Question
The GDP deflator in India is 200 January
1 2019. The deflator rises to 242 by January
1 2020 and to 266 January 1 2021. 6
a)What is the annual rate of inflation over the two year period between January 1 2019 and 2020
Answer
Annual inflation rate between 2019 and 2020
AIR= [(242-200)/200]*100
= 21%
b) what is the annual rate of inflation over the year period from January 2020 to 2021
Answer
Annual inflation rate between 2020 and 2021
A.I.R= [(266-242)/242]*100
=9.92%
There are main reason that led to the increase of inflation rate
i. Cost-push inflation.
It only happens if supply shortages are
associated with a sufficient demand to allow the manufacturer to boost prices.
Various players support hyperinflation in the free market. Wage inflation, for
example, that increases wages. It hardly happens without working unions. The
damage to production facilities creates temporary inflationary by natural catastrophes.
A significant driver of inflationary pressures is the depleting of natural resources.
Excess fishing, for instance, has decreased seafood supplies and increased costs.
As a result high inflation, the following might be the outcome
i. Dwindling of purchasing power
The initial inflation impact is simply another way to say what it is. Inflation means a
decline in currency buying power owing to an increase in economical prices. The average cost of a product within living memory was 200. As a result, the price rose from 200 in January 2019 to
242 in January 2020 and similarly between 2020 and 2021. Therefore, this might have led
possibly to increased product appeal, price pooling, or years of severe drought/flood/conflict in a
central producing area. Such a price shift could have been a consequence. The prices of items
would increase in these situations, while the remaining economy remains mostly uninfluenced.
This scenario would not be inflation because the aggregate buying power would only be
significantly depreciated by the most additional features added by customers.
The drive for spending and investing in inflation, which unfortunately leads to a possibly
disastrous feedback lap, tends to enhance inflation. As consumers and companies spend faster to
shorten the time they have depreciated their currencies, nobody wants the economy in cash. In
other words, money supplies exceed demand, and money – the currency's buying power – drops
at an increasingly quicker rate.
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