Causes of inflation are of two types:
A. INCREASE IN DEMAND:
1) Increase in Money Supply
The major cause of increase in the price level is an increase in money supply. It may be due to increase in currency or credit money. Increase in the stock of money induces people to demand more and more of goods and services.
2) Increase in Velocity of Money
According to the Fisher’s Quantity Theory of Money, if there is an increase in the velocity of circulation of money it also leads to inflation.
3) More Investment
Investments also play an important role in producing inflation. At the moment of investment the economy’s stock of wealth and money expands and it result is in inflation.
4) Non-productive Expenditures
Government of Pakistan has to make a lot of non-productive expenditures like defence etc. Such unproductive expenditures lead to the wastage of economy’s precious resources and also lead to inflation.
5) Corruption & Black Money
Corruption and black money leads to increase in aggregate demand, which is cause of inflation. These evils increase aggregate demand and import volume.
6) Deficit Financing
Deficit financing is another cause of inflation. It increases the money supply and leads to inflation.
7) Foreign Remittances
Increase in foreign remittances is increasing the money supply in our country. Increase in money supply leads to inflation.
8) Foreign Aids
Foreign aids are also a source of mobilization of resources form rich countries to poor countries. It is also a cause of inflation in Pakistan.
9) Consumption Trends
Due to demonstration effect people of our country want to copy the styles of people of rich countries. In this way there is an increase in consumption trends that leads to inflation.
10) Population Bomb
Population of Pakistan is increasing day by day. Increasing population is demanding more and it creates inflation.
B. DECREASE IN SUPPLY:
11) Slow Agricultural Development
Low growth rate of agricultural sector caused in shortage of productivity. It results in low supply and increase in price level.
12) Slow Industrial Growth
Our industrial sector is not at developed form due to use of backward techniques of production. Its less production also creates shortage in market and caused in inflation.
13) Increase in Wages & Salaries
Now labour is demanding more wages and salaries. Increase in wages and salaries leads to increase in cost that increases the prices. On the other hand due to more wages and salaries there is an increase in income and it caused in inflation.
14) Increase in Prices of Imports
Increase in the prices of imports also leads to creation of inflation. If there is an increase in the prices of oil and other imported raw material then it will cause to reduction in supply.
15) Devaluation
The value of our currency is decreased due to devaluation. It makes imported goods more expensive and it leads to shortage of supply.
16) Indirect Taxes
The imposition of indirect taxes is a reason for increase in prices. Sometimes government imposes taxes on some particular commodities. In this case producer may start to decline the production of those goods.
A. INCREASE IN DEMAND:
1) Increase in Money Supply
The major cause of increase in the price level is an increase in money supply. It may be due to increase in currency or credit money. Increase in the stock of money induces people to demand more and more of goods and services.
2) Increase in Velocity of Money
According to the Fisher’s Quantity Theory of Money, if there is an increase in the velocity of circulation of money it also leads to inflation.
3) More Investment
Investments also play an important role in producing inflation. At the moment of investment the economy’s stock of wealth and money expands and it result is in inflation.
4) Non-productive Expenditures
Government of Pakistan has to make a lot of non-productive expenditures like defence etc. Such unproductive expenditures lead to the wastage of economy’s precious resources and also lead to inflation.
5) Corruption & Black Money
Corruption and black money leads to increase in aggregate demand, which is cause of inflation. These evils increase aggregate demand and import volume.
6) Deficit Financing
Deficit financing is another cause of inflation. It increases the money supply and leads to inflation.
7) Foreign Remittances
Increase in foreign remittances is increasing the money supply in our country. Increase in money supply leads to inflation.
8) Foreign Aids
Foreign aids are also a source of mobilization of resources form rich countries to poor countries. It is also a cause of inflation in Pakistan.
9) Consumption Trends
Due to demonstration effect people of our country want to copy the styles of people of rich countries. In this way there is an increase in consumption trends that leads to inflation.
10) Population Bomb
Population of Pakistan is increasing day by day. Increasing population is demanding more and it creates inflation.
B. DECREASE IN SUPPLY:
11) Slow Agricultural Development
Low growth rate of agricultural sector caused in shortage of productivity. It results in low supply and increase in price level.
12) Slow Industrial Growth
Our industrial sector is not at developed form due to use of backward techniques of production. Its less production also creates shortage in market and caused in inflation.
13) Increase in Wages & Salaries
Now labour is demanding more wages and salaries. Increase in wages and salaries leads to increase in cost that increases the prices. On the other hand due to more wages and salaries there is an increase in income and it caused in inflation.
14) Increase in Prices of Imports
Increase in the prices of imports also leads to creation of inflation. If there is an increase in the prices of oil and other imported raw material then it will cause to reduction in supply.
15) Devaluation
The value of our currency is decreased due to devaluation. It makes imported goods more expensive and it leads to shortage of supply.
16) Indirect Taxes
The imposition of indirect taxes is a reason for increase in prices. Sometimes government imposes taxes on some particular commodities. In this case producer may start to decline the production of those goods.
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