Page 171 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics Hitesh Jhanji, Lovely Professional University

Notes Unit 10: Theories of Inflation

CONTENTS
Objectives
Introduction

10.1 Meaning of Inflation
10.2 The Quantity Theory of Money
10.3 The Keynesian Theory of Inflation

10.3.1 Demand Pull Inflation
10.3.2 Cost Push Inflation
10.3.3 Demand Pull vs. Cost Push Inflation
10.3.4 Sectoral Demand-Shift Inflation
10.4 Summary

10.5 Keywords
10.6 Review Questions
10.7 Further Readings

Objectives

After studying this unit, you will be able to:
Define inflation;
Identify the types of inflation;
Explain Quantity Theory of Money;
Discuss Keynesian Theory of Inflation;

Contrast the concept of demand pull and cost push inflation.

Introduction

Inflation is defined as a sustained increase in the price level or a sustained fall in the value of
money. Inflation in India is explained by various factors, viz., excessive aggregate demand,
imbalance between the sectoral demand and supply, cost factors including rising import prices
and rate of expansion of money. To understand the type of inflation, we analyse the price trends,
the rate of expansion of money supply and the rate of increase in demand. To quantify the
amount of inflation in the economy, indicators such as the Wholesale Price Index, the Consumer
Price Index and the GDP Deflator are used. The Wholesale Price Index is defined as the measure
of the cost of a given basket of goods. It includes raw materials and semi-finished goods. The
Consumer Price Index measures the cost of buying a fixed basket of goods and services. The GDP
deflator is a ratio of nominal GDP in a given year to the real GDP in that year.
The indicators of inflation will be influenced primarily by changes in money supply, financing
of the money supply by the government and the influence of money wages. Inflation affects the
private corporate sector through its impact on the interest rate, credit offtake and globalisation
of savings. In this unit, you will be introduced to the basic concept of inflation and its theories.

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