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I heartily welcome you to read about the concept of inflation, It's Types, causes along with measurements or precautions to control inflation and also the concept of trade cycles, causes/phases, Phillips curve (Related to inflation and employment), Deflation and Stagflation.

Note

Link each topic to the Economy and write the reasons equally which are responsible to a consequence such as inflation. recurring reasons to a topic is ok. Think wider because it is aggregate value. Relate each concept.

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Concept of inflation

Inflation refers to an increase in general price level is called as inflation. It is a situation in which general price levels rises. the purchasing power of money will decreases or the value of money falls down. It is a continues rise in price value due to more supply of money in the market.

simply, it's a situation where there is more availability of money than the availability of goods produced in the country. Inflation is the important concept in the scope of Macro Economics.

According to Keynes Inflation is not good for economy.

Definitions

The term Inflation is defined by many Economists in different ways but, all the definitions tells the same point.

"Issue of too much currency is inflation" Professor. Hawtrey.
"Too much money is chasing too few goods is called inflation" Dalton And Colborn.
"Persistent and appreciable rise in the general or average of price is called inflation" Gardner Ackley.
"Inflation occurs when the volume of money increases faster than the available supply of goods" Irving Fisher.
"Inflation is a phenomenon which is always and every where a monetary phenomenon" M. Friedman.
"It is a state in which the value of money is falling i.e. prices are rising is called inflation" Crowther.

Note: all the definitions are relating inflation to money and price levels. from the above definitions we can understand that when the supply of goods is not happens according to the demand, It causes inflation. as a result the purchasing power of money decreases.

Types of inflation

Following are the types or the stages of inflation.

Classification of inflation

There are 4 types of inflation. These are classified and explained by Professor Kent.

Creeping inflation: According to Prof.Kent prices will not increase more than 3% in an year. It is also known as Mildest inflation. It will not be increased immediately and not noticeable quickly. if it rises continuously; It may rise slowly to higher level and will become a problem to Economy.
Walking inflation: in this type of inflation there is an increase in price level up to 3 to 5% in an year. It is not a problem for the economy but when it starts increasing at more than 4% immediately the central bank is concern and takes measures.
Running inflation: Here price level increases around 10% in an year. It results in more cost in the production process in the economy. It may result in rapid growth of inflation.
Hyper or Galloping inflation: when price levels increases rapidly (Continuously) we call it as hyper inflation. Here price level increases more than 10% in an year. there is no other measurement for inflation from this point. Galloping inflation is a very challenging for economies. Hyper inflation causes a fast increase in price level and rapidly declines the value of money.

Other concepts in inflation

Suppressed inflation: When government controls the rate of inflation, the prices will decrease. when government doesn't regulate price levels; again it results in increase of inflation.
Stagflation: It is also a type of inflation in the economy. In this case the economic activities (Production process) comes down but wages and price rates increases rapidly. inflationary recession is also one of the name to stagflation. Inflation + Stagnation = Stagflation.
Reflation: It refers to a situation in a country where there are number of unemployed and unutilised resources. It results in increase of unemployment.
disinflation: refers to falling of prices without effecting production process.
True inflation or Real inflation: It refers to an increase in general price level after reaching full employment. It was introduced by J.M Keynes.

Causes for inflation

The main factors which are responsible for rise in price level are:

Demand push inflation
Cost push inflation
Mixed inflation
Unproductive expenditure by the government
Exports
Trading: Reserve of goods by the traders.
Population: continuous growth
Natural resources
Skilled labour (human resource)

Demand push inflation

Price increases in a situation where the aggregate demand is more than the aggregate supply. An economy faces this kind of inflation when there is full employment equilibrium.

The main reasons are:

increase of government (GOVT) expenditure
Rapid growth of population
Deficit budgeting: when expenditure is more than revenue
High rate of consumption
increase in exports
repayment of internal debt
over supply of money

Cost push inflation

It is also one of the cause of inflation to rise general price level. It happens due to an increase in cost of production or the cost of inputs. Here the demand is constant (Unchanged) but the prices will increases to cause inflation. Cost of production refers to the total amount of expenditure which is incurred in production process by the producer. (all producers aggregately).

There are 4 factors which are responsible to Cost push inflation. they are:

Increase in wages
imposition of heavy taxes by the government
increase in the cost of raw material
increase in profit

Simple, increase in cost of all factors of production.

Mixed inflation

In some cases the value of general price level can rise due to various reasons such as

Increase in demand
scarcity in supply
Natural calamities (Natural disasters)
Barriers to international trading (High prices)
Government policies (favourable and not favourable)

This reasons which results in increase in prices is called as mixed inflation.

Unproductive expenditure by the government

Unproductive expenditure by the government is also one of the reason which increases the price level in the economy. unproductive expenses such as the expenditure on wars will not result in increase in production but increases the supply of money and leads to rise the level of aggregate demand for goods and as a result, the prices will rise.

Exports

Export refers to a commodity or service which is produced in 1 country and sold to the buyer of other country to earn money. It is one of the economical activity where many countries are connected in the process of imports and exports in large scale. Higher exports will cause shortage and circulation of that good and increases demand and price will rise. Hence it is also 1 reason.

population

Rapid growth of population is also one of the reason to cause inflation. Increase of population is always results in change in demand which effects the price. for example, prices of food grains, prices of basic required material, etc.

Trading

Trade is a basic Economic concept. It involves both buying and selling of goods. Sometimes traders reserve or keep the goods in warehouses. so, the prices will rise.

Natural resources

As we have already written in previous posts, natural resources are the real wealth of an economy. if the natural resources are more, the production of output and income is also more. when natural resources are low, it results in shortage of raw material and hence it increases prices.

Effects of inflation or impact of inflation on the economy

According to J.M Keynes, Inflation is not good for an economy. Inflation refers to a rise in general price level.

Following are the points of effects of inflation:

Impact on distribution of income and wealth

The rise in prices effects the distribution of income for different groups of people in the economy. An increase of rate of inflation gives benefit to few members and there is in equal distribution for few groups of people (Lose).

Creditors and debtors: Creditors lose the value of money when they receive at the time of high rate of inflation then normal times or low level of inflation. whereas, debtors gain the value because they will repay the amount with same value of currency at that time of inflation. It loses its power of purchase.
Producers and workers: Producers gain on the time of inflation because, they earn more profit by selling their products for more amount as their cost of production is high. workers lose because the wages also decreases and the purchasing power of their income decreases. even if wages increases, the purchasing power of that income/money cannot rise equally according to inflation rate.
Fixed income earners: Fixed income earners includes regular salaried people, rent earners, landlords, pensioners(without participating in economic activities),, etc. These people suffers highly because The increase in price reduces the value of their income.
Investors: The people who incurred amount on capital. Equity share holders gain because they get higher rate of dividends due to more profits. whereas, Bondholders who gets interest at fixed rate will lose because, the value of their income is fall down due to increase of prices.
Traders, speculators, businesspeople and black-marketers gain more income because they make profits with rising prices.
Farmers: Farmers also gain more income because there is grate rise in the value of prices for agricultural products.

Impact on production

Inflation not only effects on consumer goods but also on the producer goods. It forces producers to produce more goods to earn more profits. as a result they utilise all the available resources. after maximum utilisation of resources; it reaches full employment in the economy and it is not possible to increase the level of production because all resources are employed. as a result the producers and farmers could store or reserve the stock of products for expecting the more rise of prices in the future. In some cases it is gainful for producers. This situation is also called as stagflation.

Impact on income and employment

During the period of inflation It causes to a huge rise in the level of aggregate money income that is known as national income of the community of the country. Higher investment and larger production is the main cause of this situation. In this case the level of employment increases as production increases but there is a decrease in real income of the people because of fall in the value of money or loss of purchasing power.

Impact on business and trade

The activity of internal trade expands because of higher production and higher level of income and employment. But when it comes to exports, the value of exports may decrease due to increase in price level in the country and still the business firms produce more to earn more profits in the country. but the wages of labours doesn't increase which causes in equal distribution of income.

Impact on the government finance

During the period of inflation the revenue of government increases highly because of income tax, sales tax, excise duties, etc. That is an advantage to government but the public expendutire by the government increases more for spending on administrative and other purposes. However it will reduce the burden of public debt because of payment on fixed rate of amount.

Impact on Economic growth

A normal rate of inflation promotes economic growth (Creeping and walking) but a running inflation may be challenging to the economy because of an increase in cost (expenditure) on developmental projects. a normal rate of inflation doesn't show any impact on economic growth but a higher growth inflation reduces the capital formation and effects the economy and growth adversely.

Trade cycle (Business cycle)

Trade cycle or business cycle refers to the fluctuations (Ups and downs) in business are called business cycles. Every capitalistic economy faces business fluctuations regularly in a particular times with brakes. It happens differently in different countries based on the strength and weaknesses of the economy. The recovery and measurements is also different in different economies.

Trade cycle: a process of expansion and contraction in economic activities.

Length of business cycle: the period of completing a boom (Expansion) and contraction is called as length of business cycle.

Phases of trade cycle/business cycle (Stages)

The trades cycle or business cycle are cyclical fluctuations of an economy. Each trade cycle has 4 phases. they are:

Recovery
Boom
Recession
Depression.

The upward phase of trade cycle is divided into II stages namely recovery and boom. the downward phase is also divided into 2 stages recession and depression.

Phases of trade cycle

Expansion stage: In this stage of trade cycle, entrepreneurs increase the level of investment. as a result the rate of employment and income (Economic indicators) is increased in the economy (Positive effect). Employment increases the purchasing power and it increases the demand for goods and services. when the demand for consumer goods increases, the prices also increases with the supply and leads to increase of demand for producer goods. The increase of price is depends on the investment. if the investment is more, the prices will increase and vice versa. Rising of prices will show effect on distribution of income for factors. finally the price of raw material increases more than the prices of semi finished goods. and the semi finished goods cost more than final goods. In this stage the credit facility is also more.
Prosperity stage or Boom (Peak): In this stage the rate of investments increases more and more to earn profits. The level of production increases. The economy experiences full employment and enters a stage of over full employment.
Recession stage: The recession stage is followed by the boom or Peak stage. The demand for goods starts declining or diminishing in this phase. Without noticing this the producers keep on producing the goods which leads to excessive supply in the market. The Economic indecators such as employment, wages, profits, output will comes down.
Depression or Crisis Stage: in this stage all economic activities falls down. production, employment, income decreases and prices falls. There is a decline in growth of the economy. Purchasing power of money declines and there is a change in distribution of national income. The producer goods such as machinery are not utilised fully because there is a deficiency in effective demand (Effective demand refers to the ability and willingness of consumers to purchase the goods in different prices).
Trough: It is followed by the depression stage. There is more decline in growth rate of an economy. There is more depletion in national income and expenditure. There is more decrease in prices of factors of production and supply of goods.
Recovery: after facing depression the economy now will move to recovery stage. The rate of growth is again starts increasing gradually. Demand for goods is also increases due to less prices, and the supply is also increases. the population in the economy develops a positive attitude for investment and production increases by increasing employment. The banks also start lending money due to positive growth. depreciated capital is also replaced with new capital because of investment. This recovery continues until it reaches maximum steadiness in growth.

This shows the completion of one business cycle of (Ups and downs) expansion and contraction.

Concept of Phillips curve

The concept of Phillips curve was introduced by A.W. Phillips (A British economist) in 1958. through curves, graphical presentation he explored the relationship between the rate of inflation and the level of unemployment in any economy. according to Phillips, Full employment is the main reason to increase level of inflation rate in the economy. There is an inverse (opposite or negative) relationship between money wages and the rate of unemployment. When the wages are more, it leads to full employment and vice versa. if there is high rate of unemployment, people want to get employed and they will not demand higher wages. this decreases the rate of inflation in the economy. It is related to only short run period. Due to inverse relation, the curve is downward sloping and concave curve. X axis measures the level of unemployment and Y axis measures the rate of inflation or wages.

Simple: a change in level of employment has impact on money and supply.