Understanding Inflation: Measures, Types, Causes, and Effects, Lab Reports of Engineering Economy

Download Understanding Inflation: Measures, Types, Causes, and Effects and more Lab Reports Engineering Economy in PDF only on Docsity! INFLATION Measures Types Causes Effects Definition  is a phenomenon signalizing imbalance of economy  is a rise in the general level of prices, as measured against some baseline of purchasing power  Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year  Oner, C (2017), Inflation: Prices on the Rise, IMF, http://www.imf.org/external/pubs/ft/fandd/basics/inflat.htm, C. Oner is Economist in the IMF’s Asia and Pacific Department. How to measure CPI? m (1) Selection of the Base Year (CPI = 100) m (2) Selection of CPI basket, weightage (to measure the importance of one item in the basket) m (3) Collection of data on prices m (4) Calculation of CPI sum of all weighted price index = Weighted CPI ea total weight CPi, +1—CPi, = The rate of inflation is determined as: "= . Types of Inflation = from the quantitative point of view = Creeping inflation the rate of inflation doesn’t exceed the rate of production growth, Creeping inflation is < 10% a Galloping inflation the rate of inflation exceeds the rate of production growth, Galloping inflation is from 10% to 100%. Money loose purchase power, people hold as little money as possible. = Hyperinflation is inflation that is “out of control", a condition in which prices increase els Arte a currency loses its value. Hyperinflation is over 100% per year. Prices as well as wages are extremely erratic. Money have no value and barter trade emerges (barter means the exchange of good for good). Example: Germany after |.VWW,, Hungary after LWW.  Types of Inflation m= Open inflation if economic imbalance is accompanied with rising price level. - Suppressed inflation if state authorities damp or even stop the rise of price level by administrative means. Such situation is followed by existence of scarce commodities, shadow economy etc. In such cases the provision of basic necessities such as agricultural products is set by the government by introducing price controls on commodities 5 a inflation government imposes strict controls to curb price inflation, producers are forced to sell the products at the prices required. Producers can not sell the commodity at higher prices to get the profit, therefore, lower on the quality of products. This means that employers are selling lower quality products at higher prices -> inflation is hidden. Causes of Inflation mg Built-in inflation (or Anticipated inflation) induced by adaptive expectations, often linked to the "price/wage spiral“ it involves workers trying to keep their wages up with prices and then employers passing higher costs on to consumers as higher prices as part of a "vicious circle.“ Built-in inflation reflects events in the past, and so might be seen as hangover inflation. Effects of Inflation = Redistribution effect of inflation Inflation affects recipients of fixed income firstly (nominal incomes remain same but the real value of income drop) Inflation affects the purchasing power of wages that don’t follow the rise of prices Inflation causes diminishing value of loans and savings = Social impact of inflation Socially poor persons suffer from inflation more then rich Effects of Inflation Impact on economy balance Fall of real product bellow potential product Changes in the structure of consumption (consumers are buying cheaper goods) In case of fixed currency exchange rate higher exports are incited Inflation deforms prices Inflation causes higher costs and makes economy less efficient Creeping and anticipated inflation has positive effect on economy and stimulates economic growth High inflation and not anticipated inflation are serious problems in economy.