DEFINITION OF INFLATION

INFLATION

     DEFINITION OF INFLATION

             By inflation, in ordinary language, we mean a process of raising prices. A situation is described as inflationary when either the prices or the supply of money are raising, because in practice both will rise together. In the Keynesian sense, true inflation begins when output the elasticity of supply output in response to increase in money supply has fallen to zero or when output is unresponsive to changes in money supply, when there exists a state of full employment, the conditions will be clearly inflationary, if there is increase in the supply of money. But since we do not subscribe to the classical view that there is full employment, we can say that when money supply increase it result party in the increase of output (GNP) and it partly feeds the rise in prices, and when the supply of output lags far behind, the rise in prices is described as inflationary. In Coulborn’s words, it is a case of “too much money chasing too few goods.” Thus, inflation is the generally associated with an abnormal increase in the quantity of money resulting in abnormal rise in prices.

INFLATIONARY GAP

        Keynes invented the term ‘inflationary gap’ to describe a situation when there is “excess of anticipated expenditures over the available output at base prices”. In the simple words, it is a gap between money incomes of the community and the available supply of output of goods and services.

       However, when discussing inflation, we are thinking of a persistent rise in prices rather than a once-for-all rise in prices (which may, for example, be brought about by a bad weather leading to destruction of crops). A rise in price in price is one of the indicators of inflation rather than being its cause.

   There are three main features of inflation:

a)      It is process of rising prices.

b)      It is initiated by some change which makes it impossible to satisfy the whole of the demand which is forthcoming at existing prices, so that initial price rise occur

c)      It is propagated by the reactions of buyers or group of buyers to the initial price rise so that further rise in prices in induced.