Part of The Student Room Group

  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Commentary on Indian News Article "Food prices push inflation to 6.95%"

Extracts from this document...

Introduction

Food prices push inflation to 6.95% BS Reporter / New Delhi Mar 15, 2012, 00:43 IST http://business-standard.com/india/news/food-prices-push-inflation-to-695/467799/ After showing signs of moderation in the past few months, inflation reared its ugly head once again in February and rose to 6.95 per cent from 6.55 per cent in January. Even so, a break-up of the figures may give conflicting signals to the Reserve Bank of India (RBI) on rate cut in its monetary policy review tomorrow. While food inflation has risen by over six percentage points in a span of just one month - from deflation to 6.07 per cent, the rate of price rise in manufactured products declined to 5.75 per cent in February from 6.49 per cent in January, according to official data released on Wednesday. While the monetary policy works more on manufactured products inflation, the spurt in food inflation cannot be overlooked, feel economists. Finance Minister Pranab Mukherjee admitted the existence of inflationary pressures, but expressed confidence that the rate of price rise would be close to 6.5 per cent by the end of the current financial year. "Inflationary pressure is there.... We will end the year with around 6.5 per cent (inflation)," he said, emphasising on some easing in the rise in prices of manufactured goods. ...read more.

Middle

However, except for consumer non-durable goods, other sectors did not show much upturn, again giving confused signals to the central bank. Food prices push inflation to 6.95% This article is about a rise in food prices causing inflation in India. Inflation is caused by a number of factors. This essay will determine the causes of inflation and evaluate the appropriate government responses including policies from the Reserve Bank of India (RBI). Inflation is a continuing increase in the general price level. There are mainly two types of inflation: demand-pull and cost-push. Demand-pull inflation is caused by increases in aggregate demand (AD). AD is defined as the total quantity of goods and services spent in a period of time at a given price level. Cost-push inflation is caused by an increase in the costs of production. Based on the article, it mentions both the demand-pull and cost-push inflation. Figure 1 shows the demand-pull inflation and is caused by changing food patterns in India. It can be seen in Figure 1 that an increase in AD shifts AD to the right from AD1 to AD2. This impacts the economy and causes the price level to increase from P1 to P2. AD (aggregate demand) is composed of 4 main components- consumption, investment, government spending and the net export. ...read more.

Conclusion

However, a decrease in the supply of money is necessary to ease inflation. A contractionary policy, as represented in Figure 3, can be used to fill in the inflationary gap caused by the excessive AD in India. Figure 3 shows when the RBI attempting to reduce the money supply through higher interest rates aimed to discourage investment and consumption spending, shifting AD 1 to the left to AD 2. This is so the price level will drop as it intersects the AS curve at the full employment level at real GDP. This contractionary policy has benefits and drawbacks, which affects a number of different people. For domestic firms, a rise in interest rates is disadvantageous as consumption and investment will likely decrease, meaning the demand for firms' products and their efficiency can decrease leading to a decrease in profit in the long run. On the other hand, the contractionary policy will benefit foreign investors, as they are likely to increase the amount of funds into India because as the foreign currency falls, there is an increase in the exchange rate. A higher exchange rate will cause exports to decrease and imports to increase making foreign investors to gain more profit. In conclusion, a balance of fiscal and monetary supply side policies is needed to ensure a steady economic growth in India. Words: 748 ?? ?? ?? ?? Claudia Cheng ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

or


Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. The Economics of Housing. Factors affecting prices and demand.

    In 1992 property price in London fell down over 20 %, even there was limited supply. A shortage of supply means it will be on average higher price. It does not mean they are incapable of falling.(www.uk-houseprices.co.uk) Potential trend of house prices in next two years: From the above analysis,

  2. Extended Essay

    The Hungarian government published different documents on the key outcomes of the changes applied between 2006 and 2009 (MEH, 2008). In this essay I am going to compare the results of theory with the results of these documents. 2. The new subsidy system Between 2002 and 2008 the government had

  1. Analysis of Singapore's GDP and Inflation figures.

    (Edward, 2000) The official measure of the inflation is the increase of the general level of prices measured over a period of time, and RPI or CED is used as a measurement. To explain how it does this I must first explain the main two different causes of inflation.

  2. Economics Extended Essay - To what extent has the market for paintings in South ...

    The mood is definitely upbeat. The satisfactory sales numbers suggest a demand for quality works."5 Art collectors had earlier reduced their demand for paintings of contemporary artists, as they were not willing to pay the high price of paintings of contemporary artists since they felt that the paintings were not worth that much.

  1. Rising unemployment and inflation commentary. The above article Bah Humbug talks about the ...

    The latest figures show average earnings rising by just 2.2% a year. Despite this, persistent overshoots have made it hard for the Bank of England to get across its message that spare capacity resulting from the recession should eventually bring inflation back on track.

  2. China Inflation and GDP Growth

    However, due to excess-leakage, inflation had risen above expectations. Therefore, for year 2011, the government will be focusing on stabilizing monetary policies, lowering the use of fossil fuels (because oil prices will predicted to increase in following years). Through applying the monetary policy, the government must focus on three rates: interest rates, currency rates, and the reserve ratio.

  1. Macroeconomics IA South Korea inflation at threeyear high on food price jump

    Therefore, the authorities should consider imposing Supply Side Policies, which will not harm the economy and therefore be more convenient. The goal of a Supply Side Policy is to increase the output of the economy by bringing about an improvement in the factors that affect production.

  2. IB economics commentary - Inflation

    India is experiencing demand-pull inflation, as there is full employment of resources and aggregate demand is increasing. In Figure 1, when the economy experiences more demand than supply, the aggregate demand curve, denoted by AD, shifts outwards to AD1. As a result, price increases from P1 to P2 reflecting price (GDP)

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work