Page 204 - DECO402_Macro Economics

Unit-22: Inflation

both the principal amount of ` 100 and interest amount of ` 10 will fall. If loan is interest free Notes
then too ` 100 will be less valuable at the time of inflation in comparison to that at the time
of taking loan. Things that who could buy in ` 100 at the time of taking the loan, it will cost
him more than ` 100 when inflation will take place. In this way, increasing prices provide
profit to debtors. As opposed to it, creditors suffer loss due to inflation because the amount
that they had lent, they receive comparatively less purchasing power than it.
c. Investors: Because on inflation generally investors of shares receive profit. During inflation,
firms receive huge profits. That is why shareholders at one side receive profit shares, at the
other side; because of increase in share prices they may also obtain capital gain.
Investors of bonds and debentures paying stable returns incur losses because during inflation,
actual income from such investments falls. When inflation is intense, then because of value
falling down, hard earned savings are completely finished. Maximum damage is caused
to small investors, who keep their savings in fixed deposits or savings bank accounts and
insurance schemes. This is the reason why people prefer to spend on consumer goods. They
are reluctant of saving. Declining savings have an adverse effect on capital building and
loans. Consequently, investment in productive economic activities has to suffer a setback. It
has a serious reaction on the economic activity of under developed country like India, where
more than three fourth parts of savings is created from the domestic area.
d. Fixed income earning class: People earning wages, salary or other people with fixed income
are badly hurt by inflation. Among other people, pensioners and those receiving fixed
interest or rent are included. Their monetary income is almost fixed, whereas the prices of
those goods and services which they are thinking to buy are increasing rapidly. Since the
purchasing power of their income falls, hence they suffer loss. Increase in salaries through
annual increment and untimely payment of dearness and other allowances fail to match
steps with price rise.
Labourers employed in huge organised sectors may be successful in compelling the
management to increase the wages. But labourers employed in small areas are incapable
in doing so. They are incapable of determining escalation clause of wage contracts, so that
(they) they may compel their employer for compensating the labourers for reduction in their
real income due to price rise.

3. Other Effects

Summary of other effects of inflation may be presented like this:
(i) Inflation creates uncertainty in economic activities. Businessmen dislike taking business
risks. Consequently they invest in real properties and speculation. That is why production
is adversely affected.
(ii) Resources are deviated from production of necessary goods to industries of luxury goods,
as a result of which there is lack of necessary consumable for general public. Consequently,
prices of these goods shift more high.
(iii) High cost economy adversely affects the competitive base of the country in the international
market. Because of increasing demand (consequently demand pull inflation) and/ or because
of increasing prices, quantity of export declines. That is why; foreign trade is adversely
affected by inflation (demand pull or cost push). People lose faith in domestic currency.
And for protection of their well being, they rush towards comparatively more stable foreign
currency.

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