Economy
Producer Price Index:
It is the measure of the average change in selling prices received by domestic producers for their output over some time.
It includes both goods and services and excludes transport, trade margin, taxes that the producer has to pay. It does not include imported products.
In India, PPI is not in practice.
Measures to control Inflation:
Monetary Policy Committee:
It was formed in the year 2015 based on an agreement between RBI and the Government of India.
It aims to maintain inflation at an optimum level ( ie. 4%+(or)- 2%). It meets once every 2 months.
MPC is a 6 member committee.
3 members from RBI:
1) Governor of RBI
2) Deputy Governor of RBI
3) 1 member nominated by RBI
3 members are appointed by The Government of India.
MPC is required to meet at least 4 times a year.
The quorum for a meeting is 4 members and RBI Governor has the casting vote.
Once every 6 months, the reserve bank is supposed to publish a report called the Monetary policy report to explain :
1)The sources of inflation
2)The inflation forecast for the next 6- 18 months
The MPC determines the policy interest rate to achieve the target inflation.
Monetary measures to control inflation:
RBI controls inflation using :
1)CRR
2) SLR
3)Bank Rate
4)Open Market Operation
5) Repo and Reverse Repo.
Fiscal measures are taken by the Government of India:
1) Increasing Tax
2) Public distribution of essential commodities
3) Increasing Imports and ban on Exports
4)Some restrictions on present consumption pattern
5)Increase in production of commodities that have a direct impact on the cost of living.
6)anti-hoarding measures
Philips Cure:
At optimum level, inflation creates jobs and beyond that, the situation will be reversed.
Eg: For India, the optimum inflation level is 4%+ or - 2%.
Core inflation:
It shows the price rise in all goods and services excluding food and energy.
Wage-price spiral:
When wages of labours increase, money supply increases and the prices of goods and services also increases. This phenomenon happens continuously like a spiral.
Disinflation:
The decline in the rate of inflation. The price increase is still there but at a lower rate.
Deflation:
There is a decline in the prices of Goods and Services. It is the opposite of inflation.
It is not good for an economy as the sellers suffer a lot.
Stagflation:
Recession and Unemployment along with inflation becomes a deadly combination to retard the Economy.
Reflation:
Recession leads to lack of demand, so government spends to increase liquidity and create inflation.
Deflation:
Inflation in some commodities, deflation in others and none in some others.
Trade Cycle:
The economic activity in any capitalist economy will have ups and downs. The study of these ups and downs is called trade cycle or business cycle or industrial fluctuation.
Phases:
Boom Phase:
Increase in money supply, economic activity, employment and National Income.
Recovery Phase:
1)Revival towards an upswing
2)Production, profit and wage increase.
3)Begins with demand for capital goods and autonomous investment by government increases productivity.
Recession:
Investment, production, income and profit reduces.
The liquidity preference of people rises and the money market becomes tight.
Depression:
Economic activities, wages, interests, profits and employment will be extremely low.
Trough:
The extreme point of depression and external help is required to come out of this stage.
Content Credits: Leo.A.Vishnu Varthan
