Advantages And Disadvantages Of Inflation

Inflation is the term that is used for explaining the rising prices of all commodities

. All the economies in the world face inflation. Some suffer a low rate, while the others undergo a very high rate of inflation. You will understand inflation rightly after this example. Suppose the price of milk was one dollar last year per kg, but this year it rose up to 1.5 dollars per kg. The 0.5 dollar difference is called the inflation, while a 50% change experienced in the price of milk is the inflation rate. Amongst the government economic objectives, one of them is to retain a low rate of inflation. There are some advantages and disadvantages of inflation. Seems odd, but yes! Inflation, though on a very less rate, is mandatory in an economy. Very low inflation or under inflation (Deflation) can be very disadvantageous for any economy. This is because when this occurs, people tend to spend less money immediately, because they believe that because of deflation, the prices of the commodities would go further down. Because of this, they tend to save money rather than investing on goods. If deflation carries on for a long time, the investment in all commodities might go seriously down, resulting in the change in the position of an economy. Because of this, inflation is mandatory.Ever though why the wages or salaries of workers rise? For nothing? No! The income of workers increases as the price of the commodity or service charges go up. Why do the prices of goods and services go up? Only when inflation happens! So you see, whentheres inflation, there is a rise in the wages of the workers. When there will be no inflation, the salari es of workers might never go up and their standard of living might stay down as compared to other countries. One more thing is that, during a very low inflation, the country can be experiencing a recession. Recession might not be internally, but in comparison with the other countries. But this hardly happens Now we will consider the disadvantages of inflation. If we consider inflation from another dimension, it can be as negative as possible. If prices rise in a country too much there could be multiple chaoses. First of all, the prices of all commodities will go high. This will lead to three consequences. Firstly, the standard of living of people will decrease as they will be able to afford very few luxuries or necessities. Secondly, there real income will decrease. This means that the ability to purchase or the purchasing power of a person will go down. When purchasing power will go down, there will be a less demand for all products. This will decrease the aggregate demand for products, and in turn decrease the countrys GDP. This will affect the foreign return of a country, and they might have to use up reserves to bridge the deficit in GDP. The employment will also go down, and the economy would also be pulled in to recession. So you see how one factor can ignite other one and cause an economy to get crushed.

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