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1_ Structural Theories of Inflation

The document discusses various theories of inflation, categorizing them into monetarist and structuralist perspectives. It highlights key theories such as market power theory, conventional demand-pull inflation, mark-up theory, and bottleneck inflation, emphasizing the roles of wages, prices, and government policies in inflation dynamics. Additionally, it differentiates between core and headline inflation, explaining their significance in measuring long-term and total inflation in an economy.

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51 views

1_ Structural Theories of Inflation

The document discusses various theories of inflation, categorizing them into monetarist and structuralist perspectives. It highlights key theories such as market power theory, conventional demand-pull inflation, mark-up theory, and bottleneck inflation, emphasizing the roles of wages, prices, and government policies in inflation dynamics. Additionally, it differentiates between core and headline inflation, explaining their significance in measuring long-term and total inflation in an economy.

Uploaded by

praveenchezhian1
Copyright
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Theories of Inflation

05-11-2024

MISSION VISION CORE VALUES


CHRIST is a nurturing ground for an individual’s Excellence and Service Faith in God | Moral Uprightness
holistic development to make effective contribution to Love of Fellow Beings
the society in a dynamic environment Social Responsibility | Pursuit of Excellence
CHRIST
Deemed to be University

Two Categories

● Monetarists
Associate inflation to monetary causes

● Structuralists
Associate inflation to unbalanced economic system

● Market power theory of inflation: Oligopolists can increase the price to any
level even if demand doesn’t rise. This hike in price level occurs due to
increase in wages (because of trade unions) in the oligopoly market

● Conventional DD pull inflation: Due to excess AD over AS


When the economy attains full employment equilibrium, if AD increases further
inflation becomes inevitable

Excellence and Service


CHRIST
Deemed to be University

Structural Theories

● Two versions-
● Mark- up theory: Associated with Prof. Gardner Ackley. American economist
and Advisor to President John F Kennedy

Inflation cannot occur alone by DD pull and cost push activities but it is the
cumulative effect of both
The increase in price stimulates production, but increases the dd for factors of
production. Thus cost and price, both increases
In some cases wages also increase without rise in the excess dd of products
Gardner provided the model of mark up inflation in which both the factors- dd and
cost are determined

According to him, both monetary and fiscal policies are to be used in controlling
inflation
Assigning very important role for the government
Excellence and Service
CHRIST
Deemed to be University

Bottleneck Inflation

Prof Otto Eckstein- German- American economist

Proponent of the theory of core inflation

The cause of inflation is the direct relationship between wages and prices

Simultaneous increase in wages and prices of products

During inflation prices in every industry would go up, but few industries show a
very high price-hike more than rest of the industries- bottleneck industries

These industries are mainly responsible for increase in prices

Excellence and Service


CHRIST
Deemed to be University

Core and Headline Inflation


● Core inflation
● Core inflation represents the long run trend in the price level. In measuring long run inflation,
transitory price changes should be excluded. One way of accomplishing this is by excluding
items frequently subject to volatile prices, like food and energy.
● It is most often calculated using the consumer price index (CPI), which is a measure of prices
for goods and services.
● Core inflation is the price change of goods and services minus food and energy. It represents
the most accurate picture of underlying inflation trends. Food and energy products are too
volatile to be included. They change so quickly they throw off an accurate reading of inflation.

● Headline inflation
● Headline inflation is a measure of the total inflation within an economy, including commodities
such as food and energy prices (e.g., oil and gas), which tend to be much more volatile and
prone to inflationary spikes.
● Headline inflation is a measure of the total inflation within an economy, including commodities
such as food and energy prices (e.g., oil and gas), which tend to be much more volatile and
prone to inflationary spikes.

Excellence and Service


CHRIST
Deemed to be University

Case study for Review

● Suppose iron and steel segment is facing a shortage in the availability of


essential raw materials supply. Since this is a core industry, eventually the
economy is heated up. How does it lead to increase in the general price
level? Connect this to price- wage related factors.

● DD side factors
● SS side factors

Excellence and Service

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