BCom 3rd Year Inflation Deflation Money Financial System Study Material notes in Hindi
Table of Contents
BCom 3rd Year Inflation Deflation Money Financial System Study Material notes in Hindi: Meaning of Inflation Types of Inflation Causes for Inflation Effects of Inflation Measures to Restraint Inflation Causes of Deflation Effects of Deflation Comparison Between inflation and Deflation Exercise Questions Long Answer Type Questions Short Answer Types Questions Objective Types Questions:
BCom 3rd Year Nature Importance Financial Money Study Material notes in hindi
INFLATION AND DEFLATION
It is big fault of money that its value doesn’t remain constant. There are changes in its value from time to time. The cause of this change is the change in the prices of goods and services from time to time. It has been clear in the previous chapter that there is an inversely proportional relationship between the value of money and price level and trade cycle is born due to changes in the price level. The situation of recession and boom comes in the economy due to cycle of trade. The circumstances appearing due to changes in the value of money are called inflation and deflation.
Inflation Deflation Money
MEANING OF INFLATION
The literal meaning of the term inflation is ‘spread’ or ‘expansion’ but in reality it is called monetary inflation. Its cause is that it is always a monetary event. In the common language the situation when the price level of goods and services increases and the value of money decrease it is referred to as inflation. But there has been much controversy among economists regarding the definition of inflation. Different economists have defined it differently. For the sake of convenience of study, these definitions can be classified as follows:
Inflation Deflation Money
Definition of Inflation
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A. Definitions based on Quantity of Money , Crowther, Kemmerer, Hawtray, Pigou, Golden Wiser etc.
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B. Definitions based on demand surplus-Keynes Turway, Wicksale etc. |
Inflation Deflation Money
(A) Definitions based on
(1) According to Crowther, “Inflation is a state in which the value of money is falling i.e. price is rising.”
Prof. Crowther’s this definition is certainly an easy definition but it can’t be held satisfactory. According to this definition, every increase in the price level of goods and services should be considered inflation, while it is not so in reality. Every increase in the price level can’t be called inflation. For example, when the period of depression in the economy ends, there is gradual rise in the prices, it is seen in the interest of economy. In this situation, there is a rise in the price level of goods but it can’t be called inflation. So Crowther’s definition can’t be considered to be a complete definition.
(2) According to Prof. Kemmerer, “Inflation is too much currency in relation to the physical volume of business being done.”
According to this definition, when the demand of money increases with respect to the quantities of good and services, it is called inflation. This definition can be called satisfactory to some extent because it gets clear that inflation is born when the amount of money is more that trade requirements.
(3) According to Hawtrey, “The state in which there is over-issue of currency is called inflation.”
This definition is just a circumlocution of words. It doesn’t get clear in this definition what is meant by over issue of currency.
(4) According to Pigou, “Inflation is taking place when money income is expanding relatively to the output of work by production to income earning activities.”
Prof. Pigou’s definition is more satisfactory. He has clarified that the situation of inflation rises when people’s monetary income increases more as compared to the production of goods and services. People’s monetary income increases more as compared to the production of goods and services. People’s monetary income increases due to increase in the supply of money. Consequently, there is an increase in the demands of goods and services which leads to an increase in the amount of production. Again, a time comes when a balance is established between monetary income and production. If the monetary income gets increasing beyond this point, there is no more increase in the production. This leads to rise in the prices of goods and services and it is the situation of inflation.
(5) According to Goldenwiser, “Inflation occurs when the volume of money actively bidding for goods and services increases faster than the available supply of goods.”
This definition resembles that of Prof. Kemmerer. So it is also not satisfactory.
After the study of all the above definitions we can say that Prof. Pigou’s definitions is clear, proper and the best. Actually the inflation doesn’t refer to the situation of increased prices but the sequence of rising prices.
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(B) Definitions based on Demand and Surplus :
Prof. Keynes has associated inflation with the employment condition making demand surplus its basis. According to Prof. Keynes, “If there is expansion in the amount of money before reaching full employment, one part of it will expand employment and the other part will increase prices by increasing cost of production. Keynes has referred the situation before full employment as semi-inflation.
If the amount of money increases beyond the point of full employment there will be no increase in employment because other sources of employment have already been used. So there will be increase only in the prices. According to Prof. Keynes, this will be the situation of full inflation. This can be clarified with the help of the back diagram.
In the back diagram X-axis represents amount of money and Y-axis shows employment and prices. P is the point of full employment. It is clear from the diagram that employment and prices keep rising before point P. So, this will be the condition of semi-inflation and after this situation of full inflation will start. Thus, inflation is a movable process which can be felt only in the long duration so every rise in the price level can’t be called inflation. Only the gradual and stead rise in the price level is considered the indicators of inflation.
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TYPES OF INFLATION
There are many forms of inflation. The following are the prominent ones:
(1) Commodity Inflation : It refers to general type of inflation. According to Prof. Keynes, the prices of commodities rise in a general way in this kind of inflation.
(2) Currency Inflation : When a surplus amount of paper money is issued by the central bank of the country to met the requirements of the government and it leads to the rise in prices of goods and services, it is called currency inflation or Deficit-Induced Inflation.
(3) Credit Inflation : Sometimes the government keeps the amount of money stable and encourages credit. The expansion of credit is done by the banks of the country. When the prices of commodities increase due to expansion of credit, it is called credit Inflation.
(4) Profit Inflation : Sometimes the cost of production decreases for many reasons due to which there is a tendency of decline in prices. But the government takes artificial measures to stop this decline in prices. As a result, the production gets additional profit to be profit inflation. This does not cause any change in the prices of goods. Prof. Keynes has said this stage profit inflation. The prices of commodities do not change in this inflation.
(5) Wage-Induced Inflation: When there is no rise in the production but the producer is compelled to rise wages under the pressure of trade unions, it leads to rise in cost of production. It is called Wage-Induced Inflation.
(6) Production Inflation : When there is no increase in the supply of money, but there is a decline in production due to natural factors like flood, drought, monsoon failure etc. or artificial factors like strike, lockout etc. and there is a rise in the prices of goods, it is called production inflation.
(7) Deficit-Induced Inflation : Sometimes, the government in most democratic countries are incapable of raising funds to meet the increased expenses. In this situation, the government makes a deficit budget. If this deficit is not met even through new taxes, the government issues surplus notes. Consequently, there is a rise in prices which is called Deficit-Induced Inflation.
(8) Full and Partial Inflation : According to Prof. Pigou, when there is an excess increase in the monetary income which crosses to the condition of full employment in the economy, there is rise in prices which is called full inflation. Similarly, before crossing full employment if the quantity of money expands then it is called partial inflation.
(9) Open and Suppressed Inflation : When there is no check on the ising prices in the economy and it is given the freedom of rising independently, control it is called Open Inflation. On the contrary, if the government is trying to control it is called suppressed or controlled inflation.
(10) Cost-Induced or Cost-Push Inflation : The cost of production increases due to increase in the various sources of production. This leads to the rise of prices of commodities; such inflation is called Cost-Induced or Cost-Push Inflation.
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(11) Inflation on the Basis of Speed: On this basis, there are four forms of inflation :
(a) Creeping Inflation : It is also called General Inflation. Such inflation is considered proper for the development of any economy. There is very simple increase in the quantity of money in Creeping Inflation. Generally, an annual increase up to 2 percent is called Creeping Inflation.
(b) Walking Inflation: When the quantity of money in the economy crosses Creeping Inflation i.e.; the annual income in the money is more than 2 percent, it is called Walking Inflation. In this inflation, the increase in the prices can be up to 5 percent.
(c) Running Inflation: If the Walking Inflation is not checked and it goes on increasing, it takes the form of Running Inflation. In this inflation, the prices of commodities can increase up to 10 percent. People with stable income face many hardships during this inflation.
(d) Galloping or Hyper Inflation: There is an increase in prices beyond expectation. This increase in price is observed on the daily as well weekly level. Hyper Inflation has a quick adverse impact on the economy.
Germany and Australia faced such a situation after world War-I. That time there was frequent increase in prices on very quick intervals. The value of money currency had fallen so much that old currencies had to be substituted with new ones.
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Clarification through Diagram :
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The above diagram clears that OA is Creeping Inflation which has slow Pace. If this situation is not controlled, the line of inflation will be converted into Walking Inflation represented by Line OB. OC is the line representation Running Inflation. Similarly OD represents Hyper Inflation. Creeping Inflation is supposed to be good in a developing economy, but it needs to be cared that it should not take the form of Walking or Running Inflation. Hyper Inflation can not be good for any economy
CAUSES FOR INFLATION
The causes of inflation can be divided into two categories (A) Increase in Monetary Income and (B) Decline in Production.
(A) Increase in Monetary Income:
It is true that when the monetary income of people increases, there is an increase in the demand which leads to increase in prices. Following are the main causes of increase in monetary income:
(i) Monetary Policy of the Government: The monetary Policy of the Government determines the amount of paper money issued by Central Bank of the Country. Sometimes, the government commands the central bank to issue surplus paper money in special circumstances. In this initial phase, such a decision seems to be proper for balancing the economy, but if it is not checked, it can increase extraordinarily and take the form of inflation. Similarly, the adverse conditions of bank rate, credit policies, open market operations etc. are the causes of inflation.
(ii) Reduction in Public Debt : When the government reduced the amount of public loan taken from people of the country, or start repaying the loans taken from the people, the monetary strength of people increases. Consequently demands for goods and services increase. If the amount of production is not increased, there is an increase in the prices of goods and services.
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(iii) Deficit Financing : When the government is not able to meet itsdeficit budget through new taxes, it does so by issuing surplus notes. As a result, the amount of money increases in the economy which gives rise to the situation of inflation.
(iv) Credit Policy of Commercial Banks : Credit Policy of Commercial Banks also gives rise to inflation. If these banks start providing cash to people at low rates, the monetary strength of people increases. Consequently, the purchasing power of people increases. If the quantity of production stays stable, there is an increase in prices.
(v) Increases in Demand for Expert Goods : If there is an increase in demand for export of such goods which have a stable supply, there is less availability of these for the domestic consumers. It affects prices. Due to decline in supply of goods in the domestic market, there is an increase in prices.
(vi) Black Money : Black Money refers to that income of any person on which tax has not been paid. Black money creates unnecessary demand for goods and prices increase.
(vi) Increase in Consumer Spending: When consumer starts demanding more and more goods or they demand more amount of luxury goods, there is an increase in prices. Their demand increase further if these are available on installments. As a result there is an increase in prices.
(vii) Increase in Disposable Income : Demands for goods and services increase due to increase in Disposable Income. This leads to rise in prices.
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(B) Reduction in Production :
It is also an important cause of inflation. There can be decrease in P due to the following reasons :
(i) Natural Causes : Excessive rains, drought, flood, earth lead to decline in production in the countries with agr cessive rains, drought, flood, earthquake etc. can “production in the countries with agro based economies. If there is no increase in the amount of money and at the unt of money and at the same time there is decline in production then it can encourage inflation.
(ii) Lack of Raw Materials: With the increase in the demands on goods, there is also an increase in the demand of raw material city of raw materials in the country and it has to be imported ther countries at high price it is sure to affect production. In other words, with the reduction in raw materials, there will also be reduction in production and there will rise the situation of inflation.
(iii) Taxation Policy of the Government: The prices of goods increase in a heavy excise duty is imposed on the production. This creates an environment for inflation.
(iv) Production Process: There are changes in the techniques of production of goods from time to time. If the producer applies the old techniques of production, there will be less production and the cost of production will be high. The consumer will have to pay high price for goods. Thus, the old method of production creates the situation of inflation.
(v) Industrial Disputes : There are clashes with workers and industrial ists for the demand of salaries, allowances, perquisites etc. This creates the situations like strikes, lockouts etc. Trade Unions become dominant over the management. All these cause decline in production. But due to the pre-existing situations of demands, the prices go up and inflation is increased.
(vi) Increase in Demand : When there is increase in demand of goods as compared to the production, there rises a situation of inflation. This increase in demand rises due to population growth, increase in export, period of war etc.
(vii) Black Marketing: Sometimes, people create an artificial scarcity of necessary goods in the market by stocking them. They start selling goods in black markets at high prices for earning more profits. This situation gives rise to inflation.
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EFFECTS OF INFLATION
Inflation has different effects on different classes of people. Some people are profited from it while some other are harmed. It is true that the prices of goods and services increase during the inflation. But it does not increase uniformly. People from different social classes demand different materials of necessities. So, inflation does not have equal effect on all classes. Besides some people have stable income. So, inflation does not affect all classes equally.
The effect of inflation on different classes can be classified in the following points
(A) Economic Effects:
(1) Producer’s Class : Prices of goods increase during the inflation but production cost does not increase. Its reason in that raw materials are previously purchased and production can’t be increased very much in the chart period. There is an increase in the price of finished goods Maintained in the stock. This gives the producers extra profit. Thus, inflation is beneficial for producers’ class. They also start expandingtheir activities, being encouraged by surplus profit.
(2) Consumer’s Class : Generally, consumers are from two groups—those with definite income and those with indefinite income. Those with definite income have to face more hardship as they face difficulties with their budget due to increase in the prices of goods of their consumption. Consequently, they have to reduce their consumption. Similarly, people with uncertain income also face problems due to inflation. However their income increases during the inflation, but it does not increase in the ratio of increase in prices.
(3) Wage Earners : Sometimes wage earners get benefit and sometimes face loss due to inflation. They get more opportunities of employment due to expansion of trade and industries during the inflation and they don’t face unemployment. At the same time if trade unions are strong, they can get wages adjusted according to inflation. With this view point, inflation is beneficial for labourers. On the other hand, it is also true that they have to face difficulties when wages are not increasing in the ratio of rise in the prices. The producers also exploit them if the trade unions are weak.
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(4) Debtors and Creditors: The debtors are benefited while the creditors are harmed during the inflation. The reason is that the purchasing power of money decreases during the inflation. However, the creditors get their money back but its purchasing power falls as compared to its purchasing power when the amount was lent. Thus, the creditors face a loss. If the creditors face a loss, the debtors are certainly benefited.
(5) Import and Export : There is much increase in the prices of commodities during the inflation. It is not necessary that the situation of inflation exists in all the country at the same time. Thus, in a particular country the export reduces and import increases due to increase in prices of commodities. This weakness the balance of international trade and affects the economy badly.
(6) Investors : Those investors who invest in the sector with stable income such as debentures, bonds etc. they face a loss even after getting a certain income because the purchasing power of their income reduces during inflation. But those investors who have invested in the equity share capital of companies get more profit because there is an increase in the profit of companies and so shareholders get a higher dividend.
(7) Government: The expenditure of the government increases during the inflation because the employees have to be paid a raised salary. Besides, there is also an increase in the expenses on infrastructure and development. Thus, the government faces a loss due to inflation, for the fulfillment of which the government increases the load of taxes to people.
(8) Assessee : Inflation is profitable for assessee. The reason is that the purchasing power of the amount paid by them is less.
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(B) Social, Political and Other Effects:
(1) Increase in Economic Disparity: The rich class get richer and the poor class are compelled to pay the raised prices. The maximum part of profit and income during the inflation goes to rich class. This creates economic disparity in the society.
(2) Increase in Employment: There is expansion of trade and industries during the inflation. New commercial enterprises are also established. Thus, new opportunities of employment are available and there is reduction in the unemployment.
(3) Moral Downfall : The profit of the business class increase due to inflation. Being influenced by the glory of profit, the people of business class indulge in creating artificial scarcity, adulteration, black marketing and other immoral activities.
(4) Encouragement to Bravery and Speculation : Everybody wants to get more and more income during the inflation. As a result, bravery in offices increases. Similarly, the activity of speculation is also encouraged due to inflation.
(5) Banking Development: The income of people increases very much during the inflation. As a result, there is an increase in bank deposits. Banks grant credit with the help of these deposits. Thus, inflation is profitable with the view of banking development.
(6) Political Effects : People’s faith in government weakens during the inflation. The opposition parties try to pressurise the government inside and outside of the parliament. Sometimes the inflation may even cause change in government.
(7) Hoarding : The producers and traders create an artificial scarcity of goods in the market by making stocks with the view of getting profit of increased prices. As result, there is more load of inflation on consumers.
After studying the above mentioned affects of inflation it feels that it is beneficial in certain circumstances. However, the first and second phases of inflation are certainly helpful in the development of economy but after this it disturbs the economy. People lose their faith in currency. Considering the demerits of inflation, Prof. C.N. Vakil has said, “Inflation may be compared to a robber. Both deprive the victim of some possession with the difference that robber is visible, inflation is invisible, the robber’s victim may be one or a few at a time, the victim of inflation is the whole nation, the robber may be dragged to court of law but inflation is legal.”
If we analyse Prof. C. N. Vakil’s statements seriously, it seems plausible. In fact, inflation is an economic evil. Prof. Robertson’s statement is relevant here. According to him, money is boon for humans, but if it is not kept under control; it can be cause of trouble and perplexity.
So, due to evil effects of inflation there is a need of taking measures to check it.
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MEASURES TO RESTRAINT INFLATION
It is essential to check inflation to regulate the economy. Generally following three steps are taken to control the inflation :
(1) Monetary Measures : Those steps are included in the monetary measures which are adopted by the central bank of the country to regulate money and credit. Following are the steps taken by the central bank to control inflation:
(i) To Control over the amount of Money: Controlling the amount of money is good step to check the inflation. S¢, the central bank takes the securities while issuing notes. The central bank must be extremely careful while issuing new currencies so that it should encourage the inflation.
(ii) Credit Control : The inflation can be controlled by the central bank! by credit regulation also. For this the central bank should increase the bank rate and sell the government securities in the open market. Besides, it should also have a proper control on the credit creation by the commercial banks.
(iii) Replacement of Old Money to New Money : When the inflation achieves a critical form, the old currency should be replaced with a new one.
(2) Fiscal Measures : Following steps are included under it:
(i) Increase in Taxes : The government should increase the rate of old taxes on people to check the inflation and it should reduce the purchasing power of people by imposing new direct and indirect taxes.
(ii) Reduction in Public Expenditure: The government should regulate the public expenditure during the inflation. Particularly, non-productive expenses must be checked so that the rises in prices can be controlled
(iii) Increase in Public Debt: To control the inflation, it is essential that the government should take more and more loans from the people to invest it in productive activities. This will reduce the purchasing power of people on one hand and increase the amount of production on the other.
(iv) Encouragement to Savings : The Government should discourage consumption by imposing taxes on consumer goods and it should encourage savings by bringing new schemes related to savings. But the essential goods of consumption should not be imposed with heavy taxes
(v) Balanced Budget : The government should avoid a deficit budget because extra notes will have to be issued to meet this deficit and it will promote the inflation. So, as far as possible, the government should keep a balanced budget.
(vi) Increase in Production : Increasing production is also an important measure to check the inflation. So, the Government should encourage such industries which can produce consumer goods instantly.
(3) Other Measures : Some other measures of controlling the inflation are as follows:
(i) Price Control and Rationing: When there is very much increase in the prices of inflation, the government does the rationing of very essential commodities. It means the government makes the arrangement of selling these goods at cheap rates through a separate distribution system which is availed with the help of ration cards.
(ii) Subsidy : The government gives economic aids to the producers to increase the production and reduce the cost of production of consumer goods.
Thus, a balance in the economy can be maintained by checking the inflation.
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MEANING OF DEFLATION
Deflation is a situation which is opposite to inflation. Like inflation, it is also an economic sickness. According to Crowther, “Deflation becomes a state in which the value of money is rising, i.e. prices are falling.” Crowther’s definition is certainly an easy definition but it is a major fault of this definition that in it every fall in the prices relates to deflation which is not in reality. Fall in prices after the inflation cannot be called deflation but disinflation. Some economists have the opinion that when the supply of money on a particular time in a country is less than its demand, it is called deflation.
However, the best definition has been given by Prof. Pigou. According to him, “Deflation is that situation of fall in prices which arise when the production of goods and services increases rapidly as compared to monetary income.
So, it is clear from Prof. Pigou’s definition that every decline in the price level is not deflation but it arises when the production in the country increases more rapidly as compared to the monetary income of the people. On this basis, it can be said that following declines in the price level are symbol of deflation :
(i) If the monetary income increases, but the amount of production is stable.
(ii) If the monetary income decreases, but there is an increase in the amount of production.
(iii) If the monetary income is stable and the amount of production is increasing
(iv) If there is a decline in both monetary income and production, but the decline in monetary income is less than that in production.
(v) If there is rise in both monetary income and the amount of production but the production is increasing rapidly as compared to monetary income.
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CAUSES OF DEFLATION
Following are the causes of deflation :
(i) Reduction in the Quality of Money: When the government reduces the amount of currency in the country, the situation of deflation arises. Even if the amount of money is stable and the amount of goods and services increase, the situation of deflation will rise.
(ii) Increase in Bank Rate: If the central bank increases the bank rate, the commercial banks also increase their rates of interest. Consequently, the amount of credit available in the country decreases and the prices began to fall and the situation of deflation emerges.
(iii) Open Market Operations : When the central bank of the country starts selling the government securities to the common people, it is called open market operations. When these securities are sold, the amount of money in circulation reduces and at the same time there is a decline in deposits with banks. Its cause is that people withdraw their deposits from the banks to invest in securities. This weakness the economic strength of banks and there is contraction of credit money.
(iv) Taxation and Public Debts : When government charges higher taxation on people or people take the optional or compulsory loans, the amount of money in circulation in the country reduces and the amount of production stays stable. This brings fall in prices; the value of money increases and the deflation come into effect.
(v) Increase in Production: When there is an increase in the production of goods and services in the country and there is no increase in the amount of money and credit deflation arises.
(vi) Other Policies of Credit Control : When the Central Bank of the country adopts other dominant steps like rationing of credit, direct action, change in CRR etc. for the bank rate and open market operation for the credit control, there is deflation of credit money.
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EFFECTS OF DEFLATION
The whole economy is affected by deflation. The effects of deflation on different classes are as follows:
(1) Common People : The general price level of goods and services fall during deflation. Consequently, commodities become cheap and common people are benefited.
(2) Producers and Traders : Producers and traders face loss during deflation. Its cause is that the cost of production for the producers is high while the selling prices become low. The cause of high cost of production is that raw materials are previously purchased and there is also stock of produced goods having high cost of production. But they have to sell goods at low prices due to deflation. Similarly the traders also have to sell those goods at low prices which they have purchased at high prices.
(3) Investors : Those investors who have invested their money in securities like bonds and debentures having stable income are benefited. Its cause is that the purchasing power of their stable income increases. On the other hand, those investors who have invested in the equity shares of joint stock companies face loss because the profit of companies falls during deflation and so the amount of dividend decreases.
(4) Consumers : Generally, there are two classes of consumers–those with stable income and those with unstable income. Consumers with stable income have profit during the deflation because the purchasing power of their income increases but the consumers with changeable income have loss due to deflation because their income declines more that the decline in the prices of goods.
(5) Labourer Class : The labourers get profit in the initial phase of deflation because there is a fall in prices of goods without any fall in their wages. But gradually the wages are reduced by the producers and there is also reduction in the employment if the industries face bad situations. Thus the labourers face the problem of unemployment. So deflation brings loss for the labourer in the long run.
(6) Banking Sectors : There is a decline in the demand of loans due to recession in the field of trade and industries during deflation. At the same time, there is not proper recovery of previous loans. This hampers the banking activities and there is a bigger possibility of failure of banks with poor economic condition.
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(7) Other Effects : Some other effects of deflations are as follows:
(i) The industrial calmness is disrupted during deflation because due to reducing wages and increasing unemployment there is a class between the producers and labourers.
(ii) The export gets encouragement due to the fall in price levels as there is a decline in import.
(iii) Deflation increases the value of money which raises the load of public loans and government and there is a bad effect on the economy
(iv) The incidence of tax for the tax payers is monetarily less during inflation but they have to pay more tax in the form of purchasing power due to high value of money. Thus, the tax payers face loss.
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MEASURES TO RESTRAINT DEFLATION
Deflation is an economic evil. So there is a dire need of checking it. The main measures of checking the deflation are as follows:
(A) Monetary Measures : Following steps come under it :
(i) Issue of Money : If there is an increase in production in the country due to deflation, the central bank should check it by issuing more currencies.
(ii) Increase in Credit Money: The Central Bank should bring an increase in credit money by reducing the bank rate and purchasing securities in the open market.
(B) Fiscal Measures: The government should take following fiscal measures during deflation:
(i) Reduction in Taxes : To encourage the profit of the producers there is a need of reducing the burden of taxes. This gives encouragement in the production and the labourers get chances of employment.
(ii) Increase in Public Expenditure : The government should try to provide the opportunities of economic development and construction by making the possible increase in the public expenditure with the view of increasing the employment opportunities and the purchasing power of people.
(iii) Subsidies: The industrialist should be encouraged by giving subsidies to re-establish the industries which were closed down due to deflation.
(iv) Redemption of Debts: There should be payments of public debts by the government during deflation. This increases the amount of money in circulation.
(C) Other Measures: Besides the above mentioned measures, the inflation can be controlled through other steps also which are as follows:
(i) Promotion of Exports and Control of Import : There should be encouragement to the export of goods produced in the country so that the stock should not be useless. At the same time there should be complete ban on the import of such goods. This would give encourage ment to the producers.
(ii) Elimination of Excess Production : If there is no possibility of sale of available produced goods in the country and the government would also not be in the condition of purchasing these, the surplus production should be eliminated. This brings an instant loss for the producers but in the long run there is an increase in the prices of goods due to their shortage and the producers get profit.
COMPARISON BETWEEN INFLATION AND DEFLATION
Sometimes the question arises which is better-inflation or deflation? As it! has been clear in the previous analysis that both are economic sickness for any healthy economy, so none of the two can be called better. But when the matter of comparative study is concerned we find that inflation encourages production and deflation promotes the equal distribution of income. But it is possible only when both of these are under the control of the government.
The reputed economist Prof. Keynes has said, “Inflation is unjust and deflation is inexpedient, of the two, perhaps, deflation is worse.”
Prof. Keynes’ statement can be analysed in the following ways:
Inflation is Unjust: Prof. Keynes has described inflation as unjust for the following reasons :
(1) The prices of goods increase during the inflation which increases economic burden on the poor class of the society. The rich class can bear this burden but the poor can’t bear it.
(2) The salaried class and other people with a fixed income find their income to be stable but a rise in the prices of goods and services. Consequently they have to cut down their consumption.
(3) Inflation is very bad for the creditors when they provide loan, the purchasing power of money is high but when they get the given loan repaid with the interest, the purchasing power of money is less.
(4) Inflation also promotes immoral activities. It increases the tendencies of bribary, adulteration, black marketing, hoarding, cheating, artificial scarcity of goods etc.
(5) Inflation makes the rich richer and the poor poorer. This increases the economic disparity in the society.
(6) When the government issues new currencies to meet the deficit budget it works as an indirect and surplus taxation because the prices of goods rise.
(7) Inflation brings temporary prosperity in the society but it vanishes gradually.
Thus it can be said that inflation is unjust.
Deflation is Inexpedient : Following are the causes of inexpedient of deflation:
(1) Reduction in Production: There is a fall in the prices of goods during deflation. As a result, producers face loss and reduce production due to disappointment. This weakens the economic condition of the country.
(2) Paradox: A strange paradox arises in the economy during deflation. Goods get cheaper but people have a low purchasing power due to the decline in income. The producers have unsold commodities but the people are unable to purchase essential goods for consumption due to lack of money.
(3) Unemployment: It is a major problem with deflation that trade and industries start getting closed and this increases unemployment.
(4) Difficulties in Prosperity: The economists opine that ones deflation sets in it is difficult to check it and move on the path of prosperity.
(5) Excessive Fall in Moral Value : There is much moral decline of people during deflation. Fall in income and increase in unemployment promote moral decline.
Deflation is Worst: The above discussion clears that both inflation and deflation are bad for the economy. Now the question arises—which is worse? Prof. Keynes’ concept with respect to the answer of this question is absolutely true when the translate that deflation is worse as :
(1) Deflation reduces the national income and promotes unemployment, while inflation doesn’t bring any reduction in the real income of the society. In it, there is only unequal distribution of wealth.
(2) There is more moral decline during the deflation as compared to inflation.
(3) The initial phase of inflation is an indicator of progress in the economy while deflation is bad from its beginning only.
(4) Inflation can be controlled if it has started but it is not easy to control deflation once it sets in.
So, this statement has been proved that “Inflation is unjust, deflation is inexpedient, of the two deflation is worse.”
REFLATION
Reflation is a situation resembling more or less inflation. The nature of both is approximately the same. But the main difference in these two is that reflation is a controlled inflation. When the amount of money is increased in a controlled way to normalise the economy during the deflation it is called reflation. According to Prof. G.D.H. Cole, “Reflation may be defined as inflation deliberately under taken to relieve a depression.”
DIS-INFLATION
When the inflation takes a critical form in the country, a gradual decrease in the amount of money is done to normalise it. It is called dis-inflation. According to Coulborn, “Dis-inflation is a profitable decline in prices, income and expenditure.” Dis-inflation is actually like deflation and the similar practices are implemented in it also. Thus, deflation arises from a natural process while dis-inflation is created under certain policies.
In the above diagram, inflation, deflation, reflation and disinflation are shown. In the diagram, AB is the line of General Price level.
II EXERCISE QUESTIONS.
Long Answer Type Questions
1 “Inflation is unjust and deflation is inexpedient of the two, perhaps, deflation is worse.” Explain this statement.
2. What do you mean by inflation ? Explain its different types.
3. What is inflation ? Explain its causes.
4. What is inflation ? Explain its effects.
5. What is Deflation ? Explain its causes and effects.
6. Explain the meaning of inflation and deflation. Discuss the remedies to check them.
Short Answer Type Questions
1. What is reflation ?
2. What is dis-inflation ?
3. What do you mean by inflation on the basis of speed ?
4. What is inflation ?
5. What is deflation ?
6. Discuss the effects of inflation on employment.
III. Objective Type Questions
Choose the correct option
1 The value of money during the inflation …..
(a) Increases
(b) Decreases
(c) Stays Stable
(d) None of these
2. Prices of commodities during the inflation ……
(a) Increases
(b) Decreases
(c) Stays Unaffected
(d) None of these
3…………….. is profited by inflation.
(a) Consumers
(b) Investors
(c) Producers
(d) Labourers
4. Inflation makes the distribution of wealth ..
(a) Equal
(b) Unequal
(c) Stable
(d) Unaffected
5. Keynes has called deflation as inexpedient as …………
(a) It increases unemployment
(b) It is uncontrolled
(c) It lowers foreign trade
(d) It is not a problem for the government
6. The first phase of inflation is:
(a) Creeping Inflation
(b) Walking Inflation
(c) Running Inflation
(d) Galloping or Hyper Inflation
7. When there is a deliberate expansion of money to combat the evils of depression, it is called.
(a) Inflation
(b) Dis-inflation
(c) Reflation
(d) Deflation
[Ans. 1. (b), 2. (a), 3. (c), 4. (b), 5. (a), 6. (a), 7. (c).]
