The control measures of Inflation
The following are the instruments
commonly used in order to control
inflation in modern economy;
1. Monetary policy
2. Fiscal policy
3. Direct control, and
4. Miscellaneous measures
Monetary Policy
Economists feel that inflation is basically a
monetary phenomenon. Hence, the most
logical solution to check inflation is to
check the flow of money supply by
appropriate monetary policy and carefully
implementing monetary measures.
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To control inflation, it is necessary to
control total money supply.
It is assumed that under the conditions of
full employment, increase in total money
supply will be reflected in price that is
inflation.
Monetary policy used to control inflation is
based on the assumption that a rise in
prices is due to excess of money demand
for goods and services by the people.
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The central bank’s monetary management
methods
“ The devices for decreasing or increasing
the supply of money and credit for
monetary stability is called monetary
policy.
Monetary policy is usually followed by using
the quantitative methods.
1. Bank rate may be raised (Bank rate
policy)
2. Open market operations.
3. Variable reserve ration (CRR)/
Influence of monetary measures
Increase in Bank Rate
Open market operations
Increase in cash reserve ration
Decrease in money supply and credit
Decrease in effective demand
Reduction in prices
Fiscal Policy
Fiscal policy is budgetary policy in relation
to taxation, public borrowing, and public
expenditure. Changes in the total
expenditure can be affected by fiscal
measures.
Fiscal measures would involve increase in
taxation and decrease in government
spending.
During inflation the government is
supposed to counteract and reduce public
spending.
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When more taxes are imposed, the size of
the disposable income diminishes, as also
the magnitude of the inflation, given the
available supply of goods and services.
Direct Controls
Direct controls refer to the special
regulatory measures undertaken to control
inflation. Such regulatory measures
involve the use of direct control on prices
and rationing of scarce goods.
In the view of the severe scarcity of
certain goods, particularly, food grains,
government may have to enforce
rationing, along with price control.
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The main function of rationing is to divert
consumption from those commodities
whose supply needs to be restricted for
some special reasons.
Direct controls have the following
advantages:
1. They can be introduced or changed
quickly and easily.
2. Direct controls can be more
discriminating than monetary and fiscal
controls.
National Income
Meaning of National Income:
From production angle, the national
income is the sum total of net value added
at factor cost by all the production units
located within the economics territory plus
net factor income from abroad of a
country during a year.
National Income
From income distribution angle, the
national income is the sum total of factor
incomes accruing to the residents of a
country during a year.
From expenditure angle, the national
income is the sum total of final
expenditure, that is, on consumption and
investment, net of consumption of fixed
capital and net indirect taxes but gross of
net factor income from abroad.
Methods of estimating National Income
There are three methods of estimating
national income:
1. Production (or value added) method.
2. Income distribution method, and
3. Final expenditure method.
1. Production Method
It involves the following steps;
i. Classification of production units into
different industrial sectors: production
units are classified into three broad
sectors – primary, secondary and
tertiary sector.
- Primary sector includes production
units, which are engaged in exploiting
natural resources like farming, mining,
fishing, forestry, etc.
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Secondary sector includes manufacturing
units engaged in converting one good into
another like steel producing units, cotton
textile industry.
Tertiary sector includes production units
producing services like those provided by
traders, schools, hospital, restaurants
etc..,
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ii) Estimation of value added by each sector
iii) Take the sum of value added
iv) Add net factor income received from
abroad.
2. Income distribution method
In this method, the income is estimated at
the distribution stage when factor incomes
are distributed by the production units to
the owners of the factors of production.
Final Expenditure Method
The base of this method is the
expenditure on final products. Production
and expenditure methods are the two
sides of the same coin. Production method
measures what is produced. Expenditure
method measures the products bought in
the country.