Inflation Inu

8/12/2019 Inflation Inu

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Inflationis a rise in general level of pricesof goods and services over time. Although"inflation" is sometimes used to refer to a rise in the prices of a specific set of goods orservices, a rise in prices of one set (such as food) without a rise in others (such as wages)is not included in the original meaning of the word. Inflation can be thought of as adecrease in the value of the unit of currency. It is measured as the percentage rate of

change of aprice index[!

but it is not uniuely defined because there are various priceindices that can be used.

#any economists believe that high rates of inflation are caused by high rates of growth ofthe money supply.[$!%iews on the factors that determine moderate rates of inflation aremore varied& changes in inflation are sometimes attributed to fluctuations in realdemandfor goods and services or in available supplies (i.e. changes in scarcity), and sometimes tochanges in the supply or demand for money. In the mid'twentieth century, two campsdisagreed strongly on the main causes of inflation at moderate rates& the "monetarists"argued that money supply dominated all other factors in determining inflation, while"eynesians" argued that real demand was often more important than changes in the

money supply.

here are many measures of inflation. *or example, different price indices can be used tomeasure changes in prices that affect different people. wo widely +nown indices forwhich inflation rates are reported in many countries are theonsumer -rice Index(-I),which measures consumer prices, and the /- deflator, which measures price variationsassociated with domestic production of goods and services.

[edit] Related definitions

0elated economic concepts include& deflation,a general falling in price level1

disinflation, a decrease in the rate of inflation1 hyperinflation, an out'of'controlinflationary spiral1 stagflation, a combination of inflation and slow economic growth andrising unemployment1 and reflation, which is an attempt to raise prices to counteractdeflationary pressures.

In classicalpolitical economy, inflationmeant increasing the money supply, whiledeflationmeant decreasing it (seeMonetary inflation). 2conomists from some schools ofeconomic thought (including some Austrian economists) still retain this usage. Incontemporary economic terminology, these would usually be referred to as expansionaryand contractionary monetary policies.

[edit] Measures of inflation

Inflation is measured by calculating the percentage rate of change of a price index, whichis called the inflation rate. his rate can be calculated for many differentprice indices,including&
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Consumer price indices (-Is) which measure the price of a selection of goods

purchased by a "typical consumer." In the 3, an alternative index called the0etail -rice Index (0-I)uses a slightly different mar+et bas+et.

Cost-of-living indices (45I) are indices similar to the -I which are often used

to ad6ust fixed incomes and contractual incomes to maintain the real valueof

those incomes. Producer price indices (--Is) which measure the prices received by producers.

his differs from the -I in that price subsidi7ation, profits, and taxes may causethe amount received by the producer to differ from what the consumer paid. hereis also typically a delay between an increase in the --I and any resulting increasein the -I. -roducer price inflation measures the pressure being put on producersby the costs of their raw materials. his could be "passed on" as consumerinflation, or it could be absorbed by profits, or offset by increasing productivity.In Indiaand the 3nited 8tates, an earlier version of the --I was called theWholesale Price Index.

Commodity price indices, which measure the price of a selection of

commodities. In the present commodity price indices are weighted by the relativeimportance of the components to the "all in" cost of an employee. he GP eflatoris a measure of the price of all the goods and services

included in ross /omestic -roduct(/-). he 38 ommerce /epartmentpublishes a deflator series for 38 /-, defined as its nominal /- measuredivided by its real /- measure.

Capital goods price Index, although so far no attempt at building such an index

has been made, several economists have recently pointed out the necessity ofmeasuring capital goodsinflation (inflation in the price of stoc+s, real estate, andother assets) separately.[citation needed!Indeed a given increase in the supply of moneycan lead to a rise in inflation (consumption goods inflation) and or to a rise in

capital goods price inflation. he growth in money supply has remained fairlyconstant through since the 9:;s however consumption goods price inflation hasbeen reduced because most of the inflation has happened in the capital goodsprices.

4ther types of inflation measures include&

Regional Inflationhe


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#easuring inflation reuires finding ob6ective ways of separating out changes in nominalprices from other influences related to real activity. In the simplest possible case, if theprice of a ; o7. can of corn changes from =;.9; to =.;; over the course of a year, withno change in uality, then this price change represents inflation. bas+et> of goods and services changes. his is the purpose of loo+ing at aprice index,which is a weighted average of many prices. he weights in the onsumer -rice Index,for example, represent the fraction of spending that typical consumers spend on each typeof goods (using data collected by surveying households).

Inflation measures are often modified over time, either for the relative weight of goods inthe bas+et, or in the way in which goods from the present are compared with goods fromthe past. his includes hedonic ad6ustmentsand ?reweighing@ as well as using chainedmeasures of inflation. As with many economic numbers, inflation numbers are oftenseasonally ad6ustedin order to differentiate expected cyclical cost increases, versus

changes in the economy. Inflation numbers are averaged or otherwise sub6ected tostatistical techniues in order to removestatistical noiseandvolatilityof individualprices. *inally, when loo+ing at inflation, economic institutions sometimes only loo+ atsubsets orspecial indices. 4ne common set is inflation excluding food and energy, whichis often called ?core inflation@.

[edit] "ffects of inflation

A small amount of inflation can be viewed as having a beneficial effect on the economy.[!4ne reason for this is that it can be difficult to renegotiate prices and wages. Bithgenerally increasing prices it is easier for relative prices to ad6ust.

#any prices are "stic+y downward" and tend to creep upward, so that efforts to attain a7ero inflation rate (a constant price level) punish other sectors with falling prices, profits,and employment. 2fforts to attain complete price stability can also lead todeflation,which is generally viewed as a negative by eynesians because of the downwardad6ustments in wages and output that are associated with it.

Bith inflation, the price of any given good is li+ely to increase over time, therefore bothconsumers and businesses may choose to ma+e purchases sooner rather than later. hiseffect tends to +eep an economy active in the short term by encouraging spending andborrowing, and in the long term by encouraging investments.


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Inflation also gives central ban+s room to maneuver, since their primary tool forcontrolling the money supply and velocity of moneyis by setting the lowest interest ratein an economy ' the discount rate at which ban+s can borrow from the central ban+. 8inceborrowing at negative interest is generally ineffective, a positive inflation rate givescentral ban+ers "ammunition", as it is sometimes called, to stimulate the economy. As

central ban+s are controlled by governments, there is also often political pressure toincrease the money supply to pay government services, this has the added effect ofcreating inflation and decreasing the net money owed by the government in previouslynegotiated contractual agreements and in debt.

*or these reasons, many economists see moderate inflation as a benefit1 some businessexecutives see mild inflation as "greasing the wheels of commerce." [C![D!


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example in more freuent trips to the ban+. (he term is a humorous reference tothe cost of replacing shoe leather worn out when wal+ing to the ban+.)

Menu costs& *irms must change their prices more freuently, which imposes

costs, for example with restaurants having to reprint menus. Relative Price Distortions& *irms do not generally synchroni7e ad6ustment in

prices. If there is higher inflation, firms that do not ad6ust their prices will havemuch lower prices relative to firms that do ad6ust them. his will distorteconomicdecisions, since relative prices will not be reflecting relative scarcity of differentgoods.

0ising inflation can prompt trade unions to demand higher wages, to +eep up with

consumer prices. 0ising wages in turn can help fuel inflation. In the case ofcollective bargaining, wages will be set as a factor of price expectations, whichwill be higher when inflation has an upward trend. his can cause a wage spiral.[citation needed!In a sense, inflation begets further inflationary expectations.

Hoarding& people buy consumer durables as stores of wealth in the absence of

viable alternatives as a means of getting rid of excess cash before it is devalued,

creating shortages of the hoarded ob6ects. Hyperinflation& if inflation gets totally out of control (in the upward direction), it

can grossly interfere with the normal wor+ings of the economy, hurting its abilityto supply.

[edit] Causes of inflation

In the long run inflation is generally believed to be a monetary phenomenon while in theshort and medium term it is influenced by the relative elasticity of wages, prices andinterest rates.[E!he uestion of whether the short'term effects last long enough to beimportant is the central topic of debate between monetarist and eynesian schools. In

monetarismprices and wages ad6ust uic+ly enough to ma+e other factors merelymarginal behavior on a general trendline. In theeynesianview, prices and wages ad6ustat different rates, and these differences have enough effects on real output to be "longterm" in the view of people in an economy.

A great deal of economic literature concerns the uestion of what causes inflation andwhat effect it has. here are different schools of thought as to what causes inflation. #ostcan be divided into two broad areas& uality theories of inflation, and uantity theories ofinflation. #any theories of inflation combine the two. he uality theory of inflation restson the expectation of a seller accepting currency to be able to exchange that currency at alater time for goods that are desirable as a buyer. he uantity theory of inflation rests on

the euation of the money supply, its velocity, and exchanges.Adam 8mithand /avidFumeproposed a uantity theory of inflation for money, and a uality theory of inflationfor production.

eynesianeconomic theory proposes that money is transparent to real forces in theeconomy, and that visible inflation is the result of pressures in the economy expressingthemselves in prices.
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here are three ma6or types of inflation, as part of what0obert G. ordoncalls the"triangle model"&

emand-pull inflation& inflation caused by increases in aggregate demand due to

increased private and government spending, etc. /emand inflation is constructive

to a faster rate of economic growth since the excess demand and favourablemar+et conditions will stimulate investment and expansion. he failing value ofmoney, however, may encourage spending rather than saving and so reduce thefunds available for investment.

Cost-push inflation& presently termed "supply shoc+ inflation," caused by drops

in aggregate supply due to increased prices of inputs, for example. a+e forinstance a sudden decrease in the supply of oil, which would increase oil prices.-roducers for whom oil is a part of their costs could then pass this on toconsumers in the form of increased prices.

#uilt-in inflation& induced by adaptive expectations, often lin+ed to the

"priceHwage spiral" because it involves wor+ers trying to +eep their wages up

(gross wages have to increase above the -I rate to net to -I after'tax) withprices and then employers passing higher costs on to consumers as higher pricesas part of a "vicious circle." approach& hey disagree with the notion that central ban+s control the money supply,arguing that central ban+s have little control because the money supply adapts to thedemand for ban+ credit issued by commercial ban+s. his is the theory of endogenous

money. Advocated strongly by post'eynesians as far bac+ as the 9E;s, it has todaybecome a central focus of aylor ruleadvocates.


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A fundamental concept in eynesian analysis is the relationship between inflation andunemployment, called the -hillips curve. his model suggests that there is a trade'offbetween price stability and employment. herefore, some level of inflation could beconsidered desirable in order to minimi7e unemployment. he -hillips curve modeldescribed the 3.8. experience well in the 9E;s but failed to describe the combination of

rising inflation and economic stagnation (sometimes referred to asstagflation)experienced in the 9:;s.

hus, modern macroeconomics describes inflation using a -hillips curve thatshifts(sothe trade'off between inflation and unemployment changes) because of such matters assupply shoc+s and inflation becoming built into the normal wor+ings of the economy.he former refers to such events as the oil shoc+s of the 9:;s, while the latter refers tothepriceHwage spiraland inflationary expectationsimplying that the economy "normally"suffers from inflation. hus, the -hillips curve represents only the demand'pullcomponent of the triangle model.

Another eynesian concept is thepotential output(sometimes called the "natural grossdomestic product"), a level of/-, where the economy is at its optimal level ofproduction given institutional and natural constraints. (his level of output corresponds tothe on'Accelerating Inflation 0ate of 3nemployment,AI03, or the "natural" rate ofunemployment or the full'employment unemployment rate.) If /- exceeds its potential(and unemployment is below the AI03), the theory says that inflation will accelerateas suppliers increase their prices and built'in inflation worsens. If /- falls below itspotential level (and unemployment is above the AI03), inflation will decelerateassuppliers attempt to fill excess capacity, cutting prices and undermining built'in inflation.

Fowever, one problem with this theory for policy'ma+ing purposes is that the exact level

of potential output (and of the AI03) is generally un+nown and tends to change overtime. Inflation also seems to act in an asymmetric way, rising more uic+ly than it falls.Borse, it can change because of policy& for example, high unemployment under


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general price level of consumer goods will rise only if the aggregate supply of consumergoods falls relative to aggregate demand for consumer goods, or if aggregate demandincreases relative to aggregate supply. goods based on the total uantity of money. herefore, they posit

that as the uantity of money increases, total spending increases and aggregate demandfor consumer goods increases too. *or this reason, economists who believe in theJuantity heory of #oney also believe that the only cause of rising prices in a growingeconomy (this means the aggregate supply of consumer goods is increasing) is anincrease of the uantity of money in existence, which is a function of monetary policies,generally set by central ban+sthat have a monopoly on the issuance of currency, which isnot pegged to a commodity, such as gold. he central ban+of the 3nited 8tates is the*ederal 0eserve1 the central ban+ bac+ing the eurois the 2uropean entral


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leads to the support for a commoditystandard of a very strict variety where all notes areconvertible on demand to some commodity or bas+et of commodities. (he more popularof the Austrian economists unanimously favor agold standard.)

[edit] Marxian theory

In #arxian economicsvalue is based on the labor reuired to extract a given commodityversus the demand for that commodity by those with money. he fluctuations of price inmoney terms are inconseuential compared to the rise and fall of the labor cost of acommodity, since this determines the true cost of a good or service. In this, #arxisteconomics is related to other "classical" economic theories that argue that monetaryinflation is caused solely by printing notes in excess of the basic uantity of gold.Fowever, #arx argues that the real +ind of inflation is in the cost of production measuredin labor.


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merchants. his theory was important in the 9th century in debates between "


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currency such as gold. his would be a return to the gold standard. All of these policiesare achieved in practice through a process of open mar+et operations.

Another method attempted in the past have been wage and price controls ("incomespolicies"). Bage and price controls have been successful in wartime environments in

combination with rationing. Fowever, their use in other contexts is far more mixed.otable failures of their use include the 9:$imposition of wage and price controls by0ichard ixon. In general wage and price controls are regarded as a drastic measure, andonly effective when coupled with policies designed to reduce the underlying causes ofinflation during the wage and price control regime, for example, winning the war beingfought. #any developed nations set prices extensively, including for basic commoditiesas gasoline.[citation needed!he usual economic analysis is that that which is under priced isoverconsumed, and that the distortions that occur will force ad6ustments in supply. *orexample, if the official price of bread is too low, there will be too little bread at officialprices.

emporary controls may copleenta recession as a way to fight inflation& the controlsma+e the recession more efficient as a way to fight inflation (reducing the need toincrease unemployment), while the recession prevents the +inds of distortions thatcontrols cause when demand is high. Fowever, in general the advice of economists is notto impose price controls but to liberali7e prices by assuming that the economy will ad6ustand abandon unprofitable economic activity. he lower activity will place fewer demandson whatever commodities were driving inflation, whether labor or resources, andinflation will fall with total economic output. his often produces a severe recession, asproductive capacity is reallocated and is thus often very unpopular with the people whoselivelihoods are destroyed.

he economy of Limbabwe has evolved under uniue circumstances almost three of allembracing controls and regulations (cube # 99K).he supply and demand imbalanceswhich characteri7ed the economy in the first decade could easily have resulted in severeinflationHdeterioration of balance of payment had it not been for the stringent interestrates, import and prices controls which had been a ma6or feature of government policies.

-olicies and 8trategies implemented

overnment too+ measures such as the /raconian measuresHpolicies that is tightening ofmoney supply and foreign currency allocation procedures and the suspension of profitrepatriation helped reduce inflation in the mid 9K;s and the government also put upincentives to incentives to encourage exports e.g. the 9K 2xport 0evolving *und (20*)which was established to provide exporters with foreign currency for importing inputsthat were for meeting verified export orders.
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o encourage agricultural production, producer prices were raised this increased /-*04# $.EM in 9KC to :.DM in 9KD and thus money supply expansion decreased from$$.M in 9KC to C.$M in 9KD and thus pushed inflation down to ;M from 9M in 9KCand also the interest rates ad6usted downwards, farm mechani7ation was also put in placeas part of the government efforts to revive the agricultural sector which was the bac+bone

of the economy, it also introduced the agricultural special production enhancementfacility (A8-2*) to help distressed and new farmers attain finance and loans.

he government also embar+ed in a drive to commercialise and privatise loss ma+ingenterprises and rationali7ation of the civil service and a number of companies gotcommerciali7ed such as the old 8torage ommission, /airy #ar+eting


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he government should also try to decrease the amount of subsidies and expenditures thatthey are incurring as it has been analysed as the main driver of inflation, it should fullyliberalise the foreign exchange mar+et through they willing buyer, willing seller approachso that both parties are able to sell and buy foreign currency from each ,so as tocompletely destroy the parallel mar+et and this should be bone with complete

minimi7ation of government intervention and thus re'introduce foreign currency bureaus.

he government also announces complimentary and supportive fiscal and monetarypolicies so as to ma+e people believe in them that they can reduce inflation and also theissue of channeling resources to capital development pro6ects. It should also try toinstitute the complete liberali7ation of the fuel sector, whereby we have a situation werethe ma6ority of people can be able to purchase fuel at the any service station in thecountry as this would curb the ever souring inflation which has been starving the preciousnation the most important drive of the important drive of the industry.

he need to curbHreduce new farm invasions should be done in the best interest of both

parties and there should fully implement they presidential land audit, such thatunproductive farmersN should have they land ta+en and given to those who have the 7ealand determination to do the tas+ at hand. Fence we also note that the 0eserve


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to poor planning, timing, and implementation most notably the recent programsespecially 2/-- which was deemed a failure way before implementation.

Fowever they had some strides in deregulating the foreign exchange, trade, labour andfinancial mar+ets. he investment climate also improved through the decontrol of

investment regulations and prices and the setting up of economic processing 7ones.-rogress was also made in rationali7ation and commerciali7ation of the civil service andpoor performing parastatals.

Fowever the deregulation of the economy resulted in high rates of interes

Controlling inflation

See also!Inflation targetingSee also!Monetary policy

here are a number of methods that have been suggested to control inflation. entralban+ssuch as the 3.8. *ederal 0eservecan affect inflation to a significant extent throughsetting interest rates and through other operations (that is, using monetary policy). Fighinterest ratesand slow growth of the money supply are the traditional ways throughwhich central ban+s fight or prevent inflation, though they have different approaches. *orinstance, some follow a symmetrical inflation targetwhile others only control inflationwhen it rises above a target, whether express or implied.

#onetarists emphasi7e increasing interest rates (slowing the rise in the money supply,monetary policy) to fight inflation. eynesians emphasi7e reducing demand in general,often through fiscal policy, using increased taxation or reduced government spending toreduce demand as well as by using monetary policy. 8upply'side economistsadvocatefighting inflation by fixing the exchange rate between the currency and some referencecurrency such as gold. his would be a return to the gold standard. All of these policiesare achieved in practice through a process of open mar+et operations.

Another method attempted in the past have been wage and price controls ("incomespolicies"). Bage and price controls have been successful in wartime environments incombination with rationing. Fowever, their use in other contexts is far more mixed.

otable failures of their use include the 9:$imposition of wage and price controls by0ichard ixon. In general wage and price controls are regarded as a drastic measure, andonly effective when coupled with policies designed to reduce the underlying causes ofinflation during the wage and price control regime, for example, winning the war beingfought. #any developed nations set prices extensively, including for basic commoditiesas gasoline.[citation needed!he usual economic analysis is that that which is under priced isoverconsumed, and that the distortions that occur will force ad6ustments in supply. *or
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example, if the official price of bread is too low, there will be too little bread at officialprices.

emporary controls may copleenta recession as a way to fight inflation& the controlsma+e the recession more efficient as a way to fight inflation (reducing the need to

increase unemployment), while the recession prevents the +inds of distortions thatcontrols cause when demand is high. Fowever, in general the advice of economists is notto impose price controls but to liberali7e prices by assuming that the economy will ad6ustand abandon unprofitable economic activity. he lower activity will place fewer demandson whatever commodities were driving inflation, whether labor or resources, andinflation will fall with total economic output. his often produces a severe recession, asproductive capacity is reallocated and is thus often very unpopular with the people whoselivelihoods are destroyed. 8ee reative destruction.

[edit] World inflation crisis )*++,-*++.

It has been suggested that this section be splitinto a new article entitled "orld inflationcrisis. (/iscuss)

8ee&

$;;:'$;;K world food price crisis

4il price increases since $;;

Please help improve this section%y expanding it/*urther information might be found on the tal+ pageor at reuests for expansion.

he economy of Limbabwe has evolved under uniue circumstances almost three of allembracing controls and regulations (cube # 99K).he supply and demand imbalanceswhich characteri7ed the economy in the first decade could easily have resulted in severeinflationHdeterioration of balance of payment had it not been for the stringent interestrates, import and prices controls which had been a ma6or feature of government policies.

-olicies and 8trategies implemented

overnment too+ measures such as the /raconian measuresHpolicies that is tightening ofmoney supply and foreign currency allocation procedures and the suspension of profitrepatriation helped reduce inflation in the mid 9K;s and the government also put upincentives to incentives to encourage exports e.g. the 9K 2xport 0evolving *und (20*)which was established to provide exporters with foreign currency for importing inputsthat were for meeting verified export orders.
http://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Creative_destructionhttp://en.wikipedia.org/w/index.php?title=Inflation&action=edit&section=16http://en.wikipedia.org/wiki/Wikipedia:Splittinghttp://en.wikipedia.org/wiki/World_inflation_crisishttp://en.wikipedia.org/wiki/World_inflation_crisishttp://en.wikipedia.org/wiki/Talk:Inflationhttp://en.wikipedia.org/wiki/2007-2008_world_food_price_crisishttp://en.wikipedia.org/wiki/Oil_price_increases_since_2003http://en.wikipedia.org/w/index.php?title=Inflation&action=edithttp://en.wikipedia.org/wiki/Talk:Inflationhttp://en.wikipedia.org/wiki/Talk:Inflationhttp://en.wikipedia.org/wiki/Wikipedia:Requests_for_expansionhttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Creative_destructionhttp://en.wikipedia.org/w/index.php?title=Inflation&action=edit&section=16http://en.wikipedia.org/wiki/Wikipedia:Splittinghttp://en.wikipedia.org/wiki/World_inflation_crisishttp://en.wikipedia.org/wiki/World_inflation_crisishttp://en.wikipedia.org/wiki/Talk:Inflationhttp://en.wikipedia.org/wiki/2007-2008_world_food_price_crisishttp://en.wikipedia.org/wiki/Oil_price_increases_since_2003http://en.wikipedia.org/w/index.php?title=Inflation&action=edithttp://en.wikipedia.org/wiki/Talk:Inflationhttp://en.wikipedia.org/wiki/Wikipedia:Requests_for_expansion


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o encourage agricultural production, producer prices were raised this increased /-*04# $.EM in 9KC to :.DM in 9KD and thus money supply expansion decreased from$$.M in 9KC to C.$M in 9KD and thus pushed inflation down to ;M from 9M in 9KCand also the interest rates ad6usted downwards, farm mechani7ation was also put in placeas part of the government efforts to revive the agricultural sector which was the bac+bone

of the economy, it also introduced the agricultural special production enhancementfacility (A8-2*) to help distressed and new farmers attain finance and loans.

he government also embar+ed in a drive to commercialise and privatise loss ma+ingenterprises and rationali7ation of the civil service and a number of companies gotcommerciali7ed such as the old 8torage ommission, /airy #ar+eting


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he government should also try to decrease the amount of subsidies and expenditures thatthey are incurring as it has been analysed as the main driver of inflation, it should fullyliberalise the foreign exchange mar+et through they willing buyer, willing seller approachso that both parties are able to sell and buy foreign currency from each ,so as tocompletely destroy the parallel mar+et and this should be bone with complete

minimi7ation of government intervention and thus re'introduce foreign currency bureaus.

he government also announces complimentary and supportive fiscal and monetarypolicies so as to ma+e people believe in them that they can reduce inflation and also theissue of channeling resources to capital development pro6ects. It should also try toinstitute the complete liberali7ation of the fuel sector, whereby we have a situation werethe ma6ority of people can be able to purchase fuel at the any service station in thecountry as this would curb the ever souring inflation which has been starving the preciousnation the most important drive of the important drive of the industry.

he need to curbHreduce new farm invasions should be done in the best interest of both

parties and there should fully implement they presidential land audit, such thatunproductive farmersN should have they land ta+en and given to those who have the 7ealand determination to do the tas+ at hand. Fence we also note that the 0eserve


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to poor planning, timing, and implementation most notably the recent programsespecially 2/-- which was deemed a failure way before implementation.

Fowever they had some strides in deregulating the foreign exchange, trade, labour andfinancial mar+ets. he investment climate also improved through the decontrol of

investment regulations and prices and the setting up of economic processing 7ones.-rogress was also made in rationali7ation and commerciali7ation of the civil service andpoor performing parastatals.

Fowever the deregulation of the economy resulted in high rates of interes

Issues in measuring inflation

#easuring inflation reuires finding ob6ective ways of separating out changes in nominalprices from other influences related to real activity. In the simplest possible case, if theprice of a ; o7. can of corn changes from =;.9; to =.;; over the course of a year, withno change in uality, then this price change represents inflation. bas+et> of goods and services changes. his is the purpose of loo+ing at aprice index,which is a weighted average of many prices. he weights in the onsumer -rice Index,for example, represent the fraction of spending that typical consumers spend on each typeof goods (using data collected by surveying households).

Inflation measures are often modified over time, either for the relative weight of goods inthe bas+et, or in the way in which goods from the present are compared with goods fromthe past. his includes hedonic ad6ustmentsand ?reweighing@ as well as using chainedmeasures of inflation. As with many economic numbers, inflation numbers are oftenseasonally ad6ustedin order to differentiate expected cyclical cost increases, versuschanges in the economy. Inflation numbers are averaged or otherwise sub6ected tostatistical techniues in order to removestatistical noiseandvolatilityof individualprices. *inally, when loo+ing at inflation, economic institutions sometimes only loo+ atsubsets orspecial indices. 4ne common set is inflation excluding food and energy, whichis often called ?core inflation@.

WPI Inflation in India at ,0 and clim%ing

he B-I inflation is now at :M and climbing, putting the ovt the fm and the 0


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It is hurting the middle classes as everything isgetting expensive, be it vegi oil or ricewheat, pulses, mil+ or other essentials. 8ummers mean more 2lectricity bills in a powerdeficit nation of ours. I worry about the millions that have HC children to feed living on$= a day not getting what they were promised by the 3-A during the last generalelections, in terms of subsidised food promised in


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M&2$4 Pra%ha(ar HH April D, $;;K at ;&$; pm

inflation in india will raise further for sure 0.


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4verall the 0


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the ban+ing system through its liuidity ad6ustment facilityNs repo auction. Inter'ban+ callrates also stayed high, after opening at :.KDM and closing at K.:;M.

he rupee fell this wee+ past the C;'per'dollar level for the first time since 8eptemberafter oil prices climbed to a record, sto+ing speculation Indian refiners will buy moredollars to pay for costlier crude imports. rude oil in ew Oor+ reached an all'time high=;.$ per barrel on *eb. $;. he commodity has gained more than C$ percent in thepast six months, according to data compiled by


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'uggestions o say that "economy is doing bad" is to say nothing. here are two specific ways

for the economy to be "doing bad". Oou can have a high inflation or a highunemployment. o fight high inflation, you raise interest rates1 to fight highunemployment, you lower interest rates. he big problem, of course, is stagflation

'' a situation when both inflation and unemployment are high, so one cannot befixed without ma+ing the other worse, at least temporarily.

o K hours ago

0aising interest rates has the effect of cooling off the economy. A hot, or run

away, economy is not a good thing either. An increase in interest rates tends toreduce inflation, e.g., the cost of a loaf of bread in post BB I ermany was$;,;;; mar+s. 5ater the same day, the same loaf of bread may have costD,;;;,;;; mar+s. (2ncyclopedia s not bad. 4ver theprevious E years foreign fund investment has seen phenomenal returns. ow it istime to return to normal.

he disadvantages of inflation& .It reduces per capital income of a given country.$.It leads to wear and tear in monetary value of a nation>s currency. .It leads to ahypertensive hardship. C.It breeds sharp bussiness practices and corruption. D.It begetsemmigration.

Taxation - Capital Gains TaxWhat Is the Capital Gains Tax?|Computation of Capital Gains|Why Does Capital Matter?|How Do Capital Gains Taxes Affect Workers?|A!anta"es # Disa!anta"es $f Capital Gains Tax Cut|The %ock&In 'ffect|Myths # (acts $f Capital Gains Tax Cut

Capital Gains Tax - Advantages & Disadvantages Of Capital Gains Tax Cut

$ne of the most unfair features of the capital "ains tax is that it taxes "ains that may )e attri)uta)le onlyto price chan"es* not real "ains+ Different analysts "i!e ifferent !iews re"arin" Capital Gains Tax Cut+

%et us analyse )oth step wise+

Arguments for the motion:

,+ A cut woul increase in!estment* output* an real wa"es+ If the tax on the return from capitalin!estments&&such as stock purchases* new )usiness start&ups* an new plant an e-uipment for existin"firms&&is reuce* more of those types of in!estments will )e mae+ Those risk&takin" acti!ities anin!estments are the key to "eneratin" proucti!ity impro!ements* real capital formation* increasenational output* an hi"her li!in" stanars+
http://finance.indiamart.com/taxation/capitalgains.htmlhttp://finance.indiamart.com/taxation/capitalgains.htmlhttp://finance.indiamart.com/taxation/computation_capitalgains.htmlhttp://finance.indiamart.com/taxation/computation_capitalgains.htmlhttp://finance.indiamart.com/taxation/computation_capitalgains.htmlhttp://finance.indiamart.com/taxation/capital_matter.htmlhttp://finance.indiamart.com/taxation/capital_matter.htmlhttp://finance.indiamart.com/taxation/capitalgains_taxes_affects.htmlhttp://finance.indiamart.com/taxation/capitalgains_taxes_affects.htmlhttp://finance.indiamart.com/taxation/lock-in_effect.htmlhttp://finance.indiamart.com/taxation/lock-in_effect.htmlhttp://finance.indiamart.com/taxation/lock-in_effect.htmlhttp://finance.indiamart.com/taxation/facts_capitalgains.htmlhttp://finance.indiamart.com/taxation/facts_capitalgains.htmlhttp://finance.indiamart.com/taxation/capitalgains.htmlhttp://finance.indiamart.com/taxation/computation_capitalgains.htmlhttp://finance.indiamart.com/taxation/capital_matter.htmlhttp://finance.indiamart.com/taxation/capitalgains_taxes_affects.htmlhttp://finance.indiamart.com/taxation/lock-in_effect.htmlhttp://finance.indiamart.com/taxation/facts_capitalgains.html


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.+ A cut woul li)erate locke&up capital for new in!estment+ (or those alreay holin" in!estment capital*a capital "ains tax reuction mi"ht create an /unlockin" effect/0 ini!iuals woul sell assets that ha!eaccumulate in !alue an shift their portfolio holin"s to assets with hi"her lon"&run earnin" potential+ Theunlockin" effect mi"ht ha!e stron" positi!e economic )enefits as well0 the tax cut woul prompt in!estorsto shift their funs to acti!ities an assets&&such as new firms in the rapi&"rowth* hi"h&technolo"y

inustry&&offerin" the hi"hest rate of return+

1+ A cut woul prouce more tax re!enue for the "o!ernment+ If a capital "ains tax cut increaseseconomic "rowth an spurs an unlockin" of unreali2e capital "ains* then a lower capital "ains rate willactually increase tax collections+

3+ A cut woul eliminate the unfairness of taxin" capital "ains ue to inflation+ A lar"e share of the capital"ains that are taxe is not real "ains )ut inflationary "ains+ The "o!ernment shoul not tax inflation+

Arguments against the motion:

,+ 4ro!ie a lar"e tax cut for the wealthiest citi2ens+

.+ Ha!e !ery little positi!e impact on the economy+ Many ar"ue that taxes o not influence in!estmentecisions an that e!en if there were an unlockin" effect+

1+ Increase the )u"et eficit+ If a capital "ains tax cut reuces re!enues an increases the )u"et eficit*then sa!in"s an in!estment mi"ht actually fall after the tax cut+ That woul only worsen reporte capitalshorta"e+

Education InfrastructureEducational polic and progress inthe light of the goal of nationaldevelopment and priorities set fromtime to time! Education as a part ofthe Directive "rinciples of #tate "olic

in the Constitution

Comprehensive information on theinfrastructure frame$or% availale inIndia! Gives analtical vie$ on theasic frame$or% from a investors andusiness point of vie$!

'ar%ets EmplomentGeneral information aout the stoc%exchanges and capital mar%ets inIndia!

An overvie$ of the manpo$eravailale in India! (rief introductionsto )ights Guarateed *a$! Also liststhe minimum $age rates and the actsrelated to emploees!

Euro Issues AgricultureAn issuing compan see%ingpermission for raising foreign funds Euro-issues having a consistenttrac% record of good performance

+financial or other$ise, for a period ofthree ears shall e allo$ed to issue

GD)s.CC(s

India is mainl an agricultural countr!Agriculture accounts forapproximatel // percent of India0sGD" and emplos nearl 12 percent of

the population!

3hat are the advantages and disadvantages of otha fixed exchange rate regime and a flexileexchange rate regime4

In3 2conomics
http://finance.indiamart.com/india_business_information/employement.htmlhttp://finance.indiamart.com/india_business_information/infrastructure.htmlhttp://finance.indiamart.com/india_business_information/sebi.htmlhttp://finance.indiamart.com/india_business_information/employement.htmlhttp://finance.indiamart.com/india_business_information/euro_issues.htmlhttp://finance.indiamart.com/india_business_information/agriculture.htmlhttp://wiki.answers.com/Q/FAQ/2394http://wiki.answers.com/Q/FAQ/2394http://finance.indiamart.com/india_business_information/employement.htmlhttp://finance.indiamart.com/india_business_information/infrastructure.htmlhttp://finance.indiamart.com/india_business_information/sebi.htmlhttp://finance.indiamart.com/india_business_information/employement.htmlhttp://finance.indiamart.com/india_business_information/euro_issues.htmlhttp://finance.indiamart.com/india_business_information/agriculture.htmlhttp://wiki.answers.com/Q/FAQ/2394


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here are two ways the price of a currency can be determined against another. A fixed, orpegged, rate is a rate the government (central ban+) sets and maintains as the officialexchange rate. A set price will be determined against a ma6or world currency (usually the3.8. dollar, but also other ma6or currencies such as the euro, the yen, or a bas+et ofcurrencies). In order to maintain the local exchange rate, the central ban+ buys and sells

its own currency on the foreign exchange mar+et in return for the currency to which it ispegged.

If, for example, it is determined that the value of a single unit of local currency is eual to38/ .;;, the central ban+ will have to ensure that it can supply the mar+et with thosedollars. In order to maintain the rate, the central ban+ must +eep a high level of foreignreserves. his is a reserved amount of foreign currency held by the central ban+ which itcan use to release (or absorb) extra funds into (or out of) the mar+et. his ensures anappropriate money supply, appropriate fluctuations in the mar+et (inflationHdeflation),and ultimately, the exchange rate. he central ban+ can also ad6ust the official exchangerate when necessary.

*loating

3nli+e the fixed rate, a floating exchange rate is determined by the private mar+etthrough supply and demand. A floating rate is often termed "self'correcting", as anydifferences in supply and demand will automatically be corrected in the mar+et. a+e aloo+ at this simplified model& if demand for a currency is low, its value will decrease,thus ma+ing imported goods more expensive and thus stimulating demand for local goodsand services. his in turn will generate more 6obs, and hence an auto'correction wouldoccur in the mar+et. A floating exchange rate is constantly changing.

In reality, no currency is wholly fixed or floating. In a fixed regime, mar+et pressures canalso influence changes in the exchange rate. 8ometimes, when a local currency doesreflect its true value against its pegged currency, a "blac+ mar+et" which is morereflective of actual supply and demand may develop. A central ban+ will often then beforced to revalue or devalue the official rate so that the rate is in line with the unofficialone, thereby halting the activity of the blac+ mar+et.

In a floating regime, the central ban+ may also intervene when it is necessary to ensurestability and to avoid inflation1 however, it is less often that the central ban+ of a floatingregime will interfere.

&ns:er;ixed vs/ ;lexi%le

#i$ed advantages

A fixed exchange rate should reduce uncertainties for all economic agents in the country.As businesses have the perfect +nowledge that the price is fixed and therefore not going


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to change they can plan ahead in their productions. Inflation may have a harmful effecton the demand for exports and imports. o ensure that inflation is +ept as low as possiblethe government is forced to ta+e measurements, to +eep businesses competitive in foreignmar+ets. In theory a fixed exchange rate should also reduce speculations in foreignexchange mar+ets. In reality this is not always the case as countries want to ma+e

speculative gains.#i$ed Disadvantages

he government is +eeping the exchange rate fixed by manipulating the interest rates. Ifthe exchange is in danger of falling the government needs to increase interest rates toincrease demand for the currency. As this would have a deflationary effect on theeconomy the demand might decrease and unemployment might increase. A governmenthas to maintain high levels of foreign reserves to +eep the exchange rate fixed as well asto instill confidence on the foreign exchange mar+ets. his ma+es clear that a country isable to defend its currency by the buying and selling of foreign currencies. *ixing theexchange rate is not easy as there are many variables which are changing over time if the

exchange rate is set wrong it might be hard for export companies to be competitive inforeign countries. International disagreement might be created when a country sets itsexchange rate on a too low level. his would ma+e a countries export more competitivewhich might lead to a disagreement between countries as they might see it as an unfairtrade advantage.#i$ed %dvantages

As the exchange rate does not have to be +ept at a certain level anymore interest rates arefree to be employed as domestic management policies(Appleyard :;). he floatingexchange rate is ad6usting itself to +eep the current account balanced, in theory. As thereserves are not used to control the value of the currency it is not necessary to +eep high

levels of reserves (li+e gold) of foreign countries.

#i$ed Disadvantages

*loating exchange rates tend to create uncertainty on the international mar+ets. Asbusinesses try to plan for the future it is not easy for the businesses to handle a floatingexchange rate which might vary. herefore investment is more difficult to assess andthere is no doubt that excursive exchange rates will reduce the level of internationalinvestment as it is difficult to assess the exact level of return and ris+. *loating exchangerates are affected by more factors than only demand and supply, such as governmentintervention. herefore they might not necessarily ad6ust themselves in order to eliminatecurrent account deficits. he floating exchange rate might worsen existing levels ofinflation. If a country has higher inflation rate than others this will ma+e the export of thecountry less competitive and its imports more expensive. hen the exchange rate will fallwhich could lead to even higher import prices of goods and because of cost'push inflationwhich might drive the overall inflation rate even more.


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Bhile flexible exchange rates can ensure that the country achieves external balance, theydo not ensure internal balance. In several situations the exchange rate change thatreestablishes external balance can ma+e an internal imbalance worse. If a country hasrising inflation and a tendency toward external deficit, the depreciation of the currencycan intensify the inflation pressures in the country. If a country has excessive

unemployment and a tendency toward surplus, the appreciation of the currency can ma+ethe unemployment problem worse. o achieve internal balance, the country>s governmentmay need to implement domestic policy changes.

1he good and %ad lin(s of inflation

Suresh Krishnamurthy

The administered rates on small savings would be linked to some kind of benchmark,

said the Finance Minister during the Budget presentation, where the rates wererevised downwards. ow a committee has been appointed under the stewardship of

Mr !.". #eddy, $eputy %overnor of the #eserve Bank of &ndia, that will look at

linking the administered rates with inflation.

&n the &ndian conte't, there are advantages and disadvantages in linking the rates

with inflation. The theoretical advantage of linking the rates with inflation is that it isan indirect way of ensuring that whichever government is in power, it will have to be

show its best behaviour in fiscal terms. &f it fails to rein in unnecessary e'penditureand inflation rises, it will be rapped in the form of higher interest payments. This will

then put pressure on the fiscal deficit, with the potential of showing the performanceof the government in poor light.

The disadvantage is there are no reliable and timely indicators of inflation in &ndia.The consumer price inde' which measures inflation at the retail level still does not

capture the inflation in the basket of goods that &ndian consumers largely buy. Moreimportantly, the cost of services are largely not given the importance they deserve in

the inde'.

(lso, the details regarding the )*& are dated by more than a month. &n this

backdrop, if the administered rates are linked to inflation, investors will not be ableto make any meaningful investment decisions because the information available with

them is dated and sub+ect to change. Moreover, since they are not properlyrepresentative, they may not compensate the investor properly for the risks

undertaken by them and the time period for which the investment has been made.

owever, a link with an inflation inde' is a desirable feature since the %overnment is

compelled to rein in inflation. &n this backdrop, it will be more useful if the committeerecommends a revamp of the whole system of collecting information to calculate a

more representative figure of inflation first before a linkage of the administered rateswith inflation is established. Such an outcome would be beneficial for both the parties

concerned -- the investors because it will compensate them properly for inflation,and the government because it is an indirect method for enforcing discipline


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Inflation "redictions

Ganuary Kth, $;;K S inflation'

-redicting inflation is a very important tas+ for 2conomists. *uture forecasts of

inflation are used to determine current monetary policy. If inflation predictions are wrongit can cause inappropriate monetary policy, resulting in either inflation or recession.Although economists may loo+ at various economic data, there is no foolproof methodfor predicting inflation. enerally spea+ing inflation is easier to predict and less volatilewhen inflation rates are low. As inflation increases it also becomes more volatile andharder to predict.

Predicting Inflation

o predict inflation, economists will need to loo+ at various economic data and decidewhether inflationary pressures in the economy will be increasing or decreasing. he +ey

factor here is the amount of spare capacity and the rate of economic growth.

8uppose an economy, such as the 3, has a long run trend rate of $.DM. his meansgrowth of $.DM or less is unli+ely to cause inflation. If however, growth is above 'C Mthen the economy will uic+ly approach full capacity and therefore inflation is li+ely tooccur.


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he uantity theory of money states that increased money supply will lead to inflation.his is because of the relationship between money supply and inflation, shown in theeuation #%T- where % and are independent of the #oney 8upply. Fowever, inpractise empirical evidence has shown that increased money supply doesnNt necessarilycause inflation, as there are other factors determining money supply and inflation.

!ysteresis - What !appened in the Past=

It is argued that if you want the best prediction for inflation, ignore all the economistspredictions and 6ust state what happened last year. 2.g. in $;;: the 3 experiencedinflation of $.M. herefore the best prediction for inflation in $;;: is $.M. 4f course,inflation does change from year to year, but it shows the difficulty of predicting inflationthat it is often best to 6ust use last years data.Fowever, there is an important point here and that is the role of expectations. If inflationis low, people will expect low inflation in the next year, wor+ers will not demand big payrises, firms will not try to increase prices. herefore, low inflation becomes easier to

maintain. If inflation is high then people will be expecting inflation in the next year.herefore, it becomes difficult to remove inflation from the system (without pain li+e arecession)

'upply 'ide 'hoc(s and Inflation/

Bhen predicting inflation you can never ta+e into account unexpected supply sideshoc+s. *or example, a rapid increase in inflation would cause a significant rise ininflation.

My Predictions for Inflation in *++

Inflation 3 $;;K $.M

Inflation $;;K 38 $.M

Inflation $;;K hina C.M

Inflation $;;K India K.DM

Inflation $;;K Gapan .$M

Inflation $;;K 23 .KM

Does Economics Gro$th (ring Increased *iving#tandards4

Increasing rates of economic growth has long been the holy grail of conventionaleconomics and politics. o a large extent, most developed economies have been highly


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successful in increasing economic output. s standard of livingQ

o decide whether economic growth has increased happiness is highly sub6ective, and itis difficult for economists to ma+e concrete arguments.Fowever, it is worth noting the

various side effects of growth and consider there impact on general living standards.

#enefits of "conomic Gro:th

>/ Increased consumption/

onsumers can benefit from consuming more goods and services. An assumption ofeconomics is that consumption is related to utility, so in theory, with higher consumptionlevels, there is greater prosperity.

*/ Improved Pu%lic 'ervices/

Bith increased ax 0evenues the government can spend more on important publicservices such as health and education. Improved health care can improve uality of lifethrough treating diseases and increasing life expectancy. Increased educational standardscan give the population a greater diversity of s+ills and literacy. his enables greateropportunity and freedom. 2ducation is seen as an important determinant of welfare andhappiness.

?/ Reduced


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necessities of life such as1 food, and shelter. Bhen economic growth can overcome thistype of poverty there is a clear lin+ with improved living standards. Fowever, whenincomes increase from say =D,;;; a year to =E,;;; the improvement in livingstandards is harder to 6ustify. /iminishing returnsis a basic economic concept, whichsuggests the tenth unit of a good will give much less satisfaction than the first. If we

already have $ cars, does our living standards really improve if we now have the capacityto own carsQ 4ften as economic growth increases incomes, people increasingly savetheir money (higher marginal propensity to save) this is basically because they struggle tofind anything meaningful to spend their money on.

$.2xternalities of rowth/

2conomic rowth with involves increased output causes external side effects, such, asincreased pollution. lobal warming from pollution is becoming a real problem forsociety. he economic and social costs could potentially be greater than all the perceivedbenefits of recent economic growth. Fowever, it is worth noting that economic growth

doesnNt necessarily have to cause pollution. he benefits of growth could be used todevelop better technologies that create less pollution. It is 6ust at the moment this hasbeen a low priority.

$. 2conomic rowth can cause Increased Ineuality.

It is perhaps a paradox that higher economic growth can cause an increase in relativepoverty. his is because those who benefit from growth are often the highly educated andthose who own wealth. In 9K;s and 99;s higher growth in the 3 and 38 has resultedin increased ineuality. () Fowever, it depends on how growth is managed1 economicgrowtht can be used to reduce ineuality. his occurred in D;s and E;s.

. Increase in rime and 8ocial problems.

It is another paradox that as incomes increase and people are better off the level of crimehas increased as well. ($) his suggests that crime is not motivated by poverty butperhaps envy. 4ne reason why crime rates increase is that uite simply there are morethings to steal.


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@/ /iseases of Affluence.

2conomic rowth has enabled improved health care treatments, but at the same timethere has been an unexpected rise in the number of diseases and illnesses related toincreased prosperity.(C) 4ne example is obesity. #odern lifestyles and modern diets have

created an epidemic of obesity, with significant proportions of the population expressinga desire to lose weight. It could be argued that problems such as obesity and stress relatedillnesses are not a direct conseuence of growth. his is true, but, it is symbolic of thefact increased prosperity has created as many new problems as it has solved

Conclusion

here are clearly some benefits of economic growth. hese benefits are most visiblewhen for low income countries. 2conomic growth enables the possibility to deal withmany serious problems of poverty, homelessness and lac+ of basic amenities. Foweverthis paper is more interested in whether economic growth in developed economies is

actually increasing living standards. /oes rising incomes eual rising satisfactionQ heanswer is not clear'cut. Fowever there are clearly several issues, which suggest thateconomic growth, has contributed to serious social, environmental and economicproblems, which have reduced living standards. his is not to say economic growth isdoomed to bring unhappiness. In fact the challenge is to harness the potential ofeconomic growth to ma+e sure it really does increase sustainable living standards.

Inflation in India: 5o$ to tac%le it

Inflation is no stran"er to the Inian economy+ In fact* till the early nineties Inians were use to ou)le&i"itinflation an its attenant conse-uences+ 5ut* since the mi&nineties controllin" inflation has )ecome apriority for policy framers+

The natural fallout of this has )een that we* as a nation* ha!e )ecome !irtually intolerant to inflation+ Whileinflation till the early nineties was primarily cause )y omestic factors 6supply usually was una)le to meeteman* resultin" in the classical efinition of inflation of too much money chasin" too few "oos7* toay thesituation has chan"e si"nificantly+

Inflation toay is cause more )y "lo)al rather than )y omestic factors+ 8aturally* as the Inian economyuner"oes structural chan"es* the causes of omestic inflation too ha!e uner"one tectonic chan"es+

8eeless to emphasise* causes of toay9s inflation are complicate+ Howe!er* it is inee intri"uin" that thepolicy response e!en to this ay unfortunately has )een fixate on the traitional anti&inflation instruments ofthe pre&li)eralisation era+

Gloal imalance the cause for gloal li6uidit

To unerstan the text of the present )out of inflation* let us at the outset unerstan the context0 thefunctionin" of the "lo)al economy* which is in a state of extreme im)alance+ This is simply )ecausee!elope western economies* particularly the :nite ;tates* are consumin" on a massi!e scale leain" to"ar"antuan trae eficits+

Crucially their extreme le!els of consumption an imports are matche )y the procli!ity* nay fetish* of thee!elopin" countries in ha!in" an export&ri!en economic moel+ Thus while a set of e!elopin" countries


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prouces* exports an also sa!es the procees )y in!estin" their forex reser!es )ack in these countries*e!elope countries are consumin" )oth the prouction an in!estment ori"inatin" from the e!elopin"countries+

In effect* e!elopin" countries are )uilin" their forei"n exchan"e reser!es while the e!elope countriesare accumulatin" the corresponin" e)t+ After all* it takes two to a tan"o+

(or instance* the :; current account eficit is estimate to )e < per cent of GD4 in .==> an stoo atapproximately @== )illion+ $)!iously* the current account eficit of the :; )ecomes the current accountsurplus of other exportin" countries* !i2+ China* apan an other oil proucin" an exportin" countries+

The reason for this im)alance in the "lo)al economy is the fact that after the Asian currency crisisB manycountries foun the !irtues of a weak currency an en"a"e in 9competiti!e e!aluation+9

:ner this scenario* many countries simply le!era"e their weak currency !is&&!is the :; ollar to "ain tothe "lo)al 6rea :;7 markets+ This mercantilist policy to maintain their competiti!eness is achie!e whentheir central )anks inter!enes in the currency markets leain" to accumulation of forei"n exchan"e* nota)lythe :; ollar* a"ainst their own currency+

Implicitly it means that the e!elopin" worl is su)siisin" the rich e!elope worl+ 4ut more )luntly* it

woul mean that the :; has outsource e!en efenin" the ollar to these countries* as a collapse of the:; currency woul hurt these countries holin" more ollars in reser!es than perhaps the :; itself

In this connection* commentin" on the a)o!e phenomenon in the Power and Interest News Report*ephraim 4 Gun2ik wrote that the worl "rowth /was harly sufficient to )e )ehin the further rise ofcommoity prices in the first fi!e months of this year 6i+e+ in .==>7+ ather than eman pushin" the !alue ofcommoities hi"her in the past ,E months* it has )een the 6impenin"7 ollar9s e!aluation a"ainstcommoities that has pushe commoity prices to recor hi"hs+/

8aturally* as the players fear a fall in the !alue of the ollar an reach out to !arious assets ancommoities* the prices of these commoities an assets too will rise+

The pschological dimension

5ut as the im)alance shows no si"n of correctin"* players seek to shift to commoities an assets acrosscontinents to he"e a"ainst the impenin" fall in the :; ollar+ Thus* it is a fi"ht )etween central )anks anthe psycholo"y of market players across continents+

As a correcti!e measure* economists are comin" to the conclusion that most of the currencies across the"lo)e are hi"hly uner!alue !is&&!is the ollar* which* in turn* re-uires a si"nificant ose of e!aluation+(or instance* a consensus exists amon"st economists an currency traers that the Fen is one of the mosthi"hly uner!alue currencies 6estimate at aroun >=7 alon" with the Chinese Fuan 6estimate at =7followe )y other countries in Asia+

This artificial uner!aluation of currencies is another funamental cause for increasin" "lo)al li-uiity+

To "et an iea of the enormity of the a""re"ation of these two factors on the worl9s supply of ollars*

ephraim 4+ Gun2ik calculates the ollar !alue of risin" prices of ust one commoity && crue oil+

In .==3* "lo)al eman for crue oil "rew )y a mere four per cent+ 8e!ertheless hi"her oil prices a!ance)y as much as 13 per cent+ Conse-uently* it is this factor that si"nificantly contri)ute to increase the worl9sollar supply )y a)out 11= )illion+

In .==* international crue oil prices "aine another 1 per cent an "lo)al eman for oil "rew )y only ,+>per cent+ 8onetheless* the worl9s supply of ollars increase )y a further 3>= )illion+


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8aturally* with all currencies refusin" to )e re!alue* this leas to increase "lo)al li-uiity+ While one is notsure as to whether the increase in the prices of crue le to the increase of other commoities or !ice !ersa*the fact of the matter is that* in the a""re"ate* increase li-uiity has le to the increase in commoity pricesas a whole+

Althou"h some of this increase in the worl9s supply of ollars has )een rea)sor)e into :; economy )y thetwin American eficits && current as well as )u"etary && it is estimate that as much as >== )illion remains

outsie the :;+

What has further compoune the pro)lem is the near&2ero interest rate re"ime in apan+ With almost @=)illion forex reser!es* it makes sense to )orrow in apan at such low rates an in!est elsewhere for hi"herreturns+ $)!iously* some of this money && estimate )y experts to )e approximately .== )illion && hasunou)tely foun its way into the asset markets of other countries+

Most of it has )een parke in alternati!e in!estments such as commoities* stocks* real estates an othermarkets across continents* le!era"e many times o!er+ 8eeless to reiterate* the excessi!e ollar supplytoo has fuelle the property an commoity )oom across markets an continents+

The twin causes && excessi!e li-uiity ue to uner!aluation of !arious currencies 6technical7 an fear of the:; ollar collapse leain" to increase purchase of !arious commoities to he"e a"ainst a fall in :; ollar6psycholo"ical7 && nees to )e tackle upfront if inflation has to )e confronte "lo)ally+

5igher international farm prices impact Indian farm prices

What actually compouns the pro)lem for Inia is the fact that lower har!est worlwie* specifically inAustralia an 5ra2il* an the o!erall stren"th of eman !is&&!is supply an low stock positions worl o!er*"lo)al wheat prices ha!e continue to rise+

Wheat eman is expecte to rise* while worl prouction is expecte to ecline further in the comin"months* as a result of which "lo)al stocks* alreay at historically low le!els* may fall further )y .= per cent+These "lo)al trens ha!e put upwar pressure on omestic prices of wheat an are expecte to continue too so urin" the course of this year+

8o woner* espite the "o!ernment lowerin" the import tariffs on wheat to 2ero* there has )een no

si"nificant -uantity of wheat imports as the international prices of wheat are hi"her than the omestic prices+

Gro$th and forex flo$s

Another cause for the increase in the prices of these commoities has )een ue to the fact that )oth Iniaan China ha!e )een recorin" excellent "rowth in recent years+ It has to )e note that China an Iniaha!e a com)ine population of .+ )illion people+

Gi!en this si2e of population e!en a moest ,== increase in the per capita income of these two countrieswoul translate into approximately .= )illion in aitional eman for commoities+ This has put anextraorinary hi"hly eman on !arious commoities+ ;urely "rowth will come at a cost+

The excessi!e "lo)al li-uiity as explaine a)o!e has facilitate )uoyant "rowth of money an creit in

.==&=> an .==>&=


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5o$ aout the revaluation of the Indian )upee4

To conclue* all these are pointers to a nee for a ifferent strate"y+ The current )out of inflation is cause)y a multiplicity of factors* mostly "lo)al an is structural+ Monetary as well as trae policy responses* ashas )een attempte till ate* woul )e inae-uate to eal with the extant issue effecti!ely+

Crucially* a stock market )oom* a real estate )oom an a )eni"n inflation in the foo"rains market is aneconomic impossi)ility+

It has to )e note that the Inian market is structurally suite for le!era"in" shorta"es rather effecti!ely+Ae to this is the information asymmetry amon" !arious class of consumers as well as )etweenconsumers* on the one han* an proucers an consumers* on the other+

(urther* the sustaine flow of forei"n money* thanks to the excessi!e "lo)al li-uiity in the worl* has fuellethe rise of the stock markets an real estate prices in Inia to unpreceente le!els+

This )oom has naturally le to corresponin" )ooms in !arious relate markets as much as the increasecreit flow has in a way resulte in o!erall inflation+

'conomic policy rests in the trium!irate of fiscal* monetary an trae policies+ Theoretical unerstanin" of

economics meant that these policies are interepenent+

Also* one nees to unerstan that "rowth naturally comes with its attenant costs an conse-uences+While these policies are usually intertwine an typically compensatory* one has to unerstan that theissues with respect to inflation cannot )e su)ecte to con!entional wisom in the era of "lo)alisation+

$ne policy route yet unexamine in the Inian context )y the "o!ernment is the exchan"e rate policy*especially re!aluation of the upee as an instrument to control inflation+

It is time that we think a)out a re!aluation of the Inian upee as a policy response to the complex issue ofmana"in" inflation* while simultaneously aress the constraints on the supply sie on foo "rains throu"hincrease in omestic prouction+

A hi"her upee !alue !is&&!is the ollar woul mean lower purchase price of commoities in upee terms+The Inian economy has uner"one si"nificant chan"es in the past ecae an a half+ With increaselinka"es to the "lo)al economy* it cannot uck the ne"ati!es of "lo)alisation+

Juite the contrary* it nees to come with appropriate policy responses for the same* which cannot )e of the,@>=s !inta"e+ Allowin" upee to appreciate is surely one of them+ The time for a rethink on our exchan"erate policy to tackle inflation is now+ Are we reay?

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