article on inflationBlog

article on inflation

They are more concerned with the increase in their money wage rates than real wage rates. The same is the case with the holders of fixed interest bearing securities, debentures and deposits. If it were, they could cut taxes to zero, boost spending, print money to finance the resulting deficits and never see an inflationary downside. As a result, the rich roll in wealth and indulge in conspicuous consumption, while the poor and middle classes live in abject misery and poverty.

When prices rise, the value of money falls. But at a particular level of unemployment when the demand for labour increases, wages rise in the face of expected inflation. But in How to Pay for the War, he began with a situation of full employment in the economy.He defined an inflationary gap as an excess of planned expenditure over the available output at pre-inflation or base prices. Tobin believes that there is a Phillips curve within limits. In such a situation, expectations may be disappointed year after year. In this way, the wage-cost spiral continues, thereby leading to cost-push or wage-push inflation. But wage, cost and price structures are inflexible downward because large business firms and labour organisations possess monopoly power. This process continues till the full employment level is reached. This tends to raise the aggregate demand for goods and services.

The value of bank deposits is also fixed accordingly.

To keep wage increase to the level of labour productivity (OM) in order to avoid inflation, ON rate of unemployment will have to be tolerated. When prices rise more rapidly in the home country than in foreign countries, domestic products become costlier compared to foreign products. Oligopolist and monopolist firms raise the prices of their products to offset the rise in labour and production costs so as to earn higher profits.

Thus the actual inflationary gap would be Rs. They become more impoverished. Several economists have extended the Phillips analysis to the trade-off between the rate of unem­ployment and the rate of change in the level of prices or inflation rate by assuming that prices would change whenever wages rose more rapidly than labour productivity. Moreover, output cannot be increased during the short run because factors are already fully employed. This is also known as deficit-induced inflation. They are near zero in Britain, and only a little higher in America. Monetary policy can only be helpful in controlling inflation due to demand-pull factors. It is meant to stabilise the prices of necessaries and assure distributive justice. whether the incomes of the rich have increased and that of the middle and poor classes have declined with inflation. Like Tobin, Robert Solow does not believe that the Phillips curve is vertical at all rates of inflation.

190 crores as disposable income. To profit more from rising prices, producers hoard stocks of their commodities. Such a situation brings a total collapse of mon­etary system because of the continuous fall in the purchasing power of money.

The higher the growth rate of the nominal money supply, the higher is the rate of inflation.

The demand for goods and services increases when consumer expenditure increases.

If hyperinflation persists and the value of money continues to fall many times in a day, it ultimately leads to the collapse of the monetary system, as happened in Germany after World War I. Businessmen of all types, such as producers, traders and real estate holders gain during periods of rising prices. In the long term it is the culmination of a decades-long trend. It is to be noted that PC is the “conventional” or original downward sloping Phillips curve which shows a stable and inverse relation between the rate of unemployment and the rate of change in wages. Those who correctly anticipate inflation, they can adjust their present earnings, buying, borrowing, and lending activities against the loss of income and wealth due to infla­tion.

This special report will argue that anchored inflation expectations, technological change and the flow of goods and capital across borders have conspired to make inflation a less meaningful—and less malleable—economic indicator. People belonging to the first group lose and those belonging to the second group gain. If points В and С are connected, they trace out a Phillips curve PC.

The basis of the Phillips curve LPC of the figure is that wages are sticky downward even in the face of heavy unemployment or deflation. This is because “workers are reluctant to offer their services at less than the prevailing rates when the demand for labour is low and unemployment is high so that wage rates fall very slowly.” On the other hand, when unemployment is low, the rate of increase in money wage rates is high.

Some would argue that inflation is falling short because governments have lost the ability to boost prices.

This is because it is not possible to increase the supply of factors of production and hence of output after the level of full employment. Their costs do not rise to the extent of the rise in the prices of their goods. So workers lose because by the time wages are raised, the cost of living index may have increased further. In other words, it provides a guideline to the authorities about the rate of inflation which can be tolerated with a given level of unemployment.

There is, therefore, no trade-off between unemploy­ment and inflation except in the short run.

Inflation involves the sacrificing of the advantages of international specialisation and division of labour.

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