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Group F

MUDASSAR ASHRAF SP08-MBA- 044

ZEESHAN MAQSOOD SP08-MBA- 060

NABILA KANWAL SP08-MBA- 062

JAWAD AHMAD SP08-MBA- 032

ALI MAHMOOD SP08-MBA- 006

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Inflation

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Inflation Concept

Inflation is a situation where generalprice increases consistently and value of money goes on to fall.

When price level increases peoplespurchasing power decreases. Because of this the firms have to make morepayments to the owners of resources inthe form of wages, rent and interest.

Because of this money circulationincreases, As a result prices keeps on

increasing and value of money decreases.

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Definition According to Prof Ackly Garden

Inflation is a persistent and appreciable rise ingeneral level of average prices.

Explanation Thus from above mention definitions it isconcluded that inflation is a phenomenon whereby general price level rises consistently. If pricelevel suddenly jumps, this does not representinflation, rather inflation is a process of continuous rise in prices.

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Rate of inflationThe annual percentage change in price levelrepresents rate of inflation.

Rate of inflation = change in price 100original price

= P 100P

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ExampleIf price level was Rs 2 in 2006 and Rs 3 in 2007,then inflation rate can be calculated as under,

Inflation Rate = P 100P

= 3-2 1002

= 1 1002

= 50%

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Types of inflation

Hyper Inflation

Suppressed Inflation

Stagflation

Deflation

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Hyper Inflation:High rate of inflation is prevailing in the country is calledhyper inflation.

Extreme case of hyper inflation is 700 billion% in GERMANY in1923

Suppressed Inflation: When prices are kept below their actual prices artificiallythrough Government control is called suppressed inflation.

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Stagflation:When unemployment and inflation existsimultaneously, it is called stagflation.

Deflation:It is the opposite of inflation and indicate thesituation of persistently falling prices and fall in the

money incomes of the factor of production

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Methods to calculate inflation

CPI (Consumer price index)

WPI (Whole sale price index)

SPI (Sensitive price index)

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CPI (Consumer price index)

CPI covers the retail prices of 375 items in35 major cities

It shows the rough estimation of cost of living in the urban areas

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SPI (Sensitive price index)

SPI covers prices of 53 essential itemsconsumed by those house holds whosemonthly income ranges from 3000 to12000 per month

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Inflation during the 1990s

Prices remained volatile during the decay

of 1990s ranging between 5.7% and 13%.

The worst inflation experienced in 1994-95

which was up to 13%.

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Historical Inflationary Trends(% change)

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Inflation on Monthly BasisThe monthly analysis of inflation during

2006-07 shows more clear understandingof inflation during 2006-07

Food prices increased substantially

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Comparison with some other

countries in 2007

Inflation rate in Australia was 3.8%

Inflation rate in Bangladesh was 7.2%

Inflation rate in Pakistan was 7.9%

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Foreign Economic Aid

Economic aid is taken to invest onproductive projects

But in our country, it is invested inunproductive projectsBecause of this there is no increase in

income but expenditure increasesWhich increases price level and causeinflation

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