We all are fond of buying our favorite goods from the market and sometimes we are willing to pay any price for them. However, when the prices of our favorite goods rise suddenly we often find ourselves complaining. This sudden rise in prices of commodities is called as inflation and it is a very significant topic for your banking awareness.
IBPSExamAdda.org.in is here with its latest banking awareness 2015 material and banking awareness PDF download available for you. We leave no stone unturned to help you in improving your banking awareness.
Banking Awareness: Significance of Inflation
As said earlier, Inflation is a sudden rise in the price of goods; it is a situation where the same amount of money can buy lesser goods than before. However, a mild inflation is necessary for the economy as it encourages the producers to produce more. However, if there was no rise in prices then the producers would not be encouraged to produce which would be disastrous for the economic growth of the country. Also the employment levels would fall as if the producers do not wish to produce more they would stop hiring people for production and therefore there would be unemployment in the economy. Hence, a certain level of inflation is necessary to keep the economy healthy.
Causes of Inflation
1. Increase in Demand:
When the demand of a commodity rises, its supply becomes less and therefore there is a rise in the price of the commodity. As firms reach full capability, they increase the prices of goods which leads to inflation.
2. Increase in costs for the firm:
If there is an increase in costs of the firm such as that of raw material or labor then the firm passes on this loss to the consumers. It increases the price of the product in order to cope up with the increased cost price and hence there is a situation of inflation in the economy.
3. To increase firm’s profits:
When a company wishes to increase its profit margins it increases the prices of the commodities so that there is more money received on the product and the profits are increased. If the prices of the commodities rise, the situation of inflation prevails in the economy.
4. Increase in taxes:
If the government increases the taxes required to be paid by the company the cost of production for the company will increase. Therefore the company would accommodate this cost of production in the price of the commodity and the price of the commodity will increase causing inflation.
5. Printing of more money by the central bank:
If the central bank prints more money, then a situation of inflation is expected n the economy as printing more money leads to an increase in the money supply in an economy and money supply plays a vital role in determination of prices. Increased money supply to buy the same amount of goods would lead to a rise in prices.
How to control Inflation?
Click here for how does RBI control inflation article.
1. Reducing the rate of growth of population:
Inflation is caused by an increase in demand and therefore if there is less demand then it can control the situation of inflation. Reducing the rate of growth of population is a vital way of controlling inflation as if there are less people, the goods demanded would be less and therefore inflation can be controlled.
2. Cutting production costs:
If companies try to cut their cost of production then they can sell their products on a lower price, his will not only lead to increased sales for the company but, it will also control inflation prevailing in the economy.
3. Increase in savings:
Increased savings on the part of the people would lead to lesser disposable income with them. When people spend less, they will demand less and therefore the prices of the commodities will come down thereby controlling inflation.
4. Increase in production:
Increased production would lead to excess supply and less demand thereby causing the price of the goods to come down. Hence, by increased production, the problem of inflation can be combated.
We hope we gave you adequate information of the meaning, significance and causes of inflation along with the steps to overcome it. Keep reading for more banking awareness knowledge and our primary motto is to enhance your banking awareness for the upcoming IBPS exams.
All the best!