Meaning of inflation, Managerial Economics

Meaning of Inflation

There has been a proliferation of definitions of inflation. Many of these definitions, however, embody the description of the processes by which the underlying causes of inflation demand pull, cost push etc. reveal themselves. consequently, the fundamental connection between an expansion in the money supply and prices in the economy is obscured.

According to public understanding by inflation is meant a condition which produces a rising trend in the general prices level in the economy. Inflation may however, be present in the economy if the sustained price rise. which would have otherwise occurred. Is prevented from occurring by imposing price and physical controls in the economy. Such a situations is called suppressed inflation. inflation is not amenable to any one definition. According to the chambers twentieth century dictionary inflation is an undue increase in quantity of money in proportion to buying power as on an excessive issue of fiduciary money. Gardner Ackley has defined inflation as a persistent and appreciable rise in the general level or average of prices. According to this definition a sporadic price spurt or an imperceptible rise in prices will not be inflation . elaborating further , Ackley has stated we define inflation as rising prices , not as high prices. In some sense, than inflation is a disequilibrium state it must be analysed dynamically rather than will the tools of statics . According to Crowther inflation is a state which the value of money is falling, i.e., prices are rising. According to pigou , inflation exists when money income is expanding relatively to the output of work done by the productive agents for which it is the payment. In general inflation may therefore be defined as a sustained rise in the general level of prices brought about by high rates of expansion in the aggregate money supply although in contemporary discussions on inflation it is defined as a sustained rise in the general level of prices. Howsoever generated. All these definitions have a common feature of stressing the point that inflation is a process of rising prices and not a state of high prices showing a state of disequilibrium between the aggregate supply and the aggregate demand at the existing or current prices necessitating a rise in the general price level in the economy.

According to the market laws of supply and demand, an increase in prices per se should not be inflationary. Indeed, if anything, it should be anti inflationary because consequent upon a given price rise the total amount of goods and services demanded should decrease while the amount supplied should increase. This must be so unless the aggregate demand and aggregate supply functions are perfectly inelastic. Inflation emerges in the economy on account of the increase in the money incomes of certain sections of the community without any corresponding increase in their productivity giving rise to an increase in the aggregate demand for goods and serves which cannot be met at the current rises by the total available supply of goods and services in the economy.

Posted Date: 12/1/2012 5:16:11 AM | Location : United States

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