Economic crisis due to inflation

By: Amanullah Khan Jadoon

Economy And Inflation

• Economy: The state of a country in terms of the production and consumption of the goods and services and the supply of money.

• Inflation: It is the rise in the prices of goods and services in an economy over a period of time.

Economy Of Pakistan

• The economy of Pakistan is the 26th largest economy in the world in terms of purchasing power and the 42nd largest in terms of nominal Gross Domestic Product.

• Pakistan has a semi-industrialized economy, which mainly encompasses textiles, chemicals,food processing ,agriculture and other industries.

Types of inflation

1. Hyperinflation: is the most extreme inflation phenomenon, with yearly price increases of three-digits percentage points and an explosive acceleration.

2. Extremely high inflation: could range anywhere between 50% and 100%.

3. High inflation: is a situation of price increase of, say, 30%-50% a year. Both kinds can be stable or dangerously accelerate to enter in an hyperinflation condition.

4. Moderate inflation: As an indication only, one could consider an inflation as moderate when it ranges from 5% to 25-30%.

5. Low inflation: can be characterized from 1-2% to 5%. Around zero there is no inflation (price stability). Below zero, a country faces deflation.

Pakistan Inflation Rate (2014-2015)

The inflation rate in Pakistan was recorded at 2.11 percent in April of 2015. Inflation Rate in Pakistan averaged 7.99 percent from 1957 until 2015, reaching an all time high of 37.81 percent in December of 1973 and a record low of -10.32 percent in February of 1959. Inflation Rate in Pakistan is reported by the Pakistan Bureau of Statistics.

CAUSES OF INFLATION IN PAKISTAN

Causes of inflation are of two typesA. INCREASE IN DEMAND1) Increase in Money SupplyThe major cause of increase in the price level is an increase in money supply. It may

be due to increase in currency or credit money. Increase in the stock of money induces people to demand more and more of goods and services.

2) Increase in Velocity of MoneyAccording to the Fisher’s Quantity Theory of Money, if there is an increase in the

velocity of circulation of money it also leads to inflation. 3) More InvestmentInvestments also play an important role in producing inflation. At the moment of

investment the economy’s stock of wealth and money expands and it result is in inflation.

4) Non-productive ExpendituresGovernment of Pakistan has to make a lot of non-productive expenditures

like defence etc. Such unproductive expenditures lead to the wastage of economy’s precious resources and also lead to inflation

5) Corruption & Black MoneyCorruption and black money leads to increase in aggregate demand,

which is cause of inflation. These evils increase aggregate demand and import volume.

6) Deficit FinancingDeficit financing is another cause of inflation. It increases the money

supply and leads to inflation. 7) Foreign RemittancesIncrease in foreign remittances is increasing the money supply in our

country. Increase in money supply leads to inflation.

8) Foreign AidsForeign aids are also a source of mobilization of resources form rich

countries to poor countries. It is also a cause of inflation in Pakistan. 9) Consumption TrendsDue to demonstration effect people of our country want to copy the

styles of people of rich countries. In this way there is an increase in consumption trends that leads to inflation.

10) Population BombPopulation of Pakistan is increasing day by day. Increasing population

is demanding more and it creates inflation.

B. DECREASE IN SUPPLY:11) Slow Agricultural DevelopmentLow growth rate of agricultural sector caused in shortage of productivity. It

results in low supply and increase in price level.12) Slow Industrial GrowthOur industrial sector is not at developed form due to use of backward

techniques of production. Its less production also creates shortage in market and caused in inflation.

13) Increase in Wages & SalariesNow labour is demanding more wages and salaries. Increase in wages and

salaries leads to increase in cost that increases the prices. On the other hand due to more wages and salaries there is an increase in income and it caused in inflation

14) Increase in Prices of ImportsIncrease in the prices of imports also leads to creation of inflation. If

there is an increase in the prices of oil and other imported raw material then it will cause to reduction in supply.

15) DevaluationThe value of our currency is decreased due to devaluation. It makes

imported goods more expensive and it leads to shortage of supply. 16) Indirect TaxesThe imposition of indirect taxes is a reason for increase in prices.

Sometimes government imposes taxes on some particular commodities. In this case producer may start to decline the production of those goods.

EFFECTS OF INFLATION

Following are the EFFECTS of inflation:1) It is a huge problem for employees, taking fixed

salaries.2) It generates unfair distribution of income and

wealth. 3) Inflation reduces the saving of the population. 4) It is a cause of unfavorable balance of trade and

payment. 5) Inflation increases the rate of interest.

6) It creates a lot of social evils. 7) It is difficult for consumers to purchases more

goods. 8) It generates very bad effects on the poor labour

force. 9) Inflation reduces the living standard and

purchasing power of people. 10) It is harmful for creditors.11) Inflation reduces the purchasing power.

MEASURES TO CONTROL THE INFLATION

Following measures are suggested to control inflation:1) Increase in the growth rate of output2) Government should control the supply of money

through effective monetary policy3) Highly increasing unproductive expenditures must be

control4) Government should check the corruption first to

eliminate the inflation5) Control on population is also necessary to control

inflation

6) Reduction in budget surplus7) Reduction in monetary expansion8) Effective tax system will be helpful to control the

inflation9) Improvement in balance of payment10) Developments of agricultural and industrial sector

will helps to control the inflation.

Conclusion:Inflation is everywhere in an economy. Its rate is

high in developing countries and is low in poor developed counties. Effective operation of monetary and fiscal policy is essential to control the inflation.