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Economics-How is 'Inflation' calaculated?

Updated on November 16, 2011
Indian currency-rupee
Indian currency-rupee
Japan currency-Yen
Japan currency-Yen | Source
France currency
France currency | Source

Point that always bothers us

Inflation is the point that always bothers us. WE read about it in news papers.We her politicians saying-"prices are rising because of inflation. Especially in India,inflation is causing greater botheration.

Presently,inflation rate is highest in India, among G-20 countriesIn Germany it is 2.5%, in America it is 3.8%. in England- it is 4.2%, in Japan -it is just 0.3%.But in Inida- it is 9.73%.

But, in spite of this amazing factor, India is still better for investment.Reasons are- no natural disaster has occurred here as it happened in Japan.No Economic recession is taking place here as it is happening in U.S.A.No bank is getting insolvent as it happened in America etc. Another reason is- people here are not so much after'use and throw culture' as it is in America.

Meaning

Meaning of inflation , in simple terms, is this- cost of materials has gone up and currency value has come down!An example can explain this to you properly.:

Suppose i purchase a pen for $ 2 last year and its cost now is $3.It means-cost of the pen has gone up by 50% and my currency value has come down. But Inflation rate cannot be calculated against only one material cost.Different groups of things like-construction materials, food items,Gold and silver etc are taken into consideration.When the cost of materials of that whole group of materials (or, majority of materials) rises up,then that is a matter of worry.That shows the rise in price index.Then there will some rise in the rate of inflation.It is said that at the end of Second world war, when Germany was defeated, Currency there lost its value, and it was difficult to get handful of essential material against bagfull of currency.

Inflation in different times

Twentieth century saw amazing ups and downs in Economic trends.Japan had 568%Inflation in 1945. In China- it was 1580% in 1947. But see now- how those countries have recovered! that is the strength!

inflation and oil import

Majority of countries in the world import oil from OPEC member countries. In such cases,even though business improves and more money becomes available for circulation, profit will not reach the common man in that country.One good example is -India itself!

When high amount of money is there in public circulation, then demand for materials increases.Then, there will be good sales of those products. But, At the same time, demand for petrol also rises, as it is necessary for increased transport, production of materials etc.Petrol rates are always fluctuating.AS a result, increased money circulation goes to Oil exporting countries to purchase petrol.This again results in the further rise of inflation rate.

Measures

Every government takes different measures to control inflation rate. Infact, control of inflation is much essential for a country's happy living and development.Such measures are usually the following:

1. To cut down imports to save foreign exchange.

2 .To increase interest rate on bank loans, to discourage loan taking habit.And, to increase interest rate on savings deposits, in order to encourage savings.By this, amount of money in circulation will decrease.So that, demand for things will also decrease.

3.To levy ' anti-dumping tax' on goods poured into country, in order to encourage native productions and keep the people off the temptations of purchasing foreign goods by paying more.

Many such other technics are also adopted by governments to check inflation.


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    • prasadjain profile imageAUTHOR

      Dr.S.P.PADMA PRASAD 

      6 years ago from Tumkur

      Your viewpoint is quite correct Mr.blogtipper.I thank you for adding new points to this hub.

    • profile image

      blogtipper 

      6 years ago

      In my opinion, there are three reasons for the crazy inflation rates here in India:

      1. Foreign MNC companies coming in to India and paying salaries that are far above what the average worker will earn. How can you pay one 22 year old graduate 10 lakhs and another graduate 2 lakhs and the policeman on the street with 5 years of service just 1.8 lakhs.

      2. Foreign remittances from abroad. The influx of money drives up inflation as demand pushes up prices.

      3. Importing of oil (to fuel the vehicles purchased with the high wages or remittances). The problem with oil is it's pegged to the USD and we all know that the Federal Reserve has been printing money like it's toilet paper which is devaluing the dollar, hence the oil price and gold prices 'appear' to be rising.

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