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 centres
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 market operations
2.
Variation in bank rates
3.
Credit rationing
4.
Varying 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.