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KINDS OF

INFLATIONOn the basis of rate of inflation

On the basis of degree of control

On the basis of causes

Others

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Cost-push Inflation

Ep1

E

E 1

S S 1 D

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Monetary Measures

Credit Control

Demonetization of Currency

Issue of New Currency

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Fiscal MeasuresReduction in Unnecessary Expenditure

Increase in Taxes

Increase in Savings

Surplus Budgets

Public Debt

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OTHER MEASURES To Increase Production

Rational Wage Policy

Price Control

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Consumer Price Index

CPI is a measure estimating theaverage price of consumer goods and

services purchased by households.CPI measures a price change for aconstant market basket of goods and

services from one period to the nextwithin the same area (city, region, ornation).

It is a price index determined by6/3/12 12Ghanshyam iilm gurgaon

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Wholesale Price Index

WPI was published in 1902,and was oneof the economic indicators available to

policy makers until it was replaced bymost developed countries by the CPImarket. index in the 1970.

WPI is the index that is used to measurethe change in the average price level of goods traded in wholesale market.

Some countries (like India and ThePhilippines) use WPI changes as a6/3/12 13Ghanshyam iilm gurgaon

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Problems with

WPIIn present day service sector plays a key role inIndian economy. Consumers are spending loads of money on services like education and health. And

these services are not incorpated in calculation of WPI.

WPI measures general level of price changeseither at level of wholesaler or at the producer

and does not take into account the retail margins. Therefore we see here that WPI does give the truepicture of inflation.

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Problems with

WPIWPI is supposed to measure impact of prices onbusiness. But we use it to measure the impact onconsumers. Many commodities not consumed by

consumers get calculated in the index.

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Weight edge to CPI & WPI

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Inflation rate

PI for a certain year - PI for a comparative yearX 100

PI for a comparative year

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2006-20072007-2008

Inflation 7.812.0

Food inflation 10.317.6

Non-food inflation 6.2 6.8

INFLATION RATES

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EFFECTS OF INFLATION

They add inefficiencies in the market,and make it difficult for companies to

budget or plan long-term.Uncertainty about the future purchasingpower of money discouragesinvestment and saving.

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EFFECTS OF INFLATION

There can also be negative impacts totrade from an increased instability in

currency exchange prices caused byunpredictable inflation.

Higher income tax rates.

Inflation rate in the economy is higherthan rates in other countries; this willincrease imports and reduce exports,leading to a deficit in the balance of trade. 6/3/12 20Ghanshyam iilm gurgaon

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EXAMPLE

Increase in the price of wheat

Increase in the price of world oil

Increase in the price of rice

Increase in the price of CNG

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T

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