Causes of inflation in different countries or groups of countries

Causes of inflation in different countries or groups of countries.

to describe the main theories of causes of inflation found in scientific literature;

to analyze chosen countries through different indicators in terms of inflation;

to find out how each economic indicator affects inflation growth;

to analyze what are the differences between inflation causes in countries with same and with different currency;

to compare theories found in scientific literature with results obtained in situational analysis;

Inflation is not only nowadays modern world economic problem. The features of inflation began to emerge when the exchange systems started to develop (Don Paarlberg, 1993). An approach to inflation in different stages of economic development varied. In 1776 Adam Smith in his book “The Wealth of Nations” stated that price fluctuations does not change the actual price, and although the nominal price falls or rises, it is admitted that inflation often has different effects. Karl Marx in his theory money, described in “Capital”, understood inflation as a process, when a large change in the value of money causes a large change in the general price level. Even at the beginning at the 20th century inflation was seen as exclusively negative economic process. However, John Maynard Keynes in 1936 expressed his positive attitude to inflation. Inadequate low consumption rate and surplus in savings stops circulation of money and this can lead to economic decline or even crisis according to J. M. Keynes. Positive effect of inflation here is growing consumption because within a time the value of the money diminishes. At high inflation it is advised to increase consumption and investments as these promote economic growth. Therefore, J. M. Keynes believes that policies, which promote flexibility in the price levels, affects positively economic development, and vice versa, policies hindering price flexibility, hinders economic development as well.

Inflation is decline in the total value of money or purchasing power. It is a general rise in the price equivalent. Inflation erodes both macro and micro economy and the higher inflation rate the more rapidly people impoverishes. Changes of value in money can only be determined by aggregate changes in price levels. However, to measure inflation, firstly need to form consumer goods basket consisting of a certain quantity of goods and services, which price reflects the best economic trends. The price of this market basket once in a while is compared with a base year price. As a result it is obtained a price index that shows a current price of market basket as a percentage of a base year price (Consumer Price Index Manual by International Labour Office, 2004).

There are a lot of indexes that economists use to measure inflation such as Consumer Price Index, Gross Domestic Product deflator, Producer Price Index, Purchasing Price Index of Agricultural Production, Building Price Index and much more. In this paper, I discuss two of the most important and most frequently used price indexes. Consumer Price Index the most widely and commonly used to measure inflation. It measures average price level of purchased market basket. Gross Domestic Product deflator measures inflation for consumers, governments and other institutions that provide goods and services to consumers.

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  • Causes of inflation in different countries or groups of countries
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Causes of inflation in different countries or groups of countries. (April 4, 2017). Reviewed on 09:24, April 11 2021