Understanding the Concept of Inflation

Understanding the Concept of Inflation

Introduction

Measuring performance of an economy is not an easy task. It can be measured with the help of different economic indicators.There are various economic indicators that can be used to understand how well an economy is performing. Such indicators are used to explain different aspects of an economy. For example, Gross Domestic Product (GDP) helps us in understanding the overall growth of an economy as compared to previous year. In this assignment we are going to discussinflation and its historical occurrence in the American economy (Dornbusch, R., 1991)

Discussion

1. Inflation Rate

Increase in the general price level of the products and service in an economy over a specific period of time is known as inflation. The value of dollar diminishes when there is inflation. There in not a single reason that causes inflation. However, there are two theories explains occurrence of inflation; 1- Cost Push Inflation (Inflation that take place due to rise in the input prices). 2- Demand Pull Inflation (Inflation that occurs due to increasing demand for a product or service, inflation occurs when there is a high demand for a product or service).

2. Understanding the Inflation Rate

Details of the selected variable (inflation) is given below, such information will assist the reader in developing its knowledge regarding the inflation rate.

Types of Inflation

There are various types of inflation such as Stagflation, hyperinflation and deflation. Stagflation (it arises when prices are increasing but economy is not, it is time for economic stagnation). Hyperinflation (enormously rise or out of control inflation, Germany faced hyperinflation between 1922 and 1923). Deflation (it occurs with a sudden decline in the prices of a commodity, deflation is much dangerous than the inflation).

Effects of Inflation

There are three effects of inflation; general, positive and negative. General effect (inflation ...