What are some major factors that have been responsible for inflation?

Answer 1

Demand side factors:

1- Increase in nominal money supply: Increase in nominal money supply without corresponding increase in output increases the aggregate demand. The higher the money supply the higher will be the inflation.

2- Increase in disposable income: When the disposable income of the people increases, their demand for goods and services also increases.

3- Expansion of Credit: When there's expansion in credit beyond the safe limits, it creates increase in money supply, which causes the increased demand for goods and services in the economy. This phenomenon is also known as 'credit-induced inflation'.

4- Deficit Financing Policy: Deficit financing raises aggregate demand in relation to the aggregate supply. This phenomenon is known as 'deficit financing-induced inflation'.

5- Black money spending: People having black money spend money lavishly, which increases the demand un-necessarily, while supply remains unchanged and prices go up.

6- Repayment of Public Debts: When government repays the internal debts it increases the money supply which pushes the aggregate demand.

7- Expansion of the Private Sector: Private sector comes with huge capitals and creates employment opportunities, resulting in increased income which furthers the increase in demand for goods and services.

8- Increasing Public Expenditures: Non developmental expenditures of government lead to raise aggregate demand which results as increased demand for factors of production and then increased prices.

9-Credit purchase-Due to increase in credit cards people can puchase in credit which in result increase demand

10-Speculation-Speculation is also increase demand especially gold and shares

Supply side factors

1- Shortage of factors of production or inputs: Shortage of factors of production, i.e. raw material, labour capital etc causes the reduced production, which causes the increase in prices.

2- Industrial Disputes: When industrial disputes come to happen, i.e. trade unions resort strikes or employers decide lock outs etc the industrial production reduces. And as a short supply of goods in the market the prices go up.

3- Natural Calamities: Natural disasters, invasions, diseases etc effect the agricultural production, and shortage of supply which furthers the rise in prices.

4- Artificial Scarcities: Hoarders, black marketers and speculators etc create artificial shortage to earn more profits by keeping the prices high. (in Pakistan bird flu dilemma and sugar crises are the major examples in this regard)

5- Increase in exports (excess exports): When the country has tends to earn maximum foreign exchange and exports more and more without considering the domestic use of the commodities, it creates a shortage of commodities at home which increases the prices. (With reference to Pakistan, the failure of export bonus scheme during 1950's is the most common example of this type of cause of inflation)

6- Global factors: This factor includes the changing global environment. Most common example is the rise in oil prices. This factor of inflation may vary in nature, i.e. it can be political, strategic, economic or logistic in nature.

7- Neglecting the production of consumer goods: When the production of consumer goods is neglected with reference to the increased production of luxuries, it also creates inflation. For example in Pakistan, in last couple of years our services sector has grown with the highest rate of 8.8% (mainly telecom sector), while basic necessities have been ignored which created increase in the prices of consumer goods.

8- Application of law of diminishing returns: this law applies when the industries use old machines and methods and, which increase in cost by increasing the scale of production. This furthers the increase in prices and hence inflation bursts out.

9-Iefficient supply chain - Due to iefficient supply chain supply affects and cause demand on other side

Answer 2

examine the factor affecting inflation?