Aartee Mishra is teaching live on Unacademy Plus
aily Lecture Series Ramesh Singh's) A brief Summary of Indian Economv Inflation and Business Cycle-D indi unacadeny By Aartee Mishra
lam Aartee Mishra Graduated from Delhi University, Topper in all my semesters, Pursuing P.G and preparing for CSE. 2 Years of teaching experience of General Studies for competitive examination Have been teaching on Unacademy Plus
EFFECTS OF INFLATION On Exchange Rate:With every inflation the currency of the economy depreciates (loses its exchange value in front of a foreign currency) provided it follows the flexible currency regime. Though it is a comparative matter, there might be inflationary pressure on the foreign currency against which the exchange rate is compared. On Export With inflation, exportable items of an economy gain competitive prices in the world market. Due to this, the volume of export increases On Import Inflation gives an economy the advantage of lower imports and import substitution as foreign goods become costlier. But in the case of compulsory imports (i.e., oil, technology, drugs, etc.) the economy does noft get this benefit and loses more foreign currency instead of saving it.
EFFECTS OF INFLATION On Trade Balance In the case of a developed economy, inflation makes trade balance favourable, while for the developing economies inflation is unfavourable for their balance of trade. This is because of composition of their foreign trade. The benefit to export which inflation brings in to a developing economy is usually lower than the loss it incur due to its compulsory imports which become costlier due to inflation On Employment Inflation increases employment in the short-run, but becomes neutral or even negative in the long run
EFFECTS OF INFLATION On Wages: Inflation increases the nominal (face) value of wages, while their real value falls. That is why there is a negative impact of inflation on the purchasing power and living standard of wage employees. To neutralise this negative impact the Indian government provides dearness allowance to its employees twice a year. On the Self-employed Inflation has a neutralising impact on the self- employed people in the shortrun. But in the long-run they also get affected as the economy as a whole gets affected.
EFFECTS OF INFLATION- ON ECONOMY All the segments discussed above belong to an economy, but we must know the overall short-term and long-term impacts of inflation on an economy Experiences of the world economies in the late 1980s show that a particular level of inflation is healthy for an economy. This specific level of inflation was called as the 'range' of inflation and every economy needs to calculate its own range Inflation beyond both the limits of the range is never healthy for any economy. In the case of India, it is considered 2 to 6 per cent at CPI(C), which is also known as the 'comfort zone' of inflation in India since 2015 Similarly for Australia, New Zealand, the USA, Canada and the European Union, the healthy range today is 1 to 3 per cent. This is why every economy today utilises inflation targeting as part of its monetary policy Inflation beyond the limits of the decided/prescribed range brings in recession to depressions
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