What is inflation also explain the causes and remedies (control) of inflation?

According to Silverman. Inflation  is define as, “inflation is the term given to the expansion of money supply, in excess of the amount justified by the state of the trade resulting in a general rise in prices”.

Coul born has beautifully define the term as “too much money chasing too few goods”.

According to the Crowther says, “Inflation is a state of economy in which the value of money is following.

Examples prices are rising.

There are two kinds of inflation:

1.     Demand pull inflation.

2.     Cost push inflation.

Here we goes to describe the above kinds of inflation in detail.

1.                 Demand pull inflation:

Some economists believes that inflation is caused by increase in aggregate demand for goods. They say that demand may rise due to many causes including increased money supply for example; people may reduce savings and spend more. As aggregate demand rises for goods and services, firms try to increase production. To this they need more workers, more machines and more raw materials. If these resources are not available because they are already full employed, the firms will not be able to increase output. In this case, rising demand causes inflation.

2.                 Cost push inflation:

Some economists think that inflation occurs due to rising costs. When the firms pass on their increased costs to consumers in the form of higher prices inflation starts. Important sources of rise in cost include workers demand for higher wages, increase in taxes.

Causes of inflation:

a.                 Population explosion:

Our population is rising at a very fast that is 3%. On other hand the rate of growth of GNP is not very high that is 5.4%. Thus increase in national output is insufficient to solve the problem of scarcity of goods. Since independence, our population has increase four times.

b.                 Political instability:

A country’s economy depends upon political stability. Political instability discourages investment and encourages speculation. Under such circumstances, the industrialist and businessman feel unsecure and cannot make good plans. The government also cannot adopt affective measures to control rise in prices.

c.                  Imported inflation:

A very important cause of inflation in Pakistan is the existence of inflation in their countries. Since 1970’s most countries are experiencing inflation. The result in the Pakistan has to import machinery, raw material and other goods at higher prices.

d.                 Nationalization:

Due to nationalization of industrial in 1992, people were discouraged to make investment in industrial. Moreover in Pakistan the nationalization industrial did not perform will. They becomes centers of in sufficient production, high prices and poor quality goods were result.

e.                 Wages increases:

The increase in wages of workers has also contributed to inflation. Increase in wages result in higher cost of production of goods. So their price rises.

f.                   Climatic factors:

Pakistan economies heavily depend upon agriculture but due to weather condition many crops fall short of target, thus pushing up prices. For example cotton production remain stagnant and below target during previous years. Wheat production has also not kept pace with rising demand.

g.                 Oil crises:

The oil prices in 1973 created by a large quantity of inflation throughout the world. Import of oil is a high Burdon on our foreign exchange resources. At present 25 persons of our exports are used to pay for oil. From time to time, oil exporting countries increase price of oil, which raises transport cost.

h.                 Artificial scarcity of goods:

Frequent artificial scarcity of essential items is created (cement, ghee, oil, sugar, etc) and huge profits are charged. Similarly through smuggling, large quantity of essential goods is sent to Afghanistan and India.

Remedies of inflation:

It is the main objective of every government to take proper measures to control inflation.

The main measures which are used to control inflation are:

1.     Monitory policy.

2.     Fiscal policy.

3.     Direct measures and other measures.

1.                 Monitory policy:

Monitory policy is a policy that influences, the economy through changes in money supply and available credit. Monitory policy is adopted by central bank of country. The various monitory measures which are used to control inflation are grouped under heads.

a.     Qualitative control.

b.     Quantitative control.

There are:

1.     Open markeet operations

2.     Variation in bank rates

3.     Credit rationing

4.     Varing reserve requirements.

2.                 Fiscal policy:

Fiscal policy is the deliberate change in either government pending or taxes to simulate or slow down the economy. It is the budgetary policy of government relating to taxes, public expenses, public borrowing and deficit financing.

Fiscal policy is based upon demand management examples, raising or lowering the level of aggregate demand by controlling various. Expenses, government expenses, consumption expenses.

3.                 Direct measures:

It means the step of government like rationing of goods and freezing of prices and wages. The government can also increase voluntary savings of people by giving them various incentives.

Other measure:

a.                 Increase in output:

The most effective method to control inflation is to increase the supply of goods. For this purchase, industrial and agricultural out put should be increased. However, Pakistan performance in this regard in unsatisfactory.

b.                 Control of smuggling:

All steps should be adopted to check these evils through publicity as well as punishment. Large quantity of wheat, ghee, and other essential commodities being smuggled to Afghanistan should be control.

c.                  Industrial peace:

Industrial peace should be control to maintain the supply of goods and avoid the danger of scarcity. The disturbance such as what happened at Karachi during the post years? Should be control.

d.                 Control of money supply:

Volume of credit and money supply should be control. This can be done if tight monitory policy is followed. Decrease in money supply means less purchasing power with the people.

e.                 No deficit financing:

Deficit financing should be disco tribute. The development expenses should be meat through taxation, savings. Excessive issue of currency should not be used to meet budget deficit.

f.                   Population control:

Measure should be adopted to decrees the rate of population growth. The campaign of population planning has already started showing some success.

g.                 Simple living:

Luxurious life style should be discouraged and simple living should be adopted. The political leaders should themselves adopt simple living and provide an example for others.