What is the impact of inflation on an economy?
The following points highlight the six major
impact of inflation on an economy. The effects are:
1. Effects on Distribution of Income and Wealth
The impact of inflation is felt unevenly by the
different groups of individuals within the national economy—some groups of
people gain by making big fortune and some others lose.
2. Effects on Production
The rising prices stimulate the production of
all goods—both of consumption and of capital goods. As producers get more and
more profit, they try to produce more and more by utilising all the available
resources at their disposal.
3. Effects on Income and Employment
Inflation tends to increase the aggregate money
income (i.e., national income) of the community as a whole on account of larger
spending and greater production. Similarly, the volume of employment increases
under the impact of increased production.
4.
Effects on Business and Trade
The aggregate volume of internal trade tends to
increase during inflation due to higher incomes, greater production and larger
spending.
During most inflation since costs do not rise
as fast as prices profits soar. But wages do not increase proportionate with
prices, causing hardships to workers and making more and more inequality. As
the old saying goes, during inflation prices move in escalator and wages in
stairs.
5. Effects on the Government Finance
During inflation, the government revenue
increases as it gets more revenue from income tax, sales tax, excise duties,
etc.
6. Effects on Growth
A mild inflation promotes economic growth, but
a runaway inflation obstructs economic growth as it raises cost of development
projects.
The following points highlight the six major impact of inflation on an economy. The effects are:
1. Effects on Distribution of Income and Wealth
The impact of inflation is felt unevenly by the different groups of individuals within the national economy—some groups of people gain by making big fortune and some others lose.
2. Effects on Production
The rising prices stimulate the production of all goods—both of consumption and of capital goods. As producers get more and more profit, they try to produce more and more by utilising all the available resources at their disposal.
3. Effects on Income and Employment
Inflation tends to increase the aggregate money income (i.e., national income) of the community as a whole on account of larger spending and greater production. Similarly, the volume of employment increases under the impact of increased production.
4. Effects on Business and Trade
The aggregate volume of internal trade tends to increase during inflation due to higher incomes, greater production and larger spending.
During most inflation since costs do not rise as fast as prices profits soar. But wages do not increase proportionate with prices, causing hardships to workers and making more and more inequality. As the old saying goes, during inflation prices move in escalator and wages in stairs.
5. Effects on the Government Finance
During inflation, the government revenue increases as it gets more revenue from income tax, sales tax, excise duties, etc.
6. Effects on Growth
A mild inflation promotes economic growth, but a runaway inflation obstructs economic growth as it raises cost of development projects.
