Scribd
Upload
171 views4 pages

Inflations, Its Causes and Outcomes: Madam Sanober Shaikh Mahgul Khan Niazi BBA/2k18/101

The document discusses the causes and outcomes of inflation. It defines inflation as a persistent rise in general price levels where the value of money decreases. In Pakistan, prices have risen steadily since partition due to factors like declining growth, expansionary policies, and currency depreciation. The causes of inflation are grouped as demand-pull, such as increases in money supply, government spending, and population, and cost-push, including increased wages, material costs, taxes, and import prices. The outcomes of inflation include a loss of purchasing power, increased spending and borrowing costs, and impacts on trade, employment, and economic growth.

Uploaded by

Minha Sultan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
171 views4 pages

Inflations, Its Causes and Outcomes: Madam Sanober Shaikh Mahgul Khan Niazi BBA/2k18/101

The document discusses the causes and outcomes of inflation. It defines inflation as a persistent rise in general price levels where the value of money decreases. In Pakistan, prices have risen steadily since partition due to factors like declining growth, expansionary policies, and currency depreciation. The causes of inflation are grouped as demand-pull, such as increases in money supply, government spending, and population, and cost-push, including increased wages, material costs, taxes, and import prices. The outcomes of inflation include a loss of purchasing power, increased spending and borrowing costs, and impacts on trade, employment, and economic growth.

Uploaded by

Minha Sultan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

Inflations, Its

causes and
Outcomes

Madam Sanober Shaikh


Mahgul Khan Niazi
BBA/2k18/101
Inflations, Its causes and Outcomes

INFLATION:
Inflation is a process in which the price is rising at a rapid rate and the money
is losing its value.

“Inflation may be defined as a persistent and appreciable rise in general level


of average of prices.”

INFLATION IN PAKISTAN.

In Pakistan, the general price level is persistently rising since Partition of the
Subcontinent. Prices remained volatile during the decade of 1990’s ranging from
5.7% to 13% mainly because of declining economic growth, expansionary policies,
output setbacks, higher taxes and a depreciation of Pakistani rupee. The inflation
rate started declining form 1998 on ward due to improved supply position of goods,
strict budgetary measures.

CAUSES OF INFLATION:

The causes of inflation are generally grouped under two main heads

(a) Demand Pull Inflation

(b) Cost Push Inflation.

A. Demand Pull Inflation:

Demand pull inflation occurs when aggregate demand for goods exceeds
aggregate supply of goods at current prices, thus leading to an increase in the price
level. The factors of which bring about increase in aggregate demand for goods or
rise in the general level of prices are grouped under two separate heads; (i) Factors
operating on demand side (ii) Factors operating on the supply side.

(a) Factors operating on the demand side: These are the factors which bring
continuous rise in the general price level.

(1) Increase in money supply: An increase in money supply leads to an increase in

money income. The increase in money income raises the aggregate demand for
goods and services in the country. The supply of money increases when the govt.
resorts to deficit financing or the commercial banks expand credit. When too much
money chases too few goods, the result is an increase in general price level.

(2) Increase in Government expenditure: If there is increase in govt. expenditure


due to adoption of development and welfare activities of the country has to flight a

Mahagul Khan Niazi


BBA/2k8/168 Page 1
Inflations, Its causes and Outcomes

war, it causes as increase in govt. expenditure which leads to increase in aggregate


demand for goods and services and hence the price level goes up.

(3) Increase in private expenditure: A continuous increase in consumption and


investment expenditure in the private sector raises the demand for goods and
services and leads to inflationary rise in prices.

(4) Increase in population: The rapid rising population exerts pressure on the
demand for goods and services. If the supply of goods and services fail to match
with the demand, the general price level moves upward.

(5) Black money: The money generated through smuggling, tax evasion etc. raises
the demand for luxury and other goods. Hence black money is also one of the
causes in raising the aggregate demand for goods and a rise in general price level.

B. Cost Push Inflation:


Cost push inflation occurs when there is an increase in the cost of production
of goods and is not associated with excess demand. The main causes of cost push
inflation are:

(1) Increase in money wage rate: The wage push inflation occurs when strong
labour unions manage to press for wage increases in excess of labour productivity.
Unit cost of production is thereby raised. The rise in cost of production exerts
pressure on sellers to increase prices of goods so as to get profit margin.

(2) Profit push inflation: If the producers of certain commodities have monopoly
or near monopoly power in the market, they fix up higher profit margins arbitrarily
without any increase in other elements of cost. When a few powerful firms increase
the profit margins, the smaller firms also tend to mark up their profit margins. The
higher profit margins, thus, inflate the price level.

(3) Material push inflation: If there is increase in the prices of some basic
materials such as gas, steel, chemicals, oil etc which are used directly or indirectly in
almost all industries, it causes an increase in the cost of production and hence in the
general price level.

(4) Higher taxes: If the government levies new taxes and raises the rates of old
taxes the producers generally shift the burden of taxes on to the consumers. The
increases in the selling prices of the commodities push up the inflationary trend in
the economy.

(5) Import prices: If prices of imported goods increase, it also results in the
contribution of inflation.

Mahagul Khan Niazi


BBA/2k8/168 Page 2
Inflations, Its causes and Outcomes

OUTCOMES OF INFLATION :
It adds inefficiencies in the market, and make it difficult for companies to budget or
plan long-term. Uncertainty about the future purchasing power of money discourages
investment and saving. There can be negative impacts to trade from an increased
instability in currency exchange prices caused by unpredictable inflation. Inflation
rate in the economy is higher than rates. Inflation rate in the economy is higher than
rates in other countries; this will increase imports and reduce exports, leading to a
deficit in the balance of trade, Following are the main outcomes of inflation:

 Erodes Purchasing Power


 Encourages Spending, Investing
 Causes More Inflation
 Raises the Cost of Borrowing
 Lowers the Cost of Borrowing
 Reduces Unemployment
 Increases Growth
 Reduces Employment, Growth
 Weakens or Strengthens Money

Mahagul Khan Niazi


BBA/2k8/168 Page 3

You might also like