Too Much Money Chases Too Few Goods
Rise in the general price level of goods and services over a period of time in an economy is known as Inflation. Inflation causes rise in price which tends to decrease the purchasing power of a country. Inflation is useful for an economy if it is in the within the limits however if it goes beyond the pre-determined level, it is considered as inflation crises. Literally speaking, third world countries are very much affected by inflation. Inflation is the major obstacle in the development of third world countries.
Inflation in the long and short run is largely dependent upon the demand and supply pressures in the economy however in the long run inflation is caused by an increase in the money supply. According to the economist there are several Types of Inflation. However, I have discussed some of the common types of inflation which are as follows.
Types of Inflation
This type of inflation refers to that the economy actually demands more good and services than actually available. When the demand of a commodity is higher than its supply, it is obvious that its prices will rise which will make the commodity more expensive. The prices in this type will keep on rising until equilibrium is put in place between demand and supply. This is one of the most common types of inflation which has been prevailing in economy since years.
This is another major type of inflation. When there is an increase in the cost of production of goods and services, it is likely that cost push inflation will occur. Increase in cost of production mainly occurs due to an increase in the employees wages. This type of inflation can be promptly seen in the oil markets. When OPEC reduces oil supply, prices are artificially driven up and result in higher prices at the pump. This Type of Inflation is also known as Supply shock inflation.
Sectoral inflation is also another major kind of inflation. In a particular sector, when there is an increase in the prices of goods and services it is known as sectoral inflation. When a particular sector if affected from inflation, it is obvious that the employees of that sector and its related sector will also have some impact of inflation. This type of inflation has a major role in aviation industry, ticket fares tend to rise due to an increase in the prices of oil which directly affects the aviation industry and also its employees.
Import Cost Push Inflation
This Type of Inflation mainly occurs in the third world countries. When a country is highly dependent on the imports and the import prices rises, import cost inflation occurs. Just take an example of third world countries. They are very much dependent on oil and when in 2008 oil prices raised, this type of inflation created havoc in their economy.
Generally, this type of inflation occurs after war however it is transitory.This type of inflation affects the market economy adversely during the wartime. Hyper inflation can often tumble a country’s monetary system.This type of inflation affected Zimbabwe very badly. In November 2008, in Zimbabwe, Highest monthly inflation rate was 79,600,000,000% which is equivalent to 98% daily inflation rate. This type of inflation is also very detrimental for economies.
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