The problem of inflation Essay Example

Russian inflation;- The study of the inflation forecast in Russia.The object of study is the Russian economy.Are the subject of inflation in the Russian economy.

This course consists of an introduction, two chapters, conclusion bibliography. Information basis of writing work are regulations, the fundamental works of modern economists, these online resources.Chapter 1. Theoretical aspects of inflation1.1 Inflation as a form of macroeconomic instabilityThe term "inflation" began to be used for the first time in North America during the Civil War, 1861-1865. Under-inflation then began to realize the overflow channel monetary money signs leading to the depreciation of money and an increase in the general price level. This understanding of inflation persisted for over 100 years, despite the clarifications made to him.Inflation (inflation - inflation, flatus) - a phenomenon unique to the paper money circulation, which means the overflow of the circulation of excess to requirements turnover mass of paper money, their impairment and, as a result, higher prices for goods and services that fall in the purchasing power of money .

That is, inflation is caused primarily by an overflow channel of monetary circulation of excess money supply in the absence of adequate increase of the mass of commodities. With increasing inflation money harder to function, maintain circulation of goods and services, payment transactions, etc. Originating in the unbalanced money market, inflation does not stay long there, and spreads further, affecting production and consumption.Proponents of classical (monetary) concept, consider a self-regulating market system, to treat only the inflationary rise in prices, which is caused by monetary disorder and overflow channels of monetary excess supply of money. All other changes in prices caused by the natural seasonal

and other fluctuations in supply and demand, changes in the conditions of production of goods, the impact of external economic relations, etc., are considered non-inflationary, the servants of the mechanism of market self-regulation without government intervention. The classical concept thus considers inflation purely monetary phenomenon, single-factor phenomenon. Keynesian view of the market mechanism emphasizes its limited adaptive capacities, unilateral price elasticity.

In these circumstances, any increase in prices rather irreversible and marks the beginning of inflation, passing inflationary impulse to the price system.During inflation, paper money depreciates against:a) to the gold;b) to goods;c) to foreign currencies.As a result, in the first case there is an increase in the market price of gold paper money. In the second case, rising prices of goods. In the third case, the currency falls relative to foreign monetary units, maintain the real value or impaired to a lesser degree.Getting into the economy, inflationary money is concentrated on the demand side. If this occurs regularly, there is a persistent gap between aggregate demand and aggregate supply, inflationary imbalances markets. Note that the mismatch between supply and demand in a market economy are quite common but usually are temporary and observed in only a few sectors.

They overcome the market mechanism through price fluctuations, reallocation of resources, changes in the volume of sales and purchases. Such mismatches nothing inflationary. When the imbalance of supply and demand is delayed for a long time, becomes a feature of many markets and macroeconomic becomes, it is clear signs of inflationary process.In real life, inflation is seen as increasing the general level of prices. However, not every price increase is inflationary. Thus, the cost-effective price increase

will be due to improved product quality, deteriorating conditions of extraction of raw materials, changes in the structure of demand. Increased costs of research and development, raw materials, changes in the value of demand - this is a natural phenomenon that inherent in any economy and cause a rise in prices of individual goods and services. However, the systematic increase in commodity prices without improving their quality characteristics due to inflation.

So do not just rising prices - inflation and the need of all the reasons for price increases really highlight inflation.At constant price increases there is a decline in real incomes, as the increase in prices ahead of income and in the same amount of money can buy fewer goods, is the fall in purchasing power of money. Therefore, inflation can be defined as a process of devaluation of money, or, figuratively speaking - a situation where too much money to "hunt" for fewer goods.Therefore, we can see that inflation has serious negative economic consequences, as does considerable damage to the state's economy, reducing its effectiveness and creates a lot of social problems (unemployment, declining living standards, etc.).Thus, inflation - is a complex multifactorial phenomenon, which is characterized by impaired reproductive process, is the result of macroeconomic instability, an imbalance between aggregate demand and aggregate supply and the inherent economics, using paper money circulation.The root causes of inflation are both in circulation and in the production and often are caused by economic and political relations in the country.The factors of currency include: overflow of the circulation overweight money through excessive creation of money used to cover the budget deficit, a glut of credit economy,

methods of government in support of the national currency, the limitation of motion, etc.

For non-monetary factors of inflation include: factors related to structural imbalances in social reproduction, with costly mechanism of management, government economic policy, including tax policy, price policy, foreign economic activity, etc.The causes of inflation are classified as on internal and external. The internal factors include:A) public deficit associated with the growth of government spending;B) a high level of unproductive government spending, particularly military;B) disparities at the micro-and macroeconomics, is a manifestation of the cyclical nature of the economy;D) errors in the government's economic policy, and others.External causes of inflation are:• Structural Global Crises (raw materials, energy, food, etc.), which are accompanied by repeated price increases for raw materials, oil, food, etc. This growth was the reason for the sharp increase in prices monopolies on their products;• currency exchange banks for foreign exchange is the need for more paper money that fills channels of money and leads to inflation.The velocity of circulation of money in a period of inflation determined by the following factors:Consumer-inflation of the ruble, due to a loss of state control over income and prices, resulting in increased consumer resources of money, deposits in savings banks:-Inflation investment appreciation due to the adoption of the economic programs that are not guaranteed real resources, lack of which was accompanied by a rise in prices.With such inflation occurs conditional balance of losses and gains (tab.

1.1).Table 1.1 - The balance of losses and gains in a period of inflationPossible LossesPossible Gains1. Employees, where the salary stipulated for a period.2. Loans that provided long-and medium-term loans at fixed interest.3.

Recipients of fixed payments: rent, utility

rates (stipulated by the contract.)4. Persons storing cash in "egg capsules."1. With rising inflation profitable to borrow.2. Investments in real estate, paintings etc.3.

The government may have certain "benefits" associated with an increase in tax revenues from personal income.4. Advantageous to convert domestic currency into foreign currency.At constant price increases there is a decline in real incomes, as the increase in prices ahead of income and in the same amount of money can buy fewer goods, is the fall in purchasing power of money. Therefore, inflation can be defined as a process of devaluation of money, or, figuratively speaking - a situation where too much money to "hunt" for fewer goods.Therefore, we can see that inflation has serious negative economic consequences, as does considerable damage to the state's economy, reducing its effectiveness and creates a lot of social problems (unemployment, declining living standards, etc.).1.

2 Main types of inflationClassification of inflation occurs for various reasons. There are kinds and forms of inflation:1. In the expression of isolated creeping inflation, galloping inflation and hyperinflation. Creeping inflation - inflation, reflected in a gradual long-term increase in prices when the average annual rate of price growth of 5-10%. Galloping inflation - inflation in the form of an abrupt rise in prices, when the average annual rate of price growth is 10 to 50%. Hyperinflation - inflation with a very high growth rate of prices when the price increase more than 100% per year.2. Inflation on the forms of manifestation is open and hidden.

Open inflation - inflation is due to the free growth of prices of consumer goods and industrial resources. Hidden (suppressed) inflation - when inflation is caused

by trade deficits, accompanied by the desire of the state to keep the price the same. In this case the "washout" of goods in open and flow them into shadow, "black" markets, where prices are rising. Repressed inflation generated by the activities of the state wrong. For example, introducing them to a temporary freeze of incomes and prices, upper limits of their growth, the desire to keep the dynamics of wages at a level not to exceed the growth rate of labor productivity or total administrative control of prices and costs. These actions caused unnatural monopolies and administration in the areas of pricing leads to deep strain of market mechanisms, which, of course, does not eliminate inflation, but changes its form of expression. First of all, this is expressed in a terrible shortage of goods and services. Deficit, in turn, leads to a change in the psychology of consumers and producers.

But the main evil that is repressed inflation - is depriving manufacturers of price incentives that undermine the deployment of the investment process, the expansion of production and supply. Since the dependence of prices on the demand disappears, investors lose orientation and sectoral distribution of financial, material and human resources is clearly not optimal. So, repressed inflation poses the greatest danger to the normal economic life of the country.3. By means of a distinguished demand pull inflation and offers.- demand inflation. Observed in the case when aggregate demand exceeds production. Demand inflation is represented graphically in Figure 1.

2Figure 1.2 Graphical model of inflation of demandInflation offers (costs). The rise in prices due to increased production costs in terms of unused inputs. Higher costs per

unit of output reduces the producers of products offered at the current price level. Graph of inflation offers can be seen inPicture 2.Picture 1.3 – Graphical model of inflation costs4. According to the degree of balance emit balanced and unbalanced inflation.

At first the prices of various goods to each other remain unchanged, and in the second-price different products are constantly changing in relation to each other in various proportions. Unbalanced inflation is much more common and is a great disaster for the economy as chaos rising prices complicates the orientation and assessment of the economy for the citizens, businesses and investors.5. For predictability divided into expected and unexpected inflation. First predicted and expected advance, the second - no. This is more dangerous than expected, because individuals and economic agents do not have time to prepare for it, which can be fraught with partial or complete loss of savings. Unexpected inflation disrupts the economy can lead to panic, instability deters foreign investors, so it is assumed major flaws of the government.6.

Depending on the duration of the impact of inflation on the economy distinguished: chronic inflation, stagflation and deflation.Chronic inflation is a long time and does not change the basic parameters of a gradual increase in the prices of goods and services, which is almost impossible to overcome. Stagflation is the impact of inflation, followed by a general decline of industry in the economy. Deflation is the reverse process of inflation, and is expressed in lower prices and increase the purchasing power of the monetary unit.In practice, it is not easy to distinguish one from another type of inflation. They closely interact. Therefore, the growth

of wages, for example, might look like and how inflation is demand and supply as inflation. Thus to obtain a more complete picture of inflation is necessary to study the classification of the phenomenon and competent to determine its type.

1.3 Socio-economic effects of inflationIn economic practice market entities is not only fully and correctly measure inflation, and therefore assess its impact and adapt to them. Inflation generally has a destabilizing effect on the economy. Even small growth rates can lead to significant economic and social consequences.Inflation has contradictory effects on growth. A slight inflation (3-4% per year) can temporarily stimulate economic development. Moderate growth is the rise of income and aggregate demand, which creates opportunities for businesses to expand production, involvement in the production of unused labor and material resources. Weak inflation may be a means of enhancing the business of life and the reduction of unemployment.

Failure to follow the same steps that lead to far-reaching negative consequences for the economy. During inflation the market pricing mechanism distorted that provides all businesses information on the value of the economic cost of production and sale of various products as well as changes in public demand for them. General rise in prices causes a "flight from money" to expensive goods, regardless of the actual need for them, which distorts the structure of consumer demand. Producer loses right direction in the development of production. As a result, there are numerous economic imbalances, slowing the introduction of new technology, decreases the efficiency of resource use. Race prices, their uneven disrupt economic relations in society, destroying the existing relationship between the economic actors. All this affects the rate of economic

development and its quality.Another consequence - lag in prices of public enterprises on market prices.

In the state (regulated) sector of the market economy in production costs and prices of goods are revised less frequently and for longer than in the private sector. In terms of inflation each increase their prices SOEs must justify, receive permission to do so all the parent organizations. It is long and inefficient. With monthly sharp, unexpected and abrupt rise in inflation this mechanism even technically difficult to implement. As a result, increases the imbalance of the private and public sectors, the state loses its economic potential market impacts. This effect is particularly dangerous.Inflation also reduces the money savings. Price increase leads to an impairment of deposits and lower yield savings.

Savings brings less and less real income. At some stage, the pace of price growth can outstrip the rate of interest and give it a negative value. In these conditions, conservation loses economic sense. Population and corporations seek to materialize their rapidly depreciating money supply. Companies are developing plans to enhance the use of financial resources. With the development of inflation, investors (in order to protect their savings) and submit them for the purchase of high-yield securities, foreign currency, property - real estate, jewelry, works of art, and consumer durables. Accumulation in the society bought primarily commodity-material form. Most of the population that does not have the possibility to use their savings, sends them to increase current consumption and demand.

The deficit is growing in parallel with the "glut" warehouses of enterprises and organizations, cluttering apartments population.The loss of monetary incentives for savings disrupt monetary system. Provision of funds

for loan becomes profitable and beneficial to the creditor to the debtor. Credit obtained a full money back impaired. In these circumstances, reduced the share of long-term and medium-term loans. Implementation of long-term investment is risky.Inflation has a negative impact on investment. Reduction savings in the community and long-term lending curtailment of production leads to a reduction in investment.

With the loss of stable sources of funding entrepreneurs refrain from implementing major investment projects, especially with a long payback period. Inflation distorts the structure and investment. Is the flow of capital from the production to the trade and the area of ââspeculative financial transactions. Disinvestment leads to technical and technological backwardness and cost increases, which in turn stimulates the inflation in the country.Inflation affects the state of public finances. On the one hand, financing the budget deficit by increasing the money supply the government imposes a specific population of the inflation tax. Using the increased money supply to pay for goods and services purchased, the government reduces the real purchasing power of the money placed in the hands of the people. This means the actual seizure of their real income to the state.

Besides, inflation helps the state to address the problem of domestic debt, allowing it to pay its obligations depreciated money.On the other hand, inflation devalues ââthe tax revenues that are not in a position to really meet the growing government spending. The government was forced to seek additional funds for this purpose, including the use of money. This is even more spins the inflationary spiral and destabilize the financial system of the country. In these circumstances, the economic levers of state regulation

of the economy loses efficiency, reduced public confidence in government efforts to weaken the power structures in general.Another consequence of inflation - the instability and lack of economic information, hindering development of business - plans. Price is a leading indicator of the market economy. Pricing information - the main business.

At the same inflation rates are constantly changing, buyers and sellers of goods is increasingly mistaken in choosing the optimum price. Falling confidence in future income, the population loses its economic incentives, reduced business activity.Next effects of inflation - the real money interest rate is reduced by the annual percentage increase in inflation. And finally emphasize that inflation is almost always combined with high, although part-time work and a large amount of national production. Conversely, a decrease in inflation coincided with the decline of production and rising unemployment.The negative effects of inflation evident in the field of foreign relations. Inflation has a negative impact on the balance of payments of the country, leading to a depreciation of the national currency, creating problems of repayment of foreign debt. With rising prices in the domestic market is declining exports and rising imports.

The balance of payments is negative. For the balance of payments the state has to use foreign exchange reserves, and then, when the reserves are exhausted, devalue the currency. The latter measure although increases export opportunities for the economy, but creates difficulties in the development of end-uses of imported goods or raw materials. In addition, the devaluation makes it extremely difficult external debt: to return the unit of foreign currency requires increasing the number of units of the national currency.An important consequence of inflation is

to redistribute income. With rising living standards reduced the general population by reducing its real income. However, different social groups have different degrees of loss from inflation. First, the rise in prices affects persons who receive fixed incomes, pensioners, students, the unemployed.

Government measures to the indexation of pensions, allowances, benefits, tend to lag behind the increase in prices. Significant losses are almost all persons employed in the public sector. Wages, especially of education, science, culture, etc., always grows more slowly than prices. This reduces their motivation to work. Is the movement of labor from these socially important spheres in more profitable sectors.Deterioration of living conditions mainly from representatives of social groups with solid income (pensioners, employees, students, whose revenues are from the state budget).People with fixed income can benefit from inflation, as this category of increase in nominal income can grow faster than prices.

In addition to being more affluent sections of society which are not available in the preservation of their savings and income by purchasing real estate, foreign currency, objects of art, securities.In general, high inflation reduces the real possibilities of the effective functioning of the national economy, deteriorating conditions of most of the population, deepening economic inequality between men and exacerbates social tensions.Chapter 2. Inflation in Russia and anti-inflation policy of the state2.1 Problems to maintain inflation rates in RussiaThe problem of reducing the rate of inflation is the most relevant in the Russian economy. Despite the improvement in macroeconomic indicators, the need to further reduce the rate of inflation, which is much higher than in many other countries, is still needed.Many experts, scholars and practitioners, distinguish the following problems of

reducing the rate of inflation in Russia and offer solutions:1. One of the main problems of reducing the rate of inflation in the Russian economy is the dependence of domestic energy prices on world oil prices.

In Russia, creation of a stabilization fund created incentives to encourage exports instead of concern for domestic energy prices and the consumer, so we can say that the very Russian legislation promotes communication growth of domestic prices to world prices.Experts suggest not to allow domestic prices for raw materials and energy prices following the world through the use of export duties and taxes.2. A factor of formation of cost inflation has been highlighted - rising prices for natural monopolies and utility tariffs. So in 2005, while consumer prices by 10.9% of the price for paid services, which play a significant role tariffs of natural monopolies and utilities, increased on average by 35%. This situation is, therefore, cost inflation and blocks the development of industries in non-fuel and energy complex.In addition, it should be noted that the reduction of VAT rates and the abolition of the sales tax does not contain prices.

This indicates a low price elasticity at lower cost producers and sellers, and therefore ineffective as anti-inflationary tool.As measures to fight inflation costs can be used: the use of anti-trust action against the natural monopolies and public utilities, ensuring effective control over the prices.