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Inflation

Inflation – one of the most serious problems in the economies of most countries of the world. The phenomenon of inflation existed in the early development of the money relations in the society and, as a rule, manifested-heavy States and communities times, such as war and revolutions. To date, inflation has become a constant companion States, taking a chronic form. What is inflation really, what are the reasons of its occurrence, to which it leads, and what methods of overcoming inflation regarded as the most efficient in the XXI century.

Definition of the notion of "inflation»

At the moment there are many definitions of this economic phenomenon, although the majority of  of the definitions are quite similar to each other:

As a rule, in the period of inflation rates rise unevenly only on some goods, others remain at the same price level. Usually even some bad inflation rates are falling rapidly, and the others – grow. Uneven increase in prices is considered one of the weaknesses of inflation.  Reduction in wages leads to a decrease in consumer abilities of the population,  in this connection starts falling demand for most products, and this poses a direct threat to the economy of the country.

Historical examples of inflation

Inflation has existed since the beginning of the existence of market relations between people. The rulers of the first countries in the world have tried to reduce the inflation rate by raising taxes and other primitive measures. Consider striking manifestations of inflation in the history of different countries of the world:

1.    Inflation in France

One of the most striking examples of this phenomenon are considered the situation in France during the bourgeois revolution in the second half of the XVIII century. The power of the state began to produce assignaty to cover the expenses of the state. Release assignatov led to the rapid growth of prices. For several years, the cost of a loaf of bread has risen three times, not to mention other products of the first necessity.  Many workers have lost their place, and the wages of the working share of the simple population is not enough to cover even basic expenses.

 The obvious example of the growth of inflation

Inflation affected practically all sectors of the population. The main blow fell on rural dwellers, simple artisans and work in factories. The authorities instead of preventing unrest in the country and help to the population began to carry out anti-people policies, eliminating all dissatisfied. The situation in the country stabilized only after the coup, when the new authorities have set fixed prices for necessities, and created a special unit for removal of surpluses from rich merchants. Also at that time included the use of ration cards.

Unfortunately,  although these measures have yielded results for some time, but they could not fully remove all the consequences of strong inflation of the previous years, and shortly inflation again reached its climax.

2.    Inflation in Russia

Throughout its history, Russia has seen many examples of inflation. The most striking case was to increase the issue of paper money in the times of tsarist Russia. At that time the state of the economy had not the best times, the Treasury did not have enough funds for the wars and excessive spending of the Royal family. Then in turnover introduced paper money. They were called in Bank-notes, and the first release of over 1 million rubles. It was believed that the issue of paper money successfully replace heavy and cumbersome coins. In fact, this has led to strong inflation and  a significant decline in the economy of the state.

In the XIX century, inflation again visited Russia because of the issue and the growth of the budget deficit. The war marked the huge state expenditures, the budget deficit continued to grow. The hardest inflation, as expected, struck by the common people,  especially the peasants. The exploitation of people landlords reached its heyday. In addition, inflationary processes have production and subsistence farming. Soon the cost of goods increased several times, in the country flourished speculation.

 Measures against inflation

The government has taken some measures to reduce inflation, in particular, the issue of banknotes was terminated,  and previously released money began to actively withdraw it from circulation. Unfortunately, attempts to stabilize the national currency were sokrushitel'nyyproval. Soon the cost of basic goods and food products has increased by more than 80 %and the wages fell several times.

Throughout history, almost every developed country in the world occurred inflation processes in one form or another. Usually inflation reached a peak during the long wars and changes of government.

Types and causes of inflation

Inflation can be conditionally divided into several types, depending on the pace of its growth:

This is a small price rise in the country (less than 10 % per year). Economists believe that the inflation is an inevitable process in the economy, which stimulates the development of production in the country, promotes more effective policy in the sphere of economy. Moderate and inflation helps to correct rates, make loans more accessible for the population, intensify investment activities and to accelerate production, which, in turn, under favorable conditions should lead to stabilization of prices and wages-that is, inflation – the  the overall increase in production in the country with a slight increase in prices.  But even this inflation can be as harmful for the development of the state, there is a risk of inflation from under the  state control and a significant increase in inflation. This is especially true for those countries where the level of production is not very high and there is a normally-functioning mechanisms of regulation of economic activity. Appears the question, what is a low inflation? Low inflation – the price growth is not more than 4-5 % per year.

High rates of growth of prices in the state, compared with moderate inflation (10-100 % a year, sometimes more), but lower than in the case of hyperinflation. Prevent the galloping inflation is much harder, plus, it is impossible to control. The rise in prices leads to permanent growth of wages and salaries, and it ’ to the devaluation of the currency.

Inflation is called the galloping if the growth rate of prices for goods exceeds 10 % per year and is growing rapidly. It is believed that the galloping inflation – is an intermediate link between moderate inflation and hyperinflation.  Galloping inflation is dangerous because in such circumstances, the economy is no incentive for the development of enterprises,  financial markets very quickly come to their decline. Money  quickly impaired, the population tends to invest in real estate, etc. To cope with galloping inflation, it is necessary to revise the national monetary policy and make drastic changes. Otherwise inflation will constantly grow.

Price growth of over 200 % per year. Hyperinflation is a greater danger to the economy, it is more difficult to handle, inflation becomes absolutely uncontrollable and the usual ways of dealing with this phenomenon no longer give any effect. When hyperinflation money not just lose the value of – they no longer apply, instead of the money relation comes barter exchange. Rich layers of the population lose all their savings and forced to adapt to the new order of things. The society has a speculation, production almost completely stops, and new currencies print with redoubled force. In addition, a money-try to avoid buying necessities. As a result, demand is increasing dramatically,  there is a shortage of many goods.

The best example of hyperinflation considered to be the situation in a number of States after the first world war. People tried to spend salary on essential foods during the day, because the following day rates could repeatedly increased.

Inflation can also be classified according to the extent of its predictability. So, decided to allocate the expected inflation,  which is the natural process in the economy and neozhidaemuyu inflation, which had not prevented, hence – take the necessary measures to eliminate inflation.  

Types of inflation by the nature of its manifestations:

Open (explicit)

Open inflation is characterized by a gradual rise in prices and decrease of wages, such inflation is slowly eroding the economies of States.

Suppressed inflation

Such inflation, on the contrary, passes quickly, because the government takes measures for its suppression, monitoring the market. The second type of inflation is more typical for the countries with a strong government control over production and economic sector of the country.

Hidden inflation

This considerable deterioration of the quality of products at the same prices. According to economists, open, and predictable inflation is always preferable to other species, although in practice most States, this happens very rarely.

Taking into consideration the causes of inflation, allocate the following classification:

Inflation demand

 Dimensions inflyaciy worldwide

It is  an excess demand for goods with a deficit of these goods. Due to an excess of demand prices start to grow rapidly. As a rule, inflation of demand due to the budget deficit and growing public debt. In wartime inflation demand appears as a result of the growth of military spending. Another reason for the inflation of demand is considered excessive availability of loans for the population and the emergence of excessive demand for some goods. The impact of foreign currency in the state also provokes the excessive demand for goods in the country.

The inflation of production costs

This rapid decline in production growth rates, which leads to a significant increase in costs per unit of production.  This, in turn, provokes reduction in total production in the country, the shortage of goods and growth of prices for these commodities.

The productivity of workers to remain low, with soaring cost of services on the market. Taxes will rise, the level of costs will grow.

In addition to these types inflyaciy, economists often produce and other types of events:

This type of inflation is characterized by the simultaneous presence of several factors: growth of the General price level, skyrocketing unemployment and considerable reduction of volumes of production. The reason vozniknoveniyastagflyacii often the fact of expectations of inflation, when the owners of large factories and other production factors are starting to increase the cost of their products due to the expectations of falling profits due to inflation.

It becomes the cause of excessive state control over the productive sector of the economy.

Inflation is due to the increased credit expansion of banks.

Monetary inflation – the significant growth of prices in the country caused by printing more money. Inflation this type is shown in the growth of prices, reduction of the total volume of offerings on the market, shortage of goods. In the economic literature monetary inflation rarely singled out as a separate view, claiming it to the inflation of demand.

Summing up the above, we can conclude that inflation – is the process of price increase of goods and services while reducing demand and devaluation of money.

The effects of inflation for the state

The consequences of this phenomenon in many respects depend on the types, causes, duration and the level of inflation. State control over the economy also plays an important role in preventing critical consequences for the productive sector of the economy. It is believed that a small inflation (not more than 10 % per year) stimulates the economy and new forms of production, helping to extract more money from sold products and improve the quality of goods. In addition, a small inflation is helping the country faster calculated in external debt. But the large inflation, especially hyperinflation, causing irreparable harm to the state:

Investments, including foreign, become a luxury for the entrepreneurs because of impossibility to calculate all the risks and the effectiveness of monetary investment. Entrepreneurs cannot be sure of the price for their products, and to produce new goods seems impractical solution to stabilize the economy. It  in turn, leads to increased demand for goods and a decrease in performance.

All the implicit cash grassroots quickly impaired, resulting reduced spending ability of people. A similar situation happens with entrepreneurs who have to either reduce the number of products manufactured or used in the production of lower-quality elements.

In some people the salary grows with inflation rate,  others – is not the same level. Suffers as a result of a large part of the population of the state.

The rapid devaluation of money provokes transition to other relationships, people are trying to invest the available funds in foreign currency, real estate, jewelry and other assets. Then population goes on the exchange of goods, returning to barter relations characteristic of societies of the past.

Job loss, depreciation of all savings, unstable economic situation and other factors lead to the exacerbation of the negative trends in the society. In extreme cases, this leads to mass riots, strikes, discontent of the authorities and even coups.

Measures to prevent and fight inflation

 Because in the current economic societies inflation is a necessary and inevitable process, to prevent a worsening of the inflation rate and stabilization of the economy the state is obliged to undertake a number of measures that will avoid the negative consequences of destabilization of the economy. There are several basic ways to prevent and reduce inflation, which are successfully used in most state with a market economy:

This method is called "shock therapy». Thanks to the introduction of this method in society are falling inflation expectations and confidence to the government ’ increases. This method helps slow down the rate of growth of inflationary tendencies. The introduction of this method is performed in two ways: the abolition of the old currency and the strengthening of the old currency. Also used a reduction in the rate of exchange of the state ’ devaluation.

This method should be used in cases where the inflation rate is insignificant, because of the rapid pace of growth of inflation, the method does not give such effect, as "shock therapy».

Largely dangerous method of settlement of inflation, since after the removal of the state control inflation to return to its previous position, or significantly grow. The method is based on indexation of incomes of the population of the state according to the rate of growth of inflation, including a reduction in the growth of wages and commodity prices the way they "freeze" for some time.

Also for the stabilization of the situation undertaking measures on optimization of tax system, to stabilize costs in the state and to ensure the balance between the growth of wages and prices of goods.

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