Page 196 - DECO402_Macro Economics

Unit-22: Inflation

quantity of money in circulation, by increasing faster as compared to increase in production, becomes Notes
the cause of increase in prices. Coulbourn also means this when he defines inflation as, ‘Too much
money after too less goods.’ Kemmerer also believes that inflation will be there when quantity of money
in the country will be more than physical quantity of goods and services. That is why according to
quantity theory; quantity of money is responsible for increase in prices through decrease in value of
money. This definition based on quantity theory of money was prevalent until when in the decade of
1930 the great depression introduced the limitations of quantity theory. As a result of the revolution
of Keynes, this definition was changed accordingly. Keynes’ contemporary economist, Pigou had
defined inflation in relation to changes in monetary income. In his opinion, when monetary income
is increasing in a greater ratio than accumulation activity, inflation is maintained.
Keynes connected the concept of inflation with the incident of full employment. Like Pigou, Keynes
has related inflation with the condition of increase of price level, which comes in existence after the
situation of full employment. As per him, relation of inflation is with that increase in price level which
happens after achieving the level of full employment. In this situation of price rise, production will
not increase.
Keynes has considered inflation to be different from increase in prices due to increase in production.
If an economy is working below the level of full employment, then unemployed people and unused
resources are present in large numbers. In such condition, increase in demand as a result of expansion of
money will not only increase the price level in the system but also increase the quantity of production.
This increase in price level is put in the class of reflation or partial inflation. In situation of reflation,
prices rise in a slow and steady speed, because influence of increase of prices is negated by rise in
production. Generally as much more is unemployment that much more is the possibility of increase
in money supply increasing production as compared to prices.

Notes According to Kemmerer inflation will be there when quantity of money in the
country will be more than physical quantity of goods and services.

According to Keynes, till the stage of full employment initial increase of prices is needed for the
country, because due to it, production and employment also increases. It keeps the economy free of
the serious results of depression. It is possible through deliberate anti deflationary measures taken
by the government, when prices fall to reach the minimum level. It is possible that, after the level
of full employment increase in prices is not good for the economy, because there is no favourable
increase in production or employment. It is important to note that the word inflation may be used for
an underdeveloped economy like India where along with inflationary rise of prices, unemployment
of people and resources is existent. It happens due to the obstacles of limited quantity of capital, land,
machinery, infrastructure and lack of technical knowledge. Because of these obstacles, it is possible
that, beyond a definite stage increase in price level does not cause increase in production, though may
be the country had not attained the stage of full employment.
It is worth paying attention that the word inflation may be used for developing countries like India,
where along with inflationary increase of prices, unemployment of people and resources is existent.
Industries like textile, textile machine, steel, tyre, tractor, business vehicles, and general engineering
etc. had been some examples. It had happened due to obstacles like limited quantity of capital, land,
machinery, and infrastructure and due to lack of technical knowledge. Due to these obstacles, as
a result of increase in price level after a certain limit, increase in production is not necessary, even
when the country has not attained the condition of full employment. Problem of increasing inflation
along with increasing stagnancy (or unemployment) is often known by the name of stagnation or
slumpflation.

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