Thursday, 5 July 2012

Inflation and developing economy

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As an economy develops the per capita income also increases. Benefits of the development start reaching the bottom of the economical structure. Their purchasing power and thus demand increases, this increases the price. Increase in the price pushes them to earn more. They become more efficient to earn more to meet their requirement. Hence contributes in the development. Inflation causes the development. According to a Times report, inflation had been used as the tool by the Latin American governments for the economical development.
When the inflation becomes higher, government starts spending more on curbing inflation than development works. Giving subsidized food to the poor usually controls food inflations, which costs more for the government. The central bank increases the lending rates, which in turn pressurizes the banks to push their products at higher interest rate. The growth slows down.
Most challenging problem in the developing economy arises when it faces the problem of wage-price-spiral. When the economy develops, the industries see prosperity the workers demand for higher wage. Higher wages increases the cost of the products. Hence the manufacturer and the service providers increase the price of the product. This in turn affects the society and again a demand for the higher wage. This cycle is called as wage-price-spiral. Presently Indian economy is facing this problem and central bank accepts it is very difficult control wage-price-spiral.
Moderate inflation is always good for the developing economy. But development should not be an excuse for the central government and central bank for its failure to curb the problematic inflation.
Inflation is the second nature of developing economy. But development should always be the first nature.

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