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Inflation BY AYUSSH SANGHI Impact of Inflation - Part 4.6
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Costs of Inflation People would normally say, about inflation, that it is bad because it: reduces the purchasing power of people and . lowers the overall standard of living by making goods and services more expensive
Example . Let's say, the cost of a basket of goods has increased from Rs.100 to Rs. 1000. e would say that it is inflation. Let's check out our observation. . W
Analysis In real terms it may not be an actual increase. Let's consider if a person who once earned Rs. 5000 but now he earns Rs. 50,000 If income increases by 10 times then there is also simultaneous increase in prices of goods by 10 times Hence inflation in real terms is NIL
Analysis Whatever people's income is, it increases. Everything including wages, salaries, profits, interest and rent increases during inflations. The wage rate is the price of labour; rent is the price of land etc. During inflations, most prices - including input prices - tend to rise together, and input prices determine both the incomes of workers and the incomes of owners of capital and land
How does Inflation affect Distribution of Income? Gain or loss during inflation depends on whether income rises faster or slower than the prices of the things you a consumer purchases. . Example: Let's say, Mr. A's income is fixed. If his income is fixed and prices rise, A's ability to purchase goods and services falls proportionately . This is reflected in the pensions received by the pensioners. As their pension amount shall never increase.
Impact of Inflation on economy? I'll explain this concept through an example. . Assumption: Prices of Pulses, Wheat and Rice does not increase but prices of automobile, gold and other luxurious items in ncreases What does the above say about an economy?
Impact of Inflation on economy? We can say that prices of Non-essential Goods (like automobile, gold) are increasing. But the prices of essential goods (like wheat, pulses and rice) are stable. It will be more profitable for producers to invest their money for the production of non-essential goods. So, What has taken place in the above economy?
Impact of Inflation on economy? Due to inflation in prices of non essential goods and services the price relationships are distorted and production pattern goes different from what is demanded the most. . As a result, there is misallocation of resources. As a result, there is misallocation of resources. The resoures (land, labou,capial etc) available in the country .The resources (land, labour, capital etc.) available in the country get diverted from essential to non-essential goods.