Inflation is referred to as a rise in the general level of prices or a sustained rise in the general level of price. In case, general price level rises, each unit of money buys fewer goods and services. Consequently, Inflation also degrading in the purchasing power of money which leads to affect negatively GDP. What are the different types of inflation?
RBI has to increase the rate of interest in order to stabilize prices because higher borrowing cost can obstruct business investments which might slow down GDP growth and other economic activity. Indian exports become less competitive which would lead to trade deficit further impacting GDP negatively. However, government steps taken to control Inflation such as Spending on subsidies, readjustment in taxation can also affects GDP. At what range, the rate of intrest affects the cost borrowing for business and their investments?
Sometimes, high inflation can lead to social unrest or political instability which were creating volatile economic environment resultant in disruption of GDP growth.
Rising inflation is typically associated with negative economic consequences, such as decreased purchasing power and higher costs of living. However, under certain circumstances, it could potentially lead to an increase in India’s GDP. Here’s how this might happen:
1. Increased Nominal GDP:
2. Boost to Certain Sectors:
3. Government Revenue and Fiscal Stimulus:
4. Encouragement of Investment:
5. Export Competitiveness:
Important Considerations:
Rising inflation is typically associated with negative economic consequences, such as decreased purchasing power and higher costs of living. However, under certain circumstances, it could potentially lead to an increase in India’s GDP. Here’s how this might happen:
1. Increased Nominal GDP:
2. Boost to Certain Sectors:
3. Government Revenue and Fiscal Stimulus:
4. Encouragement of Investment:
5. Export Competitiveness:
Important Considerations:
Rising inflation directly doesn’t lead to increase in india’s GDP,
Rather it leads too increase in nominal GDP of the country which is calculated at current year prices of final goods and services, that neans inflation leads to increase in nominal GDP even if the productivity of the country is stagnent
Which makes Nominal GDP of a country as an illusionary indicator of growth in an economy while real indicator is increase in Real GDP which is calculated at base year prices (unaffected by inflation)
Infact sometimes Increase in Nominal GDP of a country results in negetive growth in following ways
1. Increase in cost of production
As a result of increase in general price levels producers would face increase in cost of production, This leads to lower profit margins which makes the producers difficult to survive
2 Lower consumer spending in long term
Rise in general price levels leads to decrease in purchasing power of consumer if income doesn’t increase proportionately, as a result consumer tends to reduce the consumption
3. Rise in interest rates
To curb the inflation RBI mmay increase the interest rates, so that it makes costly to consumer to borrow and it tends to lower the consumer spending
4. Economic unstability
Inflation leads to uncertainty in economy which makes it difficult to make decisions for consumers as well as producers which results in. Economic unstability
GOVERNMENT can take necessary steps to curb the inflation through fiscal policy so as to reduce uncertainty in market by
• Increasing taxes on income to reduce the purchasing power of consumers
• decresing govt spending or investments
• borrowing more from public to reduce the money supply in markets
Through monitery policy by
• increase in repo rates or reverse repo rates
• controlling open market operations
• increasing interest rates etc
Rising inflation directly doesn’t lead to increase in india’s GDP,
Rather it leads too increase in nominal GDP of the country which is calculated at current year prices of final goods and services, that neans inflation leads to increase in nominal GDP even if the productivity of the country is stagnent
Which makes Nominal GDP of a country as an illusionary indicator of growth in an economy while real indicator is increase in Real GDP which is calculated at base year prices (unaffected by inflation)
Infact sometimes Increase in Nominal GDP of a country results in negetive growth in following ways
1. Increase in cost of production
As a result of increase in general price levels producers would face increase in cost of production, This leads to lower profit margins which makes the producers difficult to survive
2 Lower consumer spending in long term
Rise in general price levels leads to decrease in purchasing power of consumer if income doesn’t increase proportionately, as a result consumer tends to reduce the consumption
3. Rise in interest rates
To curb the inflation RBI mmay increase the interest rates, so that it makes costly to consumer to borrow and it tends to lower the consumer spending
4. Economic unstability
Inflation leads to uncertainty in economy which makes it difficult to make decisions for consumers as well as producers which results in. Economic unstability
GOVERNMENT can take necessary steps to curb the inflation through fiscal policy so as to reduce uncertainty in market by
• Increasing taxes on income to reduce the purchasing power of consumers
• decresing govt spending or investments
• borrowing more from public to reduce the money supply in markets
Through monitery policy by
• increase in repo rates or reverse repo rates
• controlling open market operations
• increasing interest rates etc