Inflation and Index Numbers, Fall in the Rate of Inflation does NOT imply fall in the Price Level!
🚩Timestamps:-
00:11 Session Agenda
01:06 Inflation and Index Numbers
07:02 FALL IN THE RATE OF INFLATION DOES NOT IMPLY FALL IN THE PRICE LEVEL
13:02 Concluding Remarks
Learning Outcomes:-
Through this module, you will gain understanding
on:-
1.
Inflation
and Index Numbers
2.
FALL
IN THE RATE OF INFLATION DOES NOT IMPLY FALL IN THE PRICE LEVEL
Inflation and Index Numbers
·
Inflation refers
to a situation of rise in the general price level in a country over a fairly
long period of time. Often, inflation is measured in terms of wholesale price
index. A consistent rise in the wholesale price index over time implies a
situation of inflation.
·
Example: If
wholesale price index rises from 100 in 2004-05 (base year) to 150 in 2014, and
if the increase in price has almost been consistent over time (like, every year
the general price level has been rising by 5-10%), it would be deemed as a
situation of inflation. Implying a continuous erosion in the value of money or
purchasing power of money.
·
Value of money
(or purchasing power of money) reduces to half if wholesale price index rises
by 100%. Obviously. double the price level, half the purchasing power of a
rupee. If money income of the people remains constant, 10% increase in the
price level implies a 10% decrease in purchasing power of the people.
·
Inflation causes
erosion of purchasing power of the people, if their money income remains
constant. Accordingly, often we find workers pestering the government for
dearness allowance (DA) to compensate for the loss of purchasing power during
periods of inflation.
pestering
= asking for something repeatedly
FALL IN THE RATE OF INFLATION
DOES NOT IMPLY FALL IN THE PRICE LEVEL
Students
here must appreciate the distinction between inflation and the rate of
inflation. Inflation is measured as a percentage increase in the general price
level, like from 100 in 2011 to 115 in 2012, implying a 15% increase in the
price level during the period of one year. While prices have tended to increase
during the year, these may not be rising at the same pace (or the same rate)
every week within the year. Relative change in the price index from week to
week measures the rate of inflation.
A2
- A1 /A1 * 100
Where
A₁ =
Wholesale price index for week 1, and A₂ = Wholesale price index for week 2.
·
Thus, within the
year, rate of inflation may increase or decrease. It only implies the increase
or decrease in the pace of inflation or increase/decrease in the speed of
inflation, not a fall in the price level
·
To illustrate, in
week 1 the rate of inflation may be 5% while in week 2, the rate of inflation
may be 4%. Fall from 5% to 4% should not be interpreted as a fall in the price
level. It only implies a fall in the speed at which prices tend to rise.
Inflation
is measured in terms of changes in the wholesale price index, based on weekly
quotations of wholesale prices. Increase in the wholesale price index over a
long period of time implies a situation inflation. It causes erosion of
purchasing power of money. In a situation of inflation, trade unions often
pester for higher money wages to compensate for the fall in the purchasing power
of a rupee.
Dearness Allowance
https://groww.in/p/tax/dearness-allowance
https://vakilsearch.com/blog/wp-content/uploads/2022/12/Dearness-Allowance.jpg
VIDEO DESCRIPTION (max 5,000 characters)
Inflation and Index Numbers, FALL IN THE RATE OF INFLATION DOES NOT IMPLY FALL IN THE PRICE LEVEL | Index Numbers | 11th Commerce | by @statomics11comm
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