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The Factors Affecting Inflation

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                   The Factors Affecting Inflation

By inflation one generally means rise in prices. To be more correct inflation is persistent rise in
the general price level rather than a once-for-all rise in it, while deflation is persistent falling
price.
These days economies of all countries whether underdeveloped, developing as well developed
suffers from inflation. Inflation or persistent rising prices are major problem today in world.
Because of many reasons, first, the rate of inflation these years are much high than experienced
earlier periods. Second, Inflation in these years coexists with high rate of unemployment, which
is a new phenomenon and made it difficult to control inflation.
Depending upon the reason of inflation, it can be divided in many types as (1.) Demand-Pull
inflation, (2.) Cost-Push inflation, (3) Structural inflation.
Inflation is very unpopular happening in an economy. Opinion survey conducted in India, USA
and many other countries reveal that inflation is the most important concern of the people as it
badly affects their standard of living. So why it is called Inflation is enemy number one.
As India is also facing same problem so under my studies I want to find out the causes of
inflation and the measure which the RBI using to curb it as rising CRR, repo rate, reverse repo
rate etc will do as planned by RBI or need to use some other tools. And to compare it with
context of other economies problem.
The data for analysis will be collected from different surveys done by RBI and economic surveys
and other surveys and also from the survey reports of other countries to compare it globally.
Then I analyze the data collected for India and global context. Then finding and discussion &
limitation and scope for further researches.
INTRODUCTION
By inflation mean a process of rising prices. A situation is described as inflationary when either
the prices or the supply of money are rising, but in practice both will rise together. In the
Keynesian sense True inflation begins when the elasticity of supply of output in response to
increase in money supply has fallen to zero or when output is unresponsive to changes in money
supply. If there is full employment then condition will of clearly inflationary, if there is increase
in the Money Supply.
Inflation can take many form as:
Deflation: is the opposite of inflation when fall in prices occurs.
Reflation: is moderate degree of controlled inflation.
Disinflation: is process of brining down prices moderately from their high level.
Stagflation: is state where there is stagnation as well as inflation both side by side as prevailed in
India in 1974-75 and 1979-80.
Depending upon the reason of inflation, it can be divided in many types as
(1.) Demand-Pull inflation: This represents a situation where there is increase in Aggregate
Demand for resources either from the government or the entrepreneurs or the households. Result
of this is that the pressure of Demand can’t be met by the Currently available Aggregate Supply
which result in Aggregate Demand > Aggregate Supply which is bound to generate inflationary
pressure in the economy.
(2.) Cost-Push inflation: This represent the condition where even though there is no increase in
Aggregate Demand, prices may still rise. This may happen if the costs of especially wage cost
rise.
(3.) Structural inflation: This type of inflation occurs because of change in structure of economies
as happened in India from Agricultural Structure i.e. Green Revolution to Industrialization. Thus
because of change in Economic Structure gives rise to increase in prices thus generate
inflationary pressure.
Inflation is very unpopular happening in an economy. Opinion survey conducted in India, USA
and many other countries reveal that inflation is the most important concern of the people as it
badly affects their standard of living. So why it is called Inflation is enemy number one.
India is facing the problem of inflationary pressure because of the increase in Aggregate Demand
while Aggregate Supply is respectively constant. The inflationary pressure faced by Indian
Economy is due to Demand-Pull inflation i.e. Aggregate Demand > Aggregate Supply.
Thus to curb inflation need to fill the gap between Aggregate Demand and Aggregate Supply. For
this either need to increase AS or decrease AD that can hamper economic development. Thus to
increase AS is the best tool which can be used. To increase AS either need to increase production
capacity of all current production unit of to built new production plants. But as quoted in an
survey done by RBI that all the production plants are running at their full production capacity
thus all resources all-full employed the other way is to built new plant but to do this will take at
least 18months to 2years. Thus meanwhile need to decrease Money Supply, which is opted by
RBI.
As in short run it’s not possible to meet the gap between AD and AS thus RBI is planning to
decrease liquidity by reducing Money Supply from the market. For this it has been planned that
by decreasing CRR, repo rate and reverse repo rate Liquidity from the market will be drained.
CRR i.e. Cash Reserve Ratio is the percentage of deposit that a commercial bank need to keep
with RBI by which RBI control liquidity in the market and create Money Supply.
Currently CRR is 6.5% in the Indian Context.
Repo Rate: is the rate at which RBI lends money to other commercial Banks.
RBI planned that Liquidity from the market can be drained by decreasing money supply and to do
so it is increasing CRR, repo rate, reverse repo rate and taking other measure like that. But
interest is that whether hike to crr and other factors will curb inflation and what are the other
factors, which are influencing inflation.
My purpose of study is that every country faces the problem of inflation whether developed,
underdeveloped or developing. Here I want to concentrate whether the Indian Government and
RBI taking the measures to curb inflation are correct or not? Will it actually bring down the
prices? Because this is not only of our government or of a particular country but globally faced
and the principles on which economy works are same for all the economies.
By this research, it will be beneficial not only for Indian context but for all countries as on this
my whole emphasis is on the causes of inflation and measures to control it and whether the
measure taken by RBI are effective or not?
OBJECTIVE
India is facing the problem of inflationary pressure because of the increase in Aggregate Demand
while Aggregate Supply is respectively constant. The inflationary pressure faced by Indian
Economy is due to Demand-Pull inflation i.e. Aggregate Demand > Aggregate Supply. Thus to
curb inflation need to fill the gap between Aggregate Demand and Aggregate Supply. For this
either need to increase AS or decrease AD that can hamper economic development.
Inflation is very unpopular happening in an economy. Opinion survey conducted in India, USA
and many other countries reveal that inflation is the most important concern of the people as it
badly affects their standard of living. So why it is called Inflation is enemy number one.
RBI planned that Liquidity from the market can be drained by decreasing money supply and to do
so it is increasing CRR, repo rate, reverse repo rate and taking other measure like that. But
interest is that whether hike to crr and other factors will curb inflation and what are the other
factors, which are influencing inflation.
My purpose of study is that every country faces the problem of inflation whether developed,
underdeveloped or developing. Here I want to concentrate whether the Indian Government and
RBI taking the measures to curb inflation are correct or not? Will it actually bring down the
prices? Because this is not only of our government or of a particular country but globally faced
and the principles on which economy works are same for all the economies.
By this research, it will be beneficial not only for Indian context but for all countries as on this
my whole emphasis is on the causes of inflation and measures to control it and whether the
measure taken by RBI are effective or not?
LITERATURE REVIEW
Books & Journals:
? Modern Economic Theory by K. K. DEWETT.
? Macro Economics By H. L. Ahuja.
? Principles of Economics By Marshall A.
? Clayton, G., Gilbert, J. C., Sedgwick, R.: Monetary Theory and Monetary Policy in 1970’s.
? Madan B. K., Role of Monetary Policy in Economic Development.
Websites:
? http://www.wikipedia.com/
? http://moneycontrol.com/researchproject/fn
RESEARCH QUESTION
? Will hike to CRR i.e. Cash Reserve Ratio curb inflation?
? What are the factors, which are affecting inflation?
? Whether rise to inflation is due to increase in Money Supply or due to gap between AD and
AS?
? Whether tool used to drain liquidity from the market will curb inflation through decreasing
money supply?
? Does the situation which is faced by the Indian Economy is comparable to World Economy?
RESEARCH MODEL
INFLATION is a function of Aggregate Demand, Aggregate Supply, and Money Supply i.e.
I = f (AD, AS, MS)
Where AD = Aggregate Demand,
AS = Aggregate Supply,
MS = Money Supply.
HYPOTHESIS
HYPOTHESIS 1
Null Hypothesis: whether prices are rising due to increase in money supply or due to increase in
Aggregate Demand.
Alternative Hypothesis: Prices are rising due to increase in AS not due to increase in Money
Supply.
HYPOTHESIS 2
Null Hypothesis: whether hike to CRR will help to curb inflation via decreasing money supply?
Alternative Hypothesis: hike to CRR will not curb inflation though may drain liquidity from the
market.
HYPOTHESIS 3
Null Hypothesis: whether hike to Repo rates; reverse repo rate will help to curb inflation via
decreasing money supply?
Alternative Hypothesis: hike to Repo rate, reverse repo rate will not curb inflation though may
drain liquidity from the market.
HYPOTHESIS 4
Null Hypothesis: whether the problem of inflation faced by a developing country India is same as
those of other country and developed countries and under developed countries.
Alternative Hypothesis: The problem of inflation differ from countries to other countries whether
it for two developing country.
RESEARCH DESIGN
Sample and Data Description:
The sample would be the data with respect to Indian Economy
? The data of CRR and inflation of last 50years of Indian economy.
? The data of Repo rate, reverse repo rate and inflation of last 50years of Indian Economy.
? The Aggregate Demand and Aggregate Supply Data of last 50 years and respective inflation
data.
? The Money Supply Data of last 50 years and respective inflation data.
The same data will be collected in context of
? Other Developing companies like China, Pakistan etc.
? Developed Counties like USA, UK etc.
? Underdeveloped Counties like Bangladesh etc.
Data collection Technique
The whole project report is based on secondary data and data will be collected from
? RBI websites
? Economic Surveys
? Finance Journals
? Official Gazettes.
? Newspapers.
? Same respective data will also be collected for other countries from their respective source.
Data Analysis Technique
The following statistical techniques can be used while analyzing data for different perspective:
? Percentage relationship
? Ki-Square
? Correlation.
LIMITATION OF STUDIES
? Time Constraint: Because of Shortage of time research work can’t be completed properly
though I had worked hard to select the area, which is of my interest, and need research on that as
no research had been done on that context. But due to lag of time I would not be able to cover all
aspects but will try my level best.
? Resources Constraint: Because of unavailability of proper resources not possible to collect all
data required for complete study of the effect of different factors on inflation.
? Data Reliability: As topic of project is such that it can only be completed on secondary data. As
secondary data will be used so reliability of data is tough but it is too tough to get the primary
data almost impossible at that level.
? Knowledge Constraint: AS because of one major constraint that is knowledge many topics
remained untouched. There remain many more topics which had not been covered under this
topic though relate to it is because of so many other constraining.
SCOPE FOR FURTHER STUDIES
As because of some constraint some topic remained untouched and working of economy always
changes depending upon conditions prevailing in own country and also relative to world
economy so there are always have scope for further research.
Also a research had some limitation may be because of time, Resources, knowledge etc which
gives rise to scope for further findings.
Here under my studies I had not covered many other factors of price rise expect mismatch in AD
and AS and rise in Money Supply, which gives rooms for further researches.
Also I will compare it only with the result of other countries in context of India but same
fluctuation can be correlated with the working of world economy or other countries. Thus t also
gives rise to further researches.
BIBLIOGRAPHY
Books & Journals:
? Modern Economic Theory by K. K. DEWETT.
? Macro Economics By H. L. Ahuja.
? Principles of Economics By Marshall A.
Websites:
? http://www.wikipedia.com/
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