The Unpredictable Economy

  • Yo

My mornings seem bland without having a gist of “THE HINDU “. So on a sultry June, I was reading the editorial section and my sight fell on a particular article saying ‘The currency had weakened past 69 intraday against the U. S. Dollar ‘. Well, it took me few days to understand it, I googled everything and came across many enigmatic words, one of which was ‘inflation’.

Inflation means the increase in prices of products or services and the decrease in the purchasing power of money. For example, a chocolate today costs Rs. 10 but in the past it used to cost Rs. 5. So, as the price increased the purchasing power of rupee reduced.

Now, what are the causes of inflation:

1)Demand supply inflation

Consider a book, if its demand is for 1000 students and supply is only of 100 books then manifestly the price of individual book will have an increment compared to its earlier price. Evidently it has caused an inflation because the price of the product has increased.

2)Cost-push inflation

Consider the same example as above, let’s suppose its price earlier was Rs. 150, but due to rise in manufacturing cost the book price will eventually cost Rs. 200. Seemingly, it has caused an inflation again.

3)Monetary inflation

Well, it’s quite interesting. If the government prints more money than the required currencies for circulation, then people will have more money, looking at it manufacturers will ponder to increase cost of products. Patently, price of product has increased and purchasing value of currency has decreased, provoking monetary inflation.

 

When I was a tiny tot, I used to wonder that if there’s so much poverty issues in our country then why don’t our government print ample amount and distribute it to all ?

Let’s see an example, consider  A, B, C each having money Rs 500, Rs 300, Rs 100 respectively. Also consider there’s a granary shop having 90kg rice selling at Rs 10 per kg.  So the peak kgs of rice brought by A, B and C are 50, 30 and 10 kgs.

Now, if it all goes according to my question and government decides to distribute twice the currency to three of them, then A, B and C will have Rs 1000, Rs 600, Rs 200. Perhaps on the other side as the shop still has 90 kgs of rice, the owner might probably think of incrementing the rate to Rs 20 per kg. Again if we find maximum kgs of rice purchased by three they are exactly the same as that of earlier scenario.

It concludes that printing more currencies won’t solve the problem, infact it might give rise to an inflation. Limited currency will stabilize more of the market price. There will be an economic growth only if there is growth in production.

Another term opposite to inflation is deflation. Deflation means reduction of the general level of prices in an economy. There are two reasons that primarily contribute to deflation. Firstly, increase in supply and secondly fall in demand or both. Inflation does less harm to the economy than deflation, reason being that when prices begin to fall after an economic downturn deflation may set in causing an even deeper crisis. Demand drops and unemployment increases. A small amount of inflation is good for economic growth, around 2-3%. But Indian Rupee has reportedly crossed the safe line leading  its way to the downfall!

–  Kanupriya. V. Shelke

8 Replies to “The Unpredictable Economy”

  1. Mind blowing blog kanupriya . I was unaware of these terms . Thanks for adding up this to my knowledge . Keep writing .

Leave a Reply

Your email address will not be published. Required fields are marked *