1. introduction
Inflation

2. Inflation
• 1. This is the process by which the price level rises
and money loses value.
• There are two kinds of inflation:
• a) Demand pull
• b) Cost push

3. UNDERSIRABILITY OF
INFLATION
• Fixed Incomes
• Net loss
• Depreciation

4. INFLATION GAINERS
2-4
• Flexible Incomes
• Speculators
• Debtors

5. Hyper inflation
• 5. Extremely rapid or out of control inflation.
• There is no precise numerical definition to
hyperinflation.
• Price increases are so out of control that the
concept of inflation is meaningless.
• The most famous example of hyperinflation
occurred in Germany between January 1922 and
November 1923.
• By some estimates, the average price level
increased by a factor of 20 billion!

6. Money and Prices During Hyperinflations
(a) Austria (b) Hungary
Index Index
(Jan. 1921 = 100) (July 1921 = 100)
100,000 100,000
Price level
Price level
10,000 10,000
Money supply
Money supply
1,000 1,000
100 100
1921 1922 1923 1924 1925 1921 1922 1923 1924 1925
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8. Demand pull inflation
• 6- 8 pull inflation may be due to :
a) Increase in money supply
b) Increase in government purchases
c) Increase in exports

10. Quantity Theory of Money
• states that there is a direct relationship
between the quantity of money in an
economy and the level of prices of goods and
services sold. 9.According to QTM, if the
amount of money in an economy doubles,
price levels also double, causing inflation (the
percentage rate at which the level of prices is
rising in an economy). The consumer
therefore pays twice as much for the same
amount of the good or service.

11. The Theory’s Calculations
In its simplest form, the theory is expressed as:
• MV = PT (the Fisher Equation)
Each variable denotes the following:
M = Money Supply
V = Velocity of Circulation (the number of
times money changes hands)
P = Average Price Level
T = Volume of Transactions of Goods and
Services

12. Modern QTM
• Monetarists are a group of economists
so named because of their
preoccupation with money and its
effects. The most famous Monetarist is
10.Milton Friedman who developed
much of the Monetarist theory we learn.

13. Cost push Inflation
• 11-12Cost push inflation may arise
because of :
a)Increase in money wage rates
b)Increase in money prices of raw
materials.

15. THE PHILLIPS’ CURVE
• The essence of the 13.Phillips Curve is
that there is a short-term trade-off
between unemployment and inflation.

17. MEASUREMENT OF PRICE INCREASES
• Consumer Price Index - CPI
14.A measure that examines the
weighted average of prices of a basket of
consumer goods and services, such as
transportation, food and medical care.

18. • Retail Price Index (RPI)
15. Design to measure monthly changes of the
prices at which retailers dispose of their good
to consumers and end-users.

19. • Wholesale Price Index (WPI)
16.Measures monthly changes in the
general price level of commodities that
flow into wholesale trade, also measures
price changes during trade turnover.

22. THE MEANING OF THE INDEX
• 17.Is a statistical measure design to show
changes in a variable or group of related
variables (prices, quantity, value), with
respect to time, geographic location, or
other characteristics such as income,
profession, and the like.

24. The Base Year
18.Is the year which the variables during a given
year are being compared.

25. 19-20PRICE INDEX NUMBERS
1. Price Relative
2. Unweighted Priced Index
3. Weighted Price Index

26. Unweighted Priced Index

28. Weighted Price Index

30. 3. Weighted Price Index
• A price-weighted index is an index in which
the member companies are weighted in
proportion to their price per share, rather
than by number of shares outstanding, market
capitalization, or other factors