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VisionIAS - Video Classroom Lecture
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Economics Class 01

A BRIEF OVERVIEW OF THE PREVIOUS CLASS (9:17 AM)

INFLATION (9:23 AM)

  • Cause of inflation
  • Inflation can either be demand-pulled, cost-pulled, or both
  • Demand-pull inflation
  • It may be due to any of the following reasons:
  • 1. For any reason if private final consumption expenditure is increasing
  • For example, an increase in salary, tax reduction, availability of helicopter money (money distributed to the public either to boost the economy or other reasons), and so on
  • 2. For any reason if government consumption expenditure is increasing like more budgetary allocation to welfare schemes, infrastructural development, establishment cost
  • 3. For any reason if more fixed capitals are formed
  • Fixed capital refers to the investments or accumulation of new or existing fixed assets (tangible or non-tangible) within a country's economy during a specific period
  • 4. For any reason if export is increasing for the given items
  • Increased exports decrease the availability of goods in the domestic economy, thus creating a pseudo-demand for goods
  • Cost-push inflation
  • It refers to a situation where although demand remains the same, due to supply chain constraints prices are increasing
  • It  may occur if:
  • 1. For any reason the rental cost is increasing
  • 2. For any reason if labor costs are increasing because of non-availability of labor, lack of skill, trade unionism
  • 3. If the cost of funds is higher
  • It may happen because of poor logistics, disasters, epidemics, and such like factors
  • 4. For any reason if royalty costs are higher
  • Types of Inflation (10:25 AM)
  • Quantitive classification of inflation
  • Muted inflation: When the rate of inflation is between 0 to 2%
  • Creeping inflation: When inflation is between 2 to 6% in the Indian scenario and generally in single-digit
  • Creeping inflation is considered good for the economy
  • Walking inflation: When the rate of inflation is in two digits and is resulting in an adverse impact on the economy but controllable
  • Running inflation: When the rate of inflation is too high to be controlled by government efforts
  • Galloping inflation: When the rate of inflation is very high and may have a long-term adverse impact on the economy
  • Similarly, terms like hyperinflation (very high inflation) or runaway inflation are also used to describe galloping inflation
  • Inflationary trap: Whenever inflation is high, there will be demand for higher wages and dearness allowances which will further accelerate the inflation after a while, and this way a loop is created
  • Post-covid due to this inflationary trap across the world, inflation is continuing for more than expected inflation, this situation is also called sticky inflation
  • Disinflation: It is the situation where although inflation is in positive territory, but rate of inflation is declining
  • Deflation: It refers to the situation when the rate of inflation is negative i.e. prices are dropping
  • Deflationary trap: It refers to that situation where due to deflation the producers are witnessing losses resulting in salary cuts, lay-offs, and shutting down of economic activities resulting in further deflation
  • It is also known as hyperinflation
  • Reflation: It refers to the situation where the government is trying to increase inflation with various policies and programs (like monetary and fiscal policy) to correct disinflation or deflation
  • Qualitative classification of inflation (11:28 AM)
  • Stagflation:
  • It was coined by Friedman
  • It refers to a situation where on the one hand inflation is high and unlike the Philip Curve on the other hand unemployment is also high
  • Thus, the growth of the financial sector is not reflected in real economic activities
  • For economies that are on the left side of the Kuznet curve (inequality vs income per capita), stagflation is highly detrimental
  • Real sector and financial sector are the terminologies used in classical microeconomics where
  • The real sector refers to all those economic activities where some kind of production of goods and services takes place
  • The financial sector refers to those economic activities that revolve around financial asset management like banking, insurance, etc.
  • Structural inflation:
  • It refers to the situation where due to structural bottlenecks cost-pushed inflation is witnessed
  • They cannot be corrected without long-term solutions to the given problems
  • For example, dependence on fossil fuels, coal, thermal energy, poor infrastructure, poor financial inclusion, and such like
  • Skewflation:
  • It refers to a situation where certain commodities are witnessing a sudden price rise in a given period repeatedly year after year
  • For example, onion and gold prices
  • Skewflation in food articles has been a concern, as a result in 2015 the government introduced a Price Stabilization Fund of Rs 500 Crores under the Ministry of Consumer Affairs and PDS
  • Various state governments can take interest-free loans from this fund in order to provide the given commodity at a competitive price

Topic for the next class: Inflation (continued)