Inflation in bangladesh
1. Introduction
Inflation is a general increase in prices and fall in the purchasing value of money. “Too much money in circulation causes the money to lose value”-this is the true meaning of inflation.
What is Inflation.
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. (Investopedia)
a. Kinds of Inflation
Inflation means a sustained increase in the general price level. However, this increase in the cost of living can be caused by different factors. There are many types of inflation but the main two types of inflation are;
1. Demand pull inflation: This occurs when the economy grows quickly and starts to ‘overheat’ Aggregate demand (AD) will be increasing faster than aggregate supply (LRAS).
2. Cost push inflation: This occurs when there is a rise in the price of raw materials, higher taxes, etc.
1..Demand Pull Inflation
This occurs when AD increases at a faster rate than AS. Demand pull inflation will typically occur when the economy is growing faster than the long run trend rate of growth. If demand exceeds supply, firms will respond by pushing up prices.
Simple diagram showing demand-pull inflation
The UK experienced demand pull inflation during the Lawson boom of the late 1980s. Fuelled by rising house prices, high consumer confidence and tax cuts, the economy was growing by 5% a year, but this caused supply bottlenecks and firms responded by increasing prices.
This graph shows inflation and economic growth in the UK during the 1980s. High growth in 1987, 1988 of 4-5% caused an increase in the inflation rate. It was only when the economy went into recession in 1990 and 1991 that we saw a fall in the inflation rate.
2..Cost Push Inflation
This occurs when there is an increase in the cost of production for firms causing aggregate
Inflation is a general increase in prices and fall in the purchasing value of money. “Too much money in circulation causes the money to lose value”-this is the true meaning of inflation.
What is Inflation.
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. (Investopedia)
a. Kinds of Inflation
Inflation means a sustained increase in the general price level. However, this increase in the cost of living can be caused by different factors. There are many types of inflation but the main two types of inflation are;
1. Demand pull inflation: This occurs when the economy grows quickly and starts to ‘overheat’ Aggregate demand (AD) will be increasing faster than aggregate supply (LRAS).
2. Cost push inflation: This occurs when there is a rise in the price of raw materials, higher taxes, etc.
1..Demand Pull Inflation
This occurs when AD increases at a faster rate than AS. Demand pull inflation will typically occur when the economy is growing faster than the long run trend rate of growth. If demand exceeds supply, firms will respond by pushing up prices.
Simple diagram showing demand-pull inflation
The UK experienced demand pull inflation during the Lawson boom of the late 1980s. Fuelled by rising house prices, high consumer confidence and tax cuts, the economy was growing by 5% a year, but this caused supply bottlenecks and firms responded by increasing prices.
This graph shows inflation and economic growth in the UK during the 1980s. High growth in 1987, 1988 of 4-5% caused an increase in the inflation rate. It was only when the economy went into recession in 1990 and 1991 that we saw a fall in the inflation rate.
2..Cost Push Inflation
This occurs when there is an increase in the cost of production for firms causing aggregate
References: Akhtaruzzaman, Md. “Inflation in the Open Economy: An Application of the Error Correction Approach to the Recent Experience in Bangladesh,” Working Paper Series, WP 0602 (2005), Policy Analysis Unit (PAU), Research Department, Bangladesh Bank. Bruno, M. and W. Easterly. “Inflation Crises and Long-Run Growth,” World Bank Policy Research Working Paper No. 1517 (1995). Khan, M. S. and A. S. Senhadji. “Threshold Effects in the Relationship between Inflation and Growth,” IMF Staff Papers, Vol. 48, No. 1 (2001). Tobin, J. “Money and Economic Growth,” Econometrica, 33 (1965), pp. 671-684.