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Inflation and Deflation | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)

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  • Inflation
    • A continued increase in general price level over time.
    • Measured with
      • Consumer Price Index (CPI)
        • Identify the goods and services that a typical household purchases
        • It’s called a basket of products
        • The prices will be monitored based on retail outlets the entire years
        • For the first year, the average price is given the value of 100
        • The price changes over the year is calculated
        • Then we calculate the percentage increase or decrease
      • Retail Price Index (RPI)
  • Reasons for Inflation
    • Demand Pull Inflation
      • Increase in aggregate demand
      • Here, demand increases supply so shortage occurs which raises prices.
      • It occurs due to a forward shift in the demand curve on the same aggregate supply curve, so price level rises
    • Cost-push inflation
      • It is where the cost of producing goods and services increase
      • Here, the shift is a backward shift in the supply curve which raises price on the same aggregate demand curve
    • Money supply increase will increase inflation
      • Decrease will reduce inflation
  • What inflation does?
    • It reduces the consumer’s purchasing power
      • As their real disposable income declines.
      • It means that their same income will now buy less.
    • Exports become expensive, so they are less competitive compared to foreign products
    • Inflation will cause more inflation as costs of living increase, raw material price rises then it will cause more production cost rises as well
    • Fixed income groups, lenders and savers will lsoe money
      • Real value of money will reduce
      • Savers lose because interest does not rise as much as inflation
        • If they receive 5 percent interest
        • It means a 5 percent increase in value
        • If inflation rises by 10 percent, it actually lowers the real value of money
      • Lenders will lent before inflation will receive less interest payments in real terms as well
  • How inflation can be controlled
    • Offer a contractionary monetary policy
      • High interest can reduce money supply
      • It will increase the opportunity cost of spending
      • People will save more to earn interest
    • Contractionary fiscal policy
      • Discussed in fiscal policy chapter
    • Supply side policy changes
      • Privatization can allow more competition
      • Deregulation can increase customer power
    • Exchange and Rate Policy
      • Change exchange rate to lower imports and increase exports.
  • Deflation
    • Fall in the general price level
    • Different than disinflation
      • A fall in inflation rate
      • Still inflation happening but at a lower rate than before
    • CPI is used to measure it as well
    • Causes
      • Excess/ Surplus as aggregate supply increases demand
      • A fall in demand due to recession
      • Labor productivity rise so less labor can produce more so surplus
      • Advanced technology can reduce production costs considerably and push down the cost-push inflation
    • What deflation does?
      • Less production then unemployment
      • Investors will be discouraged to invest because prices falling
      • Recession will occur as well
        • A cycle starts
      • Tax revenue and government spending will be affected
      • Borrowers will lose money as the real value of the debt they took has fallen
      • Real burden of debt on the government will increase
        • For example, if government has to pay IMF 100,000 USD – previously that was 27 lac rupees.
        • Now it can be 35 lac rupees
  • How can deflation be corrected
    • Expansionary monetary or fiscal policy
    • Devalue the currency
    • Inflation expectations change if people expect inflation, then they will spend which means deflation will reduce.
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Hunain Zia has previously achieved considerable success in the high-school educational stream, gaining a massive 154 Total A Grades and 7 Major Distinctions, a process in which he broke/ set 11 different world records, including the most A grades ever achieved, most subjects ever appeared in, most distinctions, gaining distinctions across two separate boards (Pearson Edexcel and CAIE) within the same year/ ever, and even 19 hours of constant examination. All records stand intact today. Hunain pursued his Honors Accounting Degree from the prestigious Bentley University, and then completed an LLB (in Honors) from University of London. Currently, he manages multiple social and commercial projects, has founded digital streams and works tirelessly in the education sector.

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