Economy Inflation- 2 | Economy for UPSC 2024 (Pre & Mains) PDF Download

 Page 1


 
Inflation  
(Economy) 
Visit our website www.sleepyclasses.com or  
our YouTube channel for entire GS Course  FREE  of cost 
Also Available: Prelims Crash Course || Prelims T est Series 
Page 2


 
Inflation  
(Economy) 
Visit our website www.sleepyclasses.com or  
our YouTube channel for entire GS Course  FREE  of cost 
Also Available: Prelims Crash Course || Prelims T est Series 
1. In?ation 1 ........................................................................................................
Causes of in?ation 1 ......................................................................................................
Effect of in?ation 1 .........................................................................................................
How is In?ation Good For Economy 1 .......................................................................
2. De?ation 1 ......................................................................................................
De?ation can cause the following economic problem 2 .......................................
Disin?ation 2 ...................................................................................................................
Plateau effect /base effect 2 ........................................................................................
3. Core In?ation 3 .............................................................................................
Imported In?ation 3 .......................................................................................................
Hyper In?ation 3 .............................................................................................................
Other commonly used In?ations 4 ............................................................................
Structural In?ation 4 .....................................................................................................
Headline In?ation 4 .......................................................................................................
Re?ned Core In?ation 4 ................................................................................................
4. Stag?ation 4 ...................................................................................................
Stagnation + In?ation 4 ................................................................................................
5. Phillips Curve 4 .............................................................................................
Phillips Curve 5 ...............................................................................................................
NAIRU 5 ............................................................................................................................
In?ationary Gap 5 ..........................................................................................................
Why it occurs 5 ................................................................................................................
6. In?ation T ax 5 ................................................................................................
In?ation T ax 5 ..................................................................................................................
Measuring in?ation 6 ....................................................................................................
7. WPI 6 .................................................................................................................
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
T able of Contents
Page 3


 
Inflation  
(Economy) 
Visit our website www.sleepyclasses.com or  
our YouTube channel for entire GS Course  FREE  of cost 
Also Available: Prelims Crash Course || Prelims T est Series 
1. In?ation 1 ........................................................................................................
Causes of in?ation 1 ......................................................................................................
Effect of in?ation 1 .........................................................................................................
How is In?ation Good For Economy 1 .......................................................................
2. De?ation 1 ......................................................................................................
De?ation can cause the following economic problem 2 .......................................
Disin?ation 2 ...................................................................................................................
Plateau effect /base effect 2 ........................................................................................
3. Core In?ation 3 .............................................................................................
Imported In?ation 3 .......................................................................................................
Hyper In?ation 3 .............................................................................................................
Other commonly used In?ations 4 ............................................................................
Structural In?ation 4 .....................................................................................................
Headline In?ation 4 .......................................................................................................
Re?ned Core In?ation 4 ................................................................................................
4. Stag?ation 4 ...................................................................................................
Stagnation + In?ation 4 ................................................................................................
5. Phillips Curve 4 .............................................................................................
Phillips Curve 5 ...............................................................................................................
NAIRU 5 ............................................................................................................................
In?ationary Gap 5 ..........................................................................................................
Why it occurs 5 ................................................................................................................
6. In?ation T ax 5 ................................................................................................
In?ation T ax 5 ..................................................................................................................
Measuring in?ation 6 ....................................................................................................
7. WPI 6 .................................................................................................................
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
T able of Contents
8. Important changes made in WPI-new Series 7 ................................
9. CPI 7 ..................................................................................................................
6 Groups of Items 7 ........................................................................................................
Various CPIs 9 ..................................................................................................................
CPI& RBI 9 ........................................................................................................................
10. In?ation T argeting 9 ....................................................................................
Food For Thought 10 ........................................................................................................
11. PPI 10 ...................................................................................................................
PPI Vs WPI 11 ....................................................................................................................
PPI Vs CPI 11 ......................................................................................................................
12. Housing Price Indices (HPIs) 11 ................................................................
13. Efforts to contain in?ation 11 ....................................................................
13. Efforts to contain In?ation 12 ....................................................................
Efforts to contain in?ation 12 .......................................................................................
In?ation Indexed Bond 12 ..............................................................................................
In case of de?ation 12 ......................................................................................................
In?ation Indexed Bond 12 ..............................................................................................
Things to Do 13 ..................................................................................................................
Find Out 13 .........................................................................................................................
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
Page 4


 
Inflation  
(Economy) 
Visit our website www.sleepyclasses.com or  
our YouTube channel for entire GS Course  FREE  of cost 
Also Available: Prelims Crash Course || Prelims T est Series 
1. In?ation 1 ........................................................................................................
Causes of in?ation 1 ......................................................................................................
Effect of in?ation 1 .........................................................................................................
How is In?ation Good For Economy 1 .......................................................................
2. De?ation 1 ......................................................................................................
De?ation can cause the following economic problem 2 .......................................
Disin?ation 2 ...................................................................................................................
Plateau effect /base effect 2 ........................................................................................
3. Core In?ation 3 .............................................................................................
Imported In?ation 3 .......................................................................................................
Hyper In?ation 3 .............................................................................................................
Other commonly used In?ations 4 ............................................................................
Structural In?ation 4 .....................................................................................................
Headline In?ation 4 .......................................................................................................
Re?ned Core In?ation 4 ................................................................................................
4. Stag?ation 4 ...................................................................................................
Stagnation + In?ation 4 ................................................................................................
5. Phillips Curve 4 .............................................................................................
Phillips Curve 5 ...............................................................................................................
NAIRU 5 ............................................................................................................................
In?ationary Gap 5 ..........................................................................................................
Why it occurs 5 ................................................................................................................
6. In?ation T ax 5 ................................................................................................
In?ation T ax 5 ..................................................................................................................
Measuring in?ation 6 ....................................................................................................
7. WPI 6 .................................................................................................................
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
T able of Contents
8. Important changes made in WPI-new Series 7 ................................
9. CPI 7 ..................................................................................................................
6 Groups of Items 7 ........................................................................................................
Various CPIs 9 ..................................................................................................................
CPI& RBI 9 ........................................................................................................................
10. In?ation T argeting 9 ....................................................................................
Food For Thought 10 ........................................................................................................
11. PPI 10 ...................................................................................................................
PPI Vs WPI 11 ....................................................................................................................
PPI Vs CPI 11 ......................................................................................................................
12. Housing Price Indices (HPIs) 11 ................................................................
13. Efforts to contain in?ation 11 ....................................................................
13. Efforts to contain In?ation 12 ....................................................................
Efforts to contain in?ation 12 .......................................................................................
In?ation Indexed Bond 12 ..............................................................................................
In case of de?ation 12 ......................................................................................................
In?ation Indexed Bond 12 ..............................................................................................
Things to Do 13 ..................................................................................................................
Find Out 13 .........................................................................................................................
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
1. In?ation 
• Rate at which the general level of prices for goods and services is rising and the purchasing power of 
currency is falling. 
Causes of in?ation 
• Demand Pull 
•
Cost Push 
• Wage 
• Wage In?ation Spiral 
Effect of in?ation 
•
Creditors - Lose 
• Debtors - Gain 
•
Export – Depends on movement of Currency (generally gain) 
• Import - Depends on movement of Currency (generally lose) 
How is In?ation Good For Economy 
• A little in?ation encourages you to buy sooner - and that boosts economic growth. 
•
Anyone with a mortgage or a loan bene?ts from in?ation, as it has the effect of eroding debt. 
• In a world of zero in?ation some companies might be forced to cut wages. 
•
It keeps the interest rates positive. 
• The government has a huge debt, which is getting bigger thanks to a de?cit.  
• It would love to see that eroded by in?ation, which in turn would see its own income rise.  
•
As long as there's a good dose of in?ation in the system, tax revenue should go up, even if the 
economy is stagnant. 
2. De?ation 
•
The opposite of in?ation is de?ation. 
•
De?ation is the natural condition of economies when the supply of money is ?xed, or does not grow as 
quickly as population and the economy.  
• When this happens, the available amount of hard currency per person falls, in effect making money 
scarcer, and consequently, the purchasing power of each unit of currency increases.  
•
De?ation also occurs when improvements in produc9on e?ciency lower the overall price of goods.  
• Compe99on in the marketplace often prompts those producers to apply at least some portion of these 
cost savings into reducing the asking price for their goods.  
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
 1
Page 5


 
Inflation  
(Economy) 
Visit our website www.sleepyclasses.com or  
our YouTube channel for entire GS Course  FREE  of cost 
Also Available: Prelims Crash Course || Prelims T est Series 
1. In?ation 1 ........................................................................................................
Causes of in?ation 1 ......................................................................................................
Effect of in?ation 1 .........................................................................................................
How is In?ation Good For Economy 1 .......................................................................
2. De?ation 1 ......................................................................................................
De?ation can cause the following economic problem 2 .......................................
Disin?ation 2 ...................................................................................................................
Plateau effect /base effect 2 ........................................................................................
3. Core In?ation 3 .............................................................................................
Imported In?ation 3 .......................................................................................................
Hyper In?ation 3 .............................................................................................................
Other commonly used In?ations 4 ............................................................................
Structural In?ation 4 .....................................................................................................
Headline In?ation 4 .......................................................................................................
Re?ned Core In?ation 4 ................................................................................................
4. Stag?ation 4 ...................................................................................................
Stagnation + In?ation 4 ................................................................................................
5. Phillips Curve 4 .............................................................................................
Phillips Curve 5 ...............................................................................................................
NAIRU 5 ............................................................................................................................
In?ationary Gap 5 ..........................................................................................................
Why it occurs 5 ................................................................................................................
6. In?ation T ax 5 ................................................................................................
In?ation T ax 5 ..................................................................................................................
Measuring in?ation 6 ....................................................................................................
7. WPI 6 .................................................................................................................
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
T able of Contents
8. Important changes made in WPI-new Series 7 ................................
9. CPI 7 ..................................................................................................................
6 Groups of Items 7 ........................................................................................................
Various CPIs 9 ..................................................................................................................
CPI& RBI 9 ........................................................................................................................
10. In?ation T argeting 9 ....................................................................................
Food For Thought 10 ........................................................................................................
11. PPI 10 ...................................................................................................................
PPI Vs WPI 11 ....................................................................................................................
PPI Vs CPI 11 ......................................................................................................................
12. Housing Price Indices (HPIs) 11 ................................................................
13. Efforts to contain in?ation 11 ....................................................................
13. Efforts to contain In?ation 12 ....................................................................
Efforts to contain in?ation 12 .......................................................................................
In?ation Indexed Bond 12 ..............................................................................................
In case of de?ation 12 ......................................................................................................
In?ation Indexed Bond 12 ..............................................................................................
Things to Do 13 ..................................................................................................................
Find Out 13 .........................................................................................................................
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
1. In?ation 
• Rate at which the general level of prices for goods and services is rising and the purchasing power of 
currency is falling. 
Causes of in?ation 
• Demand Pull 
•
Cost Push 
• Wage 
• Wage In?ation Spiral 
Effect of in?ation 
•
Creditors - Lose 
• Debtors - Gain 
•
Export – Depends on movement of Currency (generally gain) 
• Import - Depends on movement of Currency (generally lose) 
How is In?ation Good For Economy 
• A little in?ation encourages you to buy sooner - and that boosts economic growth. 
•
Anyone with a mortgage or a loan bene?ts from in?ation, as it has the effect of eroding debt. 
• In a world of zero in?ation some companies might be forced to cut wages. 
•
It keeps the interest rates positive. 
• The government has a huge debt, which is getting bigger thanks to a de?cit.  
• It would love to see that eroded by in?ation, which in turn would see its own income rise.  
•
As long as there's a good dose of in?ation in the system, tax revenue should go up, even if the 
economy is stagnant. 
2. De?ation 
•
The opposite of in?ation is de?ation. 
•
De?ation is the natural condition of economies when the supply of money is ?xed, or does not grow as 
quickly as population and the economy.  
• When this happens, the available amount of hard currency per person falls, in effect making money 
scarcer, and consequently, the purchasing power of each unit of currency increases.  
•
De?ation also occurs when improvements in produc9on e?ciency lower the overall price of goods.  
• Compe99on in the marketplace often prompts those producers to apply at least some portion of these 
cost savings into reducing the asking price for their goods.  
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
 1
• When this happens, consumers pay less for those goods, and consequently de?ation has occurred, 
since purchasing power has increased. 
De?ation can cause the following economic problem 
• Delayed consumption 
?Consumers may delay consumption, waiting for prices to fall even further.  
?This can have a negative impact on aggregate demand, output and incomes. 
• Rising real interest rates 
?Given that nominal interest rates cannot fall below zero, falling prices cause real rates to rise.  
?For example, if nominal interest rates are currently 5% and in?ation is 1%, real interest rates  are 
4% (which is 5% – 1% = 4%).  
?However, if the price level falls by 2%, real interest rates (5% – [-2%]) rise to 7%.  
?Of course, nominal rates can be reduced, but de?ation tends to put upward pressure on real rates. 
•
A rise in debt burdens and a deterrent to borrowing 
?De?ation will cause debt burdens to rise for households that have borrowed in the past.  
?Many consumer and corporate debts are ?xed, including ?xed mortgages and personal loans, and 
repayments do not fall as prices fall, making the real price of the debt rise.  
?For ?rms, falling prices also create a debt burden because, although revenues fall, debt repayments 
may remain at the old level, increasing the real debt burden. 
• Recession 
?This is because economic con?dence begins to fall as households and ?rms save rather than spend.  
?Long term recession following de?ation is often called the Japanese disease, given that, for a long 
period during the 1990s, Japan seemed trapped in a de?ationary spiral. 
Disin?ation 
•
Disin?ation is a slowing in the rate of price in?ation.  
• It is used to describe instances when the in?ation rate has reduced marginally over the short term.  
•
Although it is used to describe periods of slowing in?ation, disin?ation should not be confused with 
de?ation, which can be harmful to the economy. 
Plateau effect /base effect 
•
The Base effect relates to in?ation in the corresponding period of the previous year, if the in?ation 
rate was too low in the corresponding period of the previous year, even a smaller rise in the Price 
Index will arithmetically give a high rate of in?ation now. 
•
And vice-versa. 
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
 2