POLICIES TO DEAL WITH INFLATION

 POLICIES TO DEAL WITH INFLATION

The correct policy to deal with inflation depends on the reason for the inflation. These are some of the policies to reduce inflation :

1. Reducing Demand

When the government believes that inflation is being caused by excess demand, it will try to use the below measures –

Monetary Policy – This initiative is taken by the central bank to reduce the money supply, and availability of credit in the economy. It puts restrictions on lending and increases the rate of interest, which induce savings and reduce borrowings, thereby decreasing the income in the hands of the people.

Anti-inflationary measures of a purely monetary nature are largely a matter of Central Bank policy.  The monetary policy is implemented by way of

• Bank rate: It is the minimum rate of interest of the Central Bank of the country. It is also the rate at which the Central bank discounts bills of exchange or securities. During inflation, higher bank policy or interest rate policy is one of the most important weapons of a central bank.When the bank rate is raised, the cost of borrowing by commercial banks from the central bank is raised and hence their lending rates follow suit.
• Open market operations : Open market operations  is the sale of government securities by the central bank to the public. As the public pay for the securities offered, they reduce their accounts by  the amount of the purchases and the member bank lose their reserve accounts by a similar amount with the Central Bank.

          

Fiscal Policy – The government increase taxes and reduce government spending, to take out money from people’s pockets, thereby reducing the demand in the economy.

2. Increasing Supply

Another way of overcoming the problem of inflation is to increase the supply of goods and services. This can be achieved by –

-          giving training to workers & making them more efficient

-          providing grants to encourage investment in latest equipments

-          promoting horizontal integration leading to economies of scale

-          improving the transport network.

3. Income Policies

It is an attempt by the government to slow down the rate at which costs of production are rising, by  controlling the incomes to the factors of production i.e. wages, interest, rent & profits. Since cost push inflation mainly occurs due to wages increasing more than productivity, income policies tend to concentrate on wages.The objective is to keep the growth of money income in line with the growth of real income. People’s money incomes should not increase faster than the supply of goods & services on which the incomes are spent.

EFFECTS / PROBLEMS OF INFLATION

- EFFECTS / PROBLEMS OF INFLATION

Inflation can cause difficulties for ordinary people, organizations and the country as a whole. Some of the reasons are :

1. It tends to accelerate

When inflation occurs for sometime, people begin to anticipate future price increases. Workers start demanding higher wages on past and expected future price increase. If the employers give them the wage rises, it will push up the cost of production, push up the prices, and further raises inflation. This is called Wage Price Spiral.The firms also start raising the prices to cover both past and expected future increases in costs. All these give rise to cost push inflation and tend to speed up the rate of inflation.

2. It effects the distribution of income

When inflation takes place, people try to increase their incomes, and some may be more successful than others. Some trade unions are in strong bargaining position, and are able to protect the real wages of some workers, others may not be able to do it and real wage  of these workers fall.

Some group of people who are dependent on private pensions or obtain income from fixed income securities, will not be able to avoid a fall in the real income. All these will increase the gap between the real incomes of people and effect the overall distribution of income.

3. Borrowers (Debtors) gain at the expense of Lenders (Creditors)

Borrowers gain during inflation because the real worth of money which they pay as interest declines as a result of inflation. Lenders lose because the real worth of interest which they get is less than what they had hoped before inflation started.As the largest borrower, the Government benefits from inflation. It is able to repay its debts with money which has a lower value than the money borrowed.

4. It affects the balance of payments (increase imports and decrease exports)

A country may get into difficulty if its inflation rate is more than its competitors. If the prices of goods produced in UK are rising faster than prices of other competing countries, then it will be cheaper to import the goods and exports will become difficult (costlier). This will affect the balance of payment position and it moves into deficit.

     5.

·         People who get a fixed annual money income from property or money lent by them, lose during inflation. For example” The rent received by them being fixed for a certain period of time, they cannot be varied easily.

·         Creditors lose where as the debtors are gainers during a period of inflation. Borrowers gain as the real value of the money which they pay back is much less than when they borrowed. Creditors lose during inflation since they receive less in real terms.

·         Securities carry a fixed rate of interest fro a specified period. So during periods of rising prices, holders of securities lose.

·         Inflation also effects the course of international trade of a country. In view of rising prices in the domestic economy, exports tend to decline and imports tend to increase. As a result there will be unfavourable balance of payments.If unfavourable balance of payments persists for quite some time, the external value of the currency will tend to decline.

1. Factors determining choice of occupation :

a. Wages or pay scale:

            If an individual gets more pay scale /salary/wages in one occupation than another then he might choose to work there. This is because pay scale is the most important factors for the choice of occupation. This is the only WAGE FACTOR.

           

b. Fringe benefits:

            If an individual gets more fringe benefits like free accommodation, free transportation, free medical facilities, free education facility for children, subsidized food etc  in one occupation than another then he might choose to work there. This is because all these factors decides the real wage of a worker.

c. Number of hours:

            If an individual gets an occupation where wage rate is same as another occupation but working hour is less than the previous job then he might choose to work there. This is because he will have more leisure time that he can spend with his family.   

                       

d. Location of his working area:

            This factors plays an important role in choosing a worker’s choice of occupation. If the work area is nearby with less pay scales too, some workers may be ready to work as they do not have to travel a long distance.

e. Opportunities for promotions / Career prospects:

             If a person has more opportunities of being promoted in one company than another, he might choose to work there. This is because of better future job prospect.

                       

f.  Job security           :

If an individual gets more secured jobs / permanent job than he might prefer to join even if the pay scale is comparatively less than the other one.

           

h. Working condition:

            If the working condition is good, safe and secure, hygienic etc then a person might be ready to work for that job then the other job where all these are not available.

i. Goodwill of the organization:

            Size of company along with goodwill also matters as an individual might prefer to work in a large organization with a good reputation as they can be benefited in different ways & of course it  good  & prestigious  matter of being a part of such organization.

 Q. Why workers in the same occupation paid differently?

Workers doing the same job within the same industry are paid differently because:

lDifferent pay agreements across the country-overtime, bonus.

lInformal economy, where there is no fixed wage policy. ( most important point )

lShortage of workers

lDifferences in the amount of experience, training, hard work & productivity. ( most important point )

lDemand for final product or service( most important point )

lLikely revenue from sale of good or service.

lWorkers in cities are paid more to meet the higher cost of living.

lIn spite of equal-opportunities women tend to earn less because their careers are interrupted by family commitments, or they suffer from sex discrimination.

lOlder workers tend to earn more because of seniority & experience.

Q. Why workers change jobs at same wages?

There are many times when a worker decides to move to another job at the same rate of pay

The reasons might be:

·         Sometimes workers move from one job to another at the same rate of pay because their working conditions are not good or acceptable to them and they prefer to change job even though they are not paid more.

·         There may be times when the worker may find problems due to extreme weather conditions or geographical factors.

·         Workers also change jobs in expectation of better prospects of promotion or professional development, though they are not getting higher wages.

·         Many workers might find the journey to work very tiring and would prefer to work close to their homes.

·         Some workers might relocate to a location which they personally like even though they might get the same wages.

·         Working in large company is considered as a status symbol by many workers and they might change job to work in a large company.

·         Many businesses don’t pay high wages but care for their employees by providing Fringe benefits such as subsidised meals, health scheme, leisure activities. This may also influence a worker to move to these businesses.

Why work for low Wages?

There may be times when a worker would be prepared to work for very low wages?

The reasons might be

·         The worker might not be able to get another job and has to contend with low wages till he finds a better paying job.

·         Low skilled jobs usually have low wages. The worker might not be trained to do skilled job and thus get low wages.

·         The worker might choose to work part-time and does not mind low pay. For example, a student working doing a part time job to earn his pocket money may not negotiate too much for higher wages.

·         In the same way, a worker might view the job as a temporary measure until a better job is available and may not negotiate for better wages.

·         Lack of information is also an important factor. Workers who do not know of alternative jobs usually land up getting lower wages.

·         Age may be a factor which limits the worker to get higher wages.

MONEY

Meaning of Money:-

Money is anything that is habitually and widely used as a means of payments and is generally acceptable in the settlement of debts. In other words, money is something which is freely used and generally accepted as a medium of exchange and or as a unit of account.

Functions of Money

1. A medium of exchange

Money overcomes the problem of needing a double coincidence of wants. It can be used to exchange and is therefore a comparative object, a tertium comparationis ("a third comparative unit").

2. A unit of account

Money acts as a measuring unit for value. Thus different commodities can be expressed in terms of money uniformly. This simplifies the comparison of the value of two products or services.

3. A store of value

Money can be used to store value. Unlike barter system where the commodities could not be saved over time, money can be stored as it does not lose value overtime.

4. A standard of deferred payment

Money can be used to pay over time for commodities. Goods and services can be paid for in instalments over a period of time e.g hire purchase. This was much more difficult and complicated in the barter system.

Qualities of Good Money

Following are the qualities of good money:

1. General acceptance

The essential quality of good money is that it should be acceptable to all, without any hesitation in the exchange for goods and services.

2. Portability

It is also an important quality of good money that is should be easily transferable from one place to another for doing business and making payment. The paper money is easier to carry because it has minimum possible wait than metallic money.

3. Storability

Money should be storable and it should not be depreciate with time. If the money used is perishable it will lose its value in few days. Paper money has this quality of storability.

4. Divisibility

Good money is that which could be divided into small units without losing any value.

5. Durability

Money should be durable. It should not lose its value with the passage of time. The gold and silver coins do not wear out quickly and quality of money remains the same.

6. Economy

It is important quality of good money that it should be made economically. If there is heavy cost on issuing more money that is not good money. Good money is that has low cost and more supply. Paper money has this quality of economy.

Why Most of the country have mixed economic system

Why Most of the country have mixed economic system

1.    @  Market economies experience high unemployment sometimes because it may not be profitable to employ people. In a mixed economy if there is un­employment the Government may be able to create jobs for those people out of work by employing them in their own offices and factories, or by helping private firms to provide jobs.

2.   @ Public goods, such as defence, law and order, and street-lighting, will not be provided by private firms in a market economy as it would be impossible to get people to pay for their use. In a mixed economy a Government
can provide these public goods and raise the money necessary to pay for them by taxing people's income and spending. In addition, the Government may provide merit goods, such as education and health care, which it feels
people should have.

3.   @  Because some people may want to buy dangerous goods like drugs, firms in a market economy may find it profitable to provide them. In a mixed economy a Government may be able to stop people consuming harmful goods by making them illegal, for example, hard drugs, or by placing high taxes on them, for example, alcohol.

4.  @ Private firms only take into account their own costs and benefits when producing goods and services. For example, a private firm pouring waste into a river will not consider the cost to the environment. A Government may use laws, or high taxes and fines on firms, to try and prevent them polluting the environment.

5.   @ One of the main problems of a market economy is that poorer people with little money are unable to buy many of the goods and services that are available. Planning gives the Government the power to give goods and ser­vices, or more money, to the people that it thinks needs them. For example, in the United Kingdom, the Government provides unemployment benefits and free health care for those who cannot afford to pay.

Mixed Economy, Features and advantages.

Mixed Economy

It is an economic system where there is coexistence of both private sector & public sector.A mixed economy is an economic system that incorporates aspects of more than one economic system. This usually means an economy that contains both privately-owned and state-owned enterprises or that combines elements of capitalism and socialism, or a mix of market economy and planned economy characteristics. This system overcomes the disadvantages of both the market and planned economic systems.

Features

• Resources are owned both by the government as well as private individuals. i.e. co-existence of both public sector and private sector.
• Market forces prevail but are closely monitored by the government.
• There is motivation for everyone (producer, consumer, workers).
• Producer, consumer, workers have freedom of choice.
• Govt. make provision for public & merit goods.
• Social costs are controlled by govt. through taxation, ban, regulation etc.

Advantages

• Producers and consumer have sovereignty to choose what to produce and what to consume but production and consumption of harmful goods and services may be stopped by the government.
• Social cost of business activities may be reduced by carrying out cost-benefit analysis by the government.
• As compared to Market economy, a mixed economy may have less income inequality due to the role played by the government.
• Monopolies may be existing but under close supervision of the government.

Planned Economy, advantages & disadvantages

Planned Economy

In a planned economy, the factors of production are owned and managed by the government. Thus the Government decides what to produce, how much to produce and for whom to produce.

Features:

• All resources are owned and managed by the government.
• There is no Consumer or producer sovereignty.
• The market forces are not allowed to set the price of the goods and services.
• Profit in not the main objective, instead the government aims to provide goods and services to everybody.
• Government decides what to produce, how much to produce and for whom to produce.

Advantages

• Prices are kept under control and thus everybody can afford to consume goods and services.
• There is less inequality of wealth.
• There is no duplication as the allocation of resources is centrally planned.
• Low level of unemployment as the government aims to provide employment to everybody.
• Elimination of waste resulting from competition between firms.
• Govt. provide public and merit goods for the people.

Disadvantages

• Consumers cannot choose and only those goods and services are produced which are decided by the government. NO CHOICE.
• Lack of profit motive may lead to firms being inefficient.
• ITtakes long time to make the decisions because everything is decided by central planning authority. 
• Lot of time and money is wasted in communicating instructions from the government to the firms.