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Inflation: By: Prescious Ann Joy Eleuterio Lauren Julleza Nicole Aira Bilbao

This document discusses inflation, including its definition, causes, and effects. Inflation is defined as a sustained increase in the general price level over time. The main causes are excess demand that pushes prices up as the economy reaches full capacity, and cost-push factors like rising wages and import prices that make goods more expensive to produce. Effects include a redistribution of wealth from creditors and those with fixed incomes to debtors, as well as potential reductions in production, saving, and quality. Governments can combat inflation through fiscal and monetary policy adjustments, supply-side policies, and direct price controls.

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Lauren Saavedra Julleza
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101 views

Inflation: By: Prescious Ann Joy Eleuterio Lauren Julleza Nicole Aira Bilbao

This document discusses inflation, including its definition, causes, and effects. Inflation is defined as a sustained increase in the general price level over time. The main causes are excess demand that pushes prices up as the economy reaches full capacity, and cost-push factors like rising wages and import prices that make goods more expensive to produce. Effects include a redistribution of wealth from creditors and those with fixed incomes to debtors, as well as potential reductions in production, saving, and quality. Governments can combat inflation through fiscal and monetary policy adjustments, supply-side policies, and direct price controls.

Uploaded by

Lauren Saavedra Julleza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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INFLATION

BY: PRESCIOUS ANN JOY ELEUTERIO


LAUREN JULLEZA
NICOLE AIRA BILBAO

In economics, inflation is a
sustained increase in the
general price level of goods
and services in an economy
over a period of time. When
the price level rises, each unit
of currency buys fewer goods
and services.

Inflation is defined as a sustained


increase in the general level of prices
for goods and services. It is measured
as an annual percentage increase. As
inflation rises, every peso you own
buys a smaller percentage of a good or
service.
(Investopedia,2013)

CAUSES OF
INFLATION

Inflation means there is a sustained increase


in the price level. The main causes of
inflation are either excess aggregate demand
(economic growth too fast) or cost push
factors (supply side factors)

Demand Pull Inflation


If the economy is at or close to full employment then
an increase in AD leads to an increase in the price
level. As firms reach full capacity, they respond by
putting up prices, leading to inflation. Also, near full
employment, workers can get higher wages which
increases their spending power

Cost Push Inflation

If there is an increase in the costs of firms,


then firms will pass this on to consumers.
There will be a shift to the left in the AS.

Cost push inflation can be caused


by many factors

Rising Wages
If trades unions can present a common front then
they can bargain for higher wages. Rising wages are
a key cause of cost push inflation because wages are
the most significant cost for many firms. (higher
wages may also contribute to rising demand)

Import Prices
If there is a devaluation then import prices will
become more expensive leading to an increase in
inflation. A devaluation / depreciation means the
Peso is worth less, therefore we have to pay more
to buy the same imported goods.

Raw Material Prices


The best example is the price of oil, if the oil price
increase by 20% then this will have a significant
impact on most goods in the economy and this
will lead to cost push inflation.

Profit Push Inflation

When firms push up prices to get higher rates of


inflation. This is more likely to occur during strong
economic growth.

Declining productivity

If firms become less productive and


allow costs to rise, this invariably
leads to higher prices.

Higher taxes
If the government put up taxes, such as VAT and
Excise duty, this will lead to higher prices, and
therefore CPI will increase. However, these tax
rises are likely to be one-off increases. There is
even a measure of inflation (CPI-CT) which ignores
the effect of temporary tax rises/decreases.

Effects of Inflation

Effects on Redistribution of Income and Wealth


Debtors and Creditors:
During periods of rising prices, debtors gain and creditors lose.
I would like
to borrow
100.00 please
Mr. Crabs, to
buy Gary a
new bed

meow

Ok, I will lend you


100.00 but in one
year you must pay
back 6% interest

Meanwhile

Prices in
bikini bottom
are rising at
10%!
Mr. Crabs

Who will be better


off in a years time,

or
SpongeBob?

Heres your
106.00 Mr.
Crabs

But. Prices have rose by


10%, if I wanted to buy a
new cash register a year
ago I would only have to
pay 100.00, now I have to
pay $110

Effects on Redistribution of Income and Wealth


Salaried Persons
Salaried workers such as clerks,
teachers, and other white collar persons lose
when there is inflation. The reason is that
their salaries are slow to adjust when prices
are rising.
Equity Holders or Investors
Persons who hold shares or stocks of companies gain during inflation. For
when prices are rising, business activities expand which increase profits of
companies. As profits increase, dividends on equities also increase at a
faster rate than prices. But those who invest in debentures, securities,
bonds, etc. which carry a fixed interest rate lose during inflation because
they receive a fixed sum while the purchasing power is falling.

Effects on Redistribution of Income and Wealth


Businessmen:
Businessmen of all types, such as producers,
traders and real estate holders gain during periods
of rising prices. Take producers first. When prices
are rising, the value of their inventories rise in the
same proportion. So they profit more when they
sell their stored commodities.
Fixed Income Group:
The recipients of transfer payments such as pensions, unemployment
insurance, social security, etc. and recipients of interest and rent live on
fixed incomes. Pensioners get fixed pensions. Similarly the renter class
consisting of interest and rent receivers get fixed payments.

Effects on Redistribution of Income and Wealth


Government
The government as a debtor gains at the expense of households
who are its principal creditors. This is because interest rates on
government bonds are fixed and are not raised to offset expected rise in
prices. The government, in turn, levies less taxes to service and retire
its debt.

Effects on Production

Misallocation of Resources
Inflation causes misallocation of resources when producers divert
resources from the production of essential to non-essential goods from
which they expect higher profits.

Reduction in Production
Inflation adversely affects the volume of production because the
expectation of rising prices along-with rising costs of inputs bring
uncertainty. This reduces production.

Effects on Production
Fall in Quality
Continuous rise in prices creates a
sellers market. In such a situation, producers
produce and sell sub-standard commodities
in order to earn higher profits. They also
indulge in adulteration of commodities.

Reduction in Saving
When prices rise rapidly, the propensity to save declines because more money
is needed to buy goods and services than before. Reduced saving adversely
affects investment and capital formation. As a result, production is hindered.

Effects on Production

Government
Inflation affects the government in various
ways. It helps the government in financing its
activities through inflationary finance. As the
money incomes of the people increase, government
collects that in the form of taxes on incomes and
commodities. So the revenues of the government
increase during rising prices.

Other Effects
Net Exports

When prices rise more rapidly in the


home country than in foreign countries,
domestic products become costlier
compared to foreign products.

Encourages Speculation
Rapidly rising prices create uncertainty among producers who
indulge in speculative activities in order to make quick profits. Instead
of engaging themselves in productive activities, they speculate in
various types of raw materials required in production.

Other Effects
Unemployment

When the cost of goods and services


go up, companies have higher overhead costs
and consumers purchase less. This can lead
to a downturn in the economy where jobs are
the first casualty.

Political
Rising prices also encourage agitations
and protests by political parties opposed to
the government. And if they gather momentum and become unhandy they
may bring the downfall of the government. Many governments have been
sacrificed at the altar of inflation.

SOLUTIONS
to

The government can help reduce inflation by applying the following


policies:

Fiscal Policy
Monetary Policy
Supply side Economic Policy
Direct Control Policy

Fiscal Policy
is the means by which a government adjusts
its spending levels and tax rates to monitor and
influence a nation's economy. It is the sister
strategy to monetary policy through which a
central bank influences a nation's money supply.

Monetary Policy
involves altering base interest rates, which
ultimately determine all other interest rates in the
economy, or altering the quantity of money in the
economy. Many economists argue that altering
exchange rates is a form of monetary policy, given
that interest rates and exchange rates are closely
related.

Supply Side Economic Policies


seek to increase productivity, competition and innovation all
of which can maintain lower prices. These are ways of controlling
inflation in the medium term.
A reduction in company taxes to encourage greater investment.
A reduction in taxes which increases risk-taking and incentives
to work a cut in income taxes can be considered both a fiscal
and a supply-side policy.
Policies to open a market to more competition to increase
supply and lower prices.
Rising productivity will cause an outward shift of aggregate
supply.

Direct controls
a control that is directly imposed upon the
manufacturing, pricing, and distribution of specific
goods in contrast with an indirect or general control
(such as a credit and fiscal policy) that affects the
economy in its entirety and specific goods only
indirectly

Philippine
Inflation
Rate for 2015

Source: Philippine Statistic Authority

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