Inflation In India
The Truth, Analysis and Happenings.
Inflation in India is increasing especially in the month of May 2012 which is the out of expectation. The inflation is due to the fuel and food prices. The rate of increase in non-food manufactured goods in April 2012 was calculated at 4.77% and then it increased to 4.86% in May 2012. Also, the price of vegetables had also increased by 49% compared to 2011 and 11.5% for power and fuel.
According to Anup Pujari, the Director General for Foreign Trade of India who provided provisional statistics at a media briefing session held in New Delhi, India had exported goods and services worth 25.68 billion US dollars in May 2012. Compared to May 2011, this amount has increased dramatically at the reduction of 4.16%. Same goes to import, imports have come down to 41.9% billions US dollars which was a decrease of 7.36%.
What are the factors of inflation rate in India?
- delayed rains and its effects the agricultural sector and reduction of production by companies to bring down its level of stocks.
- relative lack of growth in investments and the gradual decrease of investment goods.
HENCE,
The inflation that occurred in India had affected the prices of goods and services to increase and causing the consumers to become poorer. When the consumers have no sufficient income for purchases, they would reduce their consumption on goods and services. Hence, they will lose their purchasing power and it affects the aggregate demand to fall. Also, the rising of the price of goods causes the decrease in exports and increase in imports as the foreigners would possibly choose a lower price of goods. To be more serious, if the inflation is in a very critical condition, competition between firms or companies may occur and this would bring to the unemployment of workers.
To study and understand more about the topic related to the article, read the notes below.
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Aggregate Demand and Supply
What exactly is aggregate demand in macroeconomics?
Aggregate demand is the total desired purchases by all buyers in an economy. It is also the quantity demanded of all services and goods by the economy at different price level which also can be known as ceteris paribus. Unlike normal demand in microeconomics as aggregate demand includes businesses, governments and consumers who are willing to spend on goods and services at difference price level.
The curve above shows the downward sloping of aggregate demand.
The real GDP can represent the amount of goods and services purchased. As you can see, the relationship between the price level and real GDP is inversely proportional(downward sloping) due to three factors :-
a) Real wealth effect
As the price level falls, the wealth of the economy increases causing consumers to be able to purchase more goods and services. This means that the purchasing power increases and then causing the consumption to increase as well. Hence, the more the consumption is, the higher the aggregate demand/aggregate expenditure.
b) Interest-rate effect
As the price level falls, consumers do not need to borrow money to purchase goods and services. A reduction in demand for borrowings would reduce the level of interest rate causing the cost of borrowing to reduce. By then, firms will start to risk to make more investments and this causes the aggregate demand to increase.
c) Foreign purchase effect
As the domestic price level falls, the level of exports will increase as our goods and services are much cheaper than the foreigns' and that they are attracted by the difference price level. At the same time, the level of imports will decrease as local buyers would rather purchase a cheaper goods and services locally. Therefore, the net export will rise causing the aggregate demand to rise as well.
note: net export= value of export-value of import
Movement along the Aggregate Demand curve
The cruve shows the movement along the AD curve.
The movement along the AD curve is affected by only one factor which is the change in price level.
Shifting in the Aggregate Demand Curve
The curve shows the shifting of the AD curve.
Shifting of the AD curve is not affected by the change of price level. Instead, other economic variable such as :-
a) Consumer spending/Expenditure
The AD curve will shift to the right when
- consumer expectations- consumers expect higher price in future.
- consumer wealth- consumers are getting wealthier.
- personal taxes- personal taxes drops as income increases.
- household borrowing- consumers can easily get financial aid and then they will spend more.
b) Investment Expenditure
- future business conditions
- degree of excess capacity
- business taxes
- technology
c) Government Expenditure
The government expenditures will be autonomous, independent on the level of income.
d) Net Exports
If the level of exports rises, the AD curve will shift to the right. This means that foreigners have more real income and are willing to purchase imports.
Though, Demand Shocks will cause the changes in these four economic variables.
What exactly is aggregate supply in macroeconomics?
Aggregate supply is the total desired sales by all producers in an economy. It is also the quantity supplied of all services and goods(real GDP) at different price levels(ceteris paribus).
There are two types of aggregate supply curves which is short-run aggregate suppy curve and long-run aggregate supply curve.
The curve above shows the combination of aggregate supply in short-run and long-run.
Short-run aggregate supply
A period that begins immediately when the price level increases as well as the input prices with the same proportion.
- Input prices fixed- prices paid to the provides of services and goods; rent paid to landowners, wages paid to workers, prices paid to suppliers.
- Output prices variable
- Real profit changes
Long-run aggregate supply
A period when the input prices that have completely adjusted to the price level of final goods. Meaning, the aggregate supply is not affected by the changes in price level.
- All prices variable
- Full employment GDP
- All prices adjust
Changes in Equilibrium
As the equilibrium changes, the economy will experience inflation or unemployment.
Posted by Liew Pei Jiun.
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