Economics Introduction 1
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Inflation: When the price of goods increases, due to which our purchasing power decreases.Deflation: When the price of goods decreases, due to which our purchasing power increases or when inflation becomes negative.Recession: It refers to slow down in a few sectors of the economy. Here liquids & purchasing power both are present but there is a lack of liquidity. It hits the luxuries & investments area.Depression: When a recession hits each and every sector of the economy, then there is a lack of liquidity, liquid & purchasing power.Hyperinflation: When there is excess liquidity in the economy due to which liquids & purchasing power become approx. nil.Stagflation: It is a situation where inflation, recession & unemployment altogether exit in the economy.
|Situation Of An Economy||Liquidity||Liquids||Purchasing Power|
|Depression||↓ ↓ ↓ ↓||↓||↓|
Types of Inflation1. Creeping InflationWhen inflation exist in very low rate (between 0 to 9%)2. Galloping InflationWhen inflation is large and accelerating. E.g. Russia Economics in the late 1980s.3. Hyper InflationWhen inflation is extremely high. E.g. Germany after world war.4. Demand-Pull Inflation When Inflation is due to rising demand5. Cost-Push Inflation When inflation is due to the rise in factor cost.6. Bottleneck InflationWhen inflation due to fall in supply. E.g. Due to crop failure.7. Core Inflation When inflation is calculated by excluding food articles and energy. It is calculating inflation for the long term.8. Headline InflationWhen inflation is calculated by including food articles and energy. It is calculating inflation for the short term.
Calculation Of InflationTwo methods for calculation1. Wholesale Price Index (WPI): When the wholesale rate is used to calculate inflation.FORMULA → AP¹ − AP° / AP° x 100AP¹ = Aggregate price of the current yearAP° = Aggregate price of base yearTotal commodities → 676The base year → 2011-20122. Consumer Price Index (CPI):- When the retail price is used to calculate inflation.FORMULA → AP¹ − AP° / AP° x 100Total commodities → Rural →448 / Urban →460The base year → 2018
- In India, we use (CPI method) to calculate inflation.
- Data collection for inflation → NSSO (National Sample Survey Organisation).
- Calculation Of Inflation → CSO (Central Statistical Organisation).
- Announcement of Inflation → RBI (Reserve Bank Of India).
- Primary sector:- E.g. Fishing, Agriculture, Mining, Dairy, etc.
- Secondary Sector/ Manufacture Stage:- E.g. Furniture, Packed items, etc.
- Tertiary/Service Sector:- E.g. Marketing, Teacher, Selling, etc.
- Philips Curve:- It shows the inverse relationship between inflation & unemployment.
Effects Of Inflation1. On debtors and creditors.Debtor gain profits in front of creditors.2. On exporters and importers.Exporters are in profit as exports become cheaper.
Controlling Inflation Of Economy
- RBI strict monetary policies.
- Government strict fiscal policies.
- There is a temporary ban on exports (I>E).
- There is a temporary reduction in import duties.
- ESMA (Essential Service Maintenance Act).