Khanna (071301) (070829)

Some things you

should know

Batch :

B.Tech. Computer Science, II Year.

Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair

Origin & Definitions Measures and Indices Major Causes Effects on Global Economy Control Measures Present Scenario

Contents
A glimpse of what is to come.

nflation
What is Inflation

Layman

Rise in Price

Technical

It is a rise in the general price level caused by an imbalance between the quantity of money and trade needs.

Definition

Inflation has but one origin..

Origin
A Walk down the timeline for some answers
The term Inflation originated as devaluation of currency and not rise in price of goods as we now know it.
In times when gold was used as currency, the government or the king used dilution as a measure to raise the profits through Seigniorage. This practice increased the money supply but at the same time lowered the relative value of each coin. Due to this, more coins were needed for the same goods & services. Hence, the price rose.

Factors giving rise to concept of inflation

A change in the value or resource costs.

A change in the actual price of money which then (was usually referred to the metallic content in the currency).

Currency depreciation resulting from an increased supply of currency relative to the quantity of redeemable metal backing the currency.

Later in the 19th century, the term inflation originated as a direct reference to currency depreciation or debasement, and not rise in price of goods.

Inflation is the process of making addition to currencies not based on commensurate increase in production of goods

-Federal Reserves Bulletin

Measuring Inflation

Measures in terms of Price Index

Personal Consumptions Price Index : Average increase in prices for all domestic personal consumption. The PCE rises about 1/3% less than the CPI, a trend that dates back to 1992. This may be due to the failure of CPI to take into account substitution. Consumer Price Index : Measures prices of a selection of goods and services purchased by a typical consumer Formula for calculating Inflation Rate: (CPI2 CPI1) __________ * 100. CPI1 E.g. For USA, inflation rate = (211.080 202.416)/202.416 = 4.28 %

Consumer Price Index

Personal Consumptions Price Index

Other Widely Used Price Indices

Cost of Living Indices

Producer price indices

Commodity Price Indices

Core Price indices

Other Measures of Inflation

1. GDP Deflator

2. Regional Inflation
3. Historical Inflation

Other related definitions of inflation

Related Definitions

Causes Of Inflation

An increase in the general level of prices implies a decrease in the purchasing power of currency

A popular economic (Keynesian) theory proposes that money is transparent to the real forces in the economy and the visible inflation is the result of pressures in the economy expressing themselves in prices.

On the contrary, another view(Monetarist view) believes that it is a result of ineffective government fiscal policy, or spending and taxation.

Demand Pull Theory

The Triangle Theory of Inflation

Cost Push Theory Built-in Theory

Demand Pull Theory

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Supply is not!

Demand

Cost Push Theory on the other hand states that inflation occurs when the cost of producing rises and the increase is passed on to the consumer.

Built-in theory attributes the rise in prices to adaptive expectations, that is, workers trying to keep their wages up, pass higher costs on to consumers in the form of higher prices.

Effects of Inflation

Time Value of Money :

Time Value of Money is most commonly expressed in terms of Interest it receives and inflation is the principal component affecting The rates of interests.

Treasury of the Nation :

To assure that the public gets back their money, governments like USA provide for Treasury Inflation-Protected Securities (TIPS) that charge lesser interest rates. Therefore The treasuries are adversely affected.

Allocation of Money:
Affects the dealing of lenders and borrowers because the loan sanctioned before the inflation period are paid back later in the form of inflated money, i.e money with lesser relative value.

Purchasing Power of currency:

One of the most immediate effects of inflation is the decrease in the purchasing power of currency owing to the decrease in the relative value of currency.

Control Measures

Monetary Policy:
Monetary Policy essentially implies the policy followed by financial institutions. High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation..

Fixed Exchange Rates:

Under a fixed exchange rate currency regime, a country's currency is tied in value to another measure of value such as gold. In this monetary system a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold.

Fiscal Policy:
Fiscal policies are effective in increasing the leakage rates from the circular income flow, thereby rejecting all further additions into this particular flow of income.

Present Scenario

India:
A glimpse of inflation in India
In 2008,Indias Economic Survey Report targeted a drop in Indias Inflation Rate from 5.77% to 4.1%. However, the beginning of 2008 has seen a dramatic rise in the price of rice and other basic food stuffs. Indeed, by July 2008, the key Indian Inflation Rate had risen above 11%, its highest rate in 13 years. This is more than 6% higher than a year earlier and almost three times the RBIs target of 4.1%.

India is deeply intolerant of high inflation accounting to very conservative policy makers. The highest inflation that India has ever seen in the past two centuries was 53.8%

Zimbabwe:
A special reference.

Hyperinflation in Zimbabwe has persisted since 2000, shortly after that country's confiscation of white-owned farmland and its repudiation of debts to the International Monetary Fund. Recent figures (as of 14 November 2008) estimate Zimbabwe's annual inflation rate at 89.7 sextillion (10^21) percent. Early in the 21st century Zimbabwe started to experience hyperinflation. Inflation reached 624 percent in early 2004, then fell back to low triple digits.
On 16 February 2006, the governor of the Reserve Bank of Zimbabwe, Dr. Gideon Gono, announced that the government had printed ZWD 21 trillion in order to buy foreign currency to pay off IMF arrears.

The Reserve Bank of Zimbabwe issued a ZWD 10,000,000 note in January 2008, roughly equivalent of 4 US dollars.
Zimbabwe's inflation soared to a record high of 26,470.8 percent as the economy contracted by 6 percent, the central bank said.

Courtesy
We would like to thank following for assisting us in making this presentation :
1. 2. 3. 4. 5. 6. 7. En.Wikipedia.org Economywatch.com Origin and Evolution of World Inflation by Michael F. Bryan. Questions, International Price Levels and Global Inflation by Michael Ward. Anyone? LiveMint.com Inflation, a short history. WikiPridia.org Deepali Babbar

Questions, Anyone?