What are the reasons behind INFLATION?

Question

Please give me reasons behind the inflation. Please let me know about its effects on economy of country also . Thanks.

Answer 1

Rise in Prices is called Inflation and it effects an economy negatively

Reasons

1. Increase in Demand and fall in supply causes rise in prices.
2. A Growing Economy has to pass through Inflation.
3. Lack of Competition and Advanced Technology (increases cost of production and rise in price)
4. Defective Monetary and Fiscal Policy (In India its fine)
5. Hoarding (when traders hoard goods with intention to sell later at high prices)
6. Weak Public Distribution System

Answer 2

There are several reasons as to why an economy can experience inflation :

1. Demand-Pull Inflation, which states that all sectors in the economy try to buy more than the economy can produce. Shortages are then created and merchants lose business. To compensate, some merchants raise their prices. Others don't offer discounts or sales. In the end, the price level rises.

2. Cost-Push Inflation - When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

3. If interest rates increase, inflation can occur. The cost to borrow money goes up for businesses, increasing their cost and so on. However, higher interest rates also encourage people to save more and spend less, shortening demand and lowering prices on items.

Answer 3

First let s define inflation. We will call inflation the rise in the agregate level of consuming good prices. By doing this we exclude production good prices, for example housing and stocks. This mean that if the stock market goes up, we will not call it inflation, or may be we'll call it "asset price inflation", but when talking about inflation, we will mean a rise in the agregate level of consuming good prices.
Since inflation is measured through statistical methods, of course there can be huge debate on how to measure it.
Indeed from one year to another, some products disappear, some appear, for instance you won't find on the market any computer that was built 10 years ago and the new ones are much more powerful. So before we talk about inflation, we must agree that measuring an agregate level of prices is difficult and, giving meanint to this measurement is hard. Suppose that the quality of computers is much better with each year passing, but that their price stays the same. Would it be fair to say that the agregate level of price has stayed the same ? Or that it has fallen because computers of the same quality as the year before are now cheaper ? Statisticians try to offset quality variations but it's a tricky thing to do for which there is no real scientific method. So one source of potential inflation or deflation is always an "error" in the measurement, or better phrased, an effect of the measurement. The impact of quality is just one of the debates on how to measure agregate level of prices.

Now sometimes however it s pretty clear that consuming goods prices are rising and not because of the way we measure the agregate level of price (or falling : in which case we speak of deflation). . What are the causes behind this ?
Let's consider this equation :
Pc*Vtc*Gc+Pp*Vtp*Gp= M*V
The price level factor the goods available and the speed at which they are traded (for consuming goods and production goods) is equal to the money available factor the speed at which it is used during one period of time.

Here we have several sources of inflation.
If more money is created by the central banks (printing press, open market operations) or by the private banks and on money markets (through lending activities), then inflation can follow.
If a given amount of money can be used faster than before (because less is stocked, for instance electronic money circulates faster than coins) then inflation can follow.
If there are less goods available (war, more population) then inflation
If the goods circulate slower (because people make stocks) then inflation. (so for exemple ebay which helps people resell their accumulated goods is an innovation which helps lower inflation).

Finally for a given money supply and velocity of money, inflation can run into higher consuming good prices or higher production good prices.
This depends mostly from the balance of power on the labor market. When labor power is high, profits are low, asset prices fall and consuming good prices rise (see stagflation in the 70's), when labor poser is weak, profits are high, asset price rise and inflation in consuming good prices is kept low (situation since the 80's).

The impact of inflation on the economy is a very different matter. Inflation because of higher wages is different from inflation because of a credit boom and different from inflation because of direct emission of cash from the central bank.

Answer 4

According to the currently accepted big bang theory, the universe arose from an initial explosion, involving the expansion of matter from an extremely condensed state. Several problems were unresolved, however, in the original formulation of the big bang theory. The state of matter at the time of the explosion was such that normal physical laws would not apply. The degree of uniformity observed in the universe today was also hard to explain, because according to the big bang theory the universe would have expanded too rapidly to allow uniformity to develop.

Guth based his inflationary theory on the work of such physicists as Stephen Hawking, who had studied extremely strong gravitational fields, such as that in the vicinity of a black hole or in the very early universe. This work showed that matter, including all the matter in the universe, could be created by quantum fluctuations in “empty” space, under such conditions. Guth's work, then, made use of unified field theory to show that a number of phase transitions could take place in the first moments of the universe, and that one region of that original chaotic state could have inflated rapidly to allow the observable region of the universe to form.

Answer 5

Ya, i have the same question and many of your answers are more or less acceptable.But i want to ask that whether the strengthening of economy does effect the INFLATION??

What i thought is that a country is economically growing, then its INFLATION rate must reduce...i may be wrong in this...please correct me if am.

Answer 6

Inflation is too much money chasing too few goods kind of un-equilibrium. There are many short term causes due to real economic reasons -- But the main reason is all countries going on printing more & more money based on assumed gains of the real economy.

Answer 7

You know of the text-book answer. But greed must have a role to play. If you can get away by charging more for your product, you would - thus adding to inflation

Answer 8

Economic Reasons behind Outsourcing
Everybody who takes part in the process gains, and it's high time Asian
companies caught up with the trend too




CONTEMPORARY internati
onal trade flows are increasingly characterised by
'production sharing', defined as
the decoupling of
previously integrated goods into their
constituent parts, components and accessories
(PCAs) which in turn are distributed
across countries on the basis of comparative advantage.

This sort of cross-border multi-staged prod
uction and trade in PCAs has in turn been
facilitated immensely by major improvem
ents in transportation and information
communication technologies. By reducing th
e costs of production
of a good, production
sharing makes the entire set of countries th
at participates in the integrated production
system more attractive as an export
market and investment destination.

This in turn is a win-win arrangement fo
r all participants. Lower income developing
economies are not only able
to gain a comparative advant
age in lower-end light
industries, but also in t
he lower-end production stage of
heavy industries. Middle and
higher income developing countries are abl
e to graduate to higher segments of the
value-added chain.

Countries could also move along the prod
uction chain horizontally, ie improve product
quality and serve higher val
ue-added market segments where
profit margins are wider.
This essentially involves moving from se
lling under a foreign label to developing and
selling under their own label, hence allo
wing them to captur
e brand name rents.

Production sharing involving developing economies is highly concentrated in Mexico
(because of Nafta) and Asia, primarily Great
er China and Asean, but increasingly India
as well, which is gr
adually becoming a sourcing hub
for auto components, textiles and
pharmaceuticals. This is larg
ely explained by the fact that
production sharing has been
facilitated by the expansion of
the global operations of
multinational corporations
(MNCs) and consequent foreign direct inve
stment (FDI) which in turn has been
clustered in these countries.

This is not to suggest that such cross-
border trade always requires MNCs. In cases
where there are no obvious benefits from 'i
nternationalisation', ou
tsourcing could also
be conducted at 'arm's length' between independe
nt actors, ie separation of ownership.

Answer 9

inflation is due to weak economy the cur ency is always in the devalue mode the country is usually suffering from imbalance economy

Answer 10

when supply of money decreases from rbi,inflation rate increases