Inflation can be defined as a state of affairs where there is a sustained addition in the mean monetary value degree over clip or a autumn in the value of money. Therefore, by and large rising prices is a state of affairs where there is excessively much money trailing excessively few goods and cost of populating addition. When rising prices occurs, the value of a dollar does non remain changeless. The value of a dollar is observed in term of buying power, which is existent and touchable goods that money can purchase. Thus, buying power of money will worsen as rising prices addition. For illustration, say that a $ 1 battalion of gum will be $ 1.02 in a twelvemonth when the rising prices rate is 2 % yearly. However, you can & amp ; acirc ; ˆ™t purchase the same goods with the same monetary value after rising prices.
To mensurate rising prices rate we calculate the per centum alteration in mean monetary value degree. Average monetary value degree is measured by utilizing monetary value index. There are two major monetary value indexes that measure the monetary value degree and rising prices which is GDP deflator and consumer monetary value index ( CPI ) .
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The consumer monetary value index ( CPI ) is the best known index to mensurate rising prices. It is an index that measures the mean monetary value degree of goods and services typically consumed family. The CPI is measured as a ratio of the value of basal twelvemonth basket of goods at current monetary values to its value at basal twelvemonth monetary values and multiplied it by 100.
CPI = x 100
Assuming CPI is used to mensurate rising prices, so the rate of rising prices between 2 period, say T and period ( t-1 ) is given by
Inflation rate = x 100
If the monetary value degree is lifting, the rising prices rate is positive. For a given monetary value degree last twelvemonth, the higher the monetary value degree in current, the higher the rising prices rate. Plus, the lower the value of money. It is besides possible for rising prices to be negative but it is rare. These occur when the general monetary value degree falls.
There are many different type of rising prices such as deflation which is the antonym of rising prices and occurs when the mean monetary value degree is falling. Following, we have mild rising prices which is non so serious economic status and occurs usually when the mean monetary value degree would increase up to 5 % . Other than that is hyperinflation or rapid rising prices which is a really serious economic status where the value of money is persistently falling. An illustration of hyperinflation that has occurred is in Germany 1923 where the monetary value rose up to 2500 % in one month. Last, we have is stagflation which is the combination of economic stagnancy and high unemployment. Industrialized states in 1970s frequently face this job because of bad economic system and addition in oil monetary value by the Organization of Petroleum Exporting Countries ( OPEC ) .
Inflation can ensue from either an addition in aggregative demand or a lessening in aggregative supply. Demand pull rising prices is caused by go oning rises in aggregative demand. It is usually associated with an addition in money supply, authorities purchases and exports. If demand is lifting ( and uninterrupted making so ) and can non be met by a corresponding addition in supply, so the general monetary value degree will increase and rising prices will happen. Figure below shows the rightward displacement in the AD curve from AD1 to AD2 will ensue in extra demand. The consequence is to force monetary value degree upward from P1 to P2.
The following cause of rising prices is cost push rising prices or provide push rising prices. It is the consequences from any factor that decreases aggregative supply. It occurs when the increasing costs of production push up the general monetary value degree. The beginnings of an addition in cost are an addition in pay rate and the monetary value of natural stuffs. When houses face with lifting production costs, they will react by raising monetary values and cutting back on production. The figure below shows leftward displacements in the AS curve from AS1 to AS 2. The consequence is a rise in monetary values from P1 to P2 and a autumn in the end product degree from Q2 to Q1.
Different manner of rising prices can impact different people. It all depends on whether it is an awaited rising prices or unforeseen rising prices. If the rising prices is anticipated, we can antagonize it and the bad consequence can be lowered. For illustration, contract can be negotiate by the worker so that the pay can be hike automatically depend on the monetary value degree. However, if it an unforeseen rising prices we will hold a scarce of clip to antagonize with it. Therefore, it will be job such as the market value of domestic merchandise will diminish and the economic system have to use bill of fare costs to work out this job.
There are several ways to command rising prices such as by following contractionary pecuniary policy which use some instruments to act upon the economic system by cut downing money supply and higher the involvement rate. Next, by following contractionary financial policy, this deals with cut downing authorities outgo and increasing the revenue enhancement. Last, by utilizing direct control where authorities intervene in the monetary value mechanism if the state.
The rising prices rate in Malaysia is still under control which is 3.2 % in 2011. If we look in the past 12 old ages, the mean rising prices rate in Malaysia is 2.3 % . The highest rising prices rate in Malaysia is in 2008 where the rate is 5.4 % compared to in 2006 with the rate of 3.8 % .