Presentation of inflation and Rwandan economy
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The document provides a comprehensive overview of inflation, including its definitions, types (creeping, running, hyper), causes (demand-pull and cost-push), and effects on the economy. It also outlines various control measures such as fiscal and monetary policies to manage inflation. Additionally, it presents statistics on the inflation rate in Rwanda from 1997 to 2015, highlighting significant fluctuations.
Presentation of inflation and Rwandan economy
- 2. Contents : A glimpse of what is to come Meaning and Definitions Types of Inflation Causes of Inflation Effects of Inflation Control Measures Present Scenario of Rwandan Economy
- 3. Meaning of inflation In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. In a broad sense, inflation is that state in which the prices of goods and services rise on the one hand and value of money falls on the other.
- 4. Definition of Inflation According to Prof. Samuelson “inflation occurs when general level of prices & cost are rising”. “Inflation is an increase in the quantity of purchasing power.”– Gregory Inflation is the stage of too much money chasing too few goods.”-- Coulbourn
- 5. Types of Inflation 1. Creeping Inflation 2. Running Inflation 3. Hyper Inflation
- 6. 1. Creeping Inflation “When the rise in prices is very low like that of a snail or creeper, is called Creeping Inflation” Here the inflation rate is upto 5% The general level of prices rise at a moderate rate over a long period of time
- 7. 2. Running Inflation Running inflation has inflation rate between 8-10 %. A sense of urgency needs to be shown in controlling the running inflation. Persistent running inflation reduces the savings in the economy and results in slowdown in economic growth.
- 8. 3. Hyper Inflation Prices rise very fast at double or triple digit rate. Also called Runway or Galloping Inflations This type of inflation is witnessed in the past in many countries. Many Latin American countries like Argentina and Brazil had inflation rates of 50 to 700 percent per year in the 1970s and 1980s. Many developed and industrialized countries like Italy and Japan also witnessed the hyper inflation in the past.
- 9. • Pricing Power Inflation: Pricing power inflation is more often called as administered price inflation. This type of inflation occurs when the business houses and industries decide to increase the price of their respective goods and services to increase their profit margins.
- 10. Causes of inflation There are two main causes for inflation which is stated as below: • Demand-pull inflation • Cost-push inflation
- 11. Demand Pull Inflation: The demand for goods and services increases and production remains the same or does not increase as fast. The excess demand results in prices being “pulled up”. Demand pull inflation occurs when total demand for goods and services exceeds the total supply. This type of inflation happens when there is an inflationary gap
- 12. Causes of Demand Pull Inflation : increase in consumption, perhaps expectations of future inflation. increase in investment caused by falling interest rates or expectations of a booming economy. increase in government spending or a decrease in taxes, either of which would boost deficit spending. increase in exports to other nations or a decline in imports from other nations.
- 13. Demand Pull Inflation Graph
- 14. Cost Push Inflation: • Cost push inflation explains the causes of inflation origination from the supply side. • It is caused by an increase in the cost of production. Increased costs “push up” the price level. • This occurs when costs of production or operation are increasing.
- 15. Cost Push inflation is mainly caused due to the following factors: increase in wages. increase in cost of raw materials increased cost of imported components (import-push inflation)
- 16. Cost Push Inflation Graph
- 17. Effects of Inflation Effect depends on the speed of inflation and the nature of the economy. – Rising prices of imports – Lowers national saving – Redistribution of Income & Wealth – Collapse of Monetary system – Adverse impact socially and politically – Discourages Investment & savings – Higher Interest / Income tax rates
- 18. Control Measures
- 19. Measures to control Inflation • Fiscal Measures • Monetary Measures • General Measures
- 20. Fiscal measures Increase in direct taxes. Increase in indirect taxes. Reduce government spending. Introduce measures to increase productivity, e.g. tax rebates and subsidies. Surplus Budget.
- 21. Monetary Policy: Increase interest rates of banks. Decrease money supply. Decrease availability of credit from banks. Issue of new currency. Credit Control.
- 22. Increase productivity. Freeze prices and wages. Implement a wage restraint policy. Encourage personal savings. Implement control measures for consumer credit. Import control: make competing imported goods cheaper. Introduce price indexation: linking all prices to a particular index, e.g. CPI. General Measures
- 23. Meaning of Inflation Rate • The inflation rate is a measurement of the rise in price of a good or service over a period of time reflected as a percentage. It is usually measured on a monthly and annual basis. • The inflation rate is the percentage rate of change of a price index over time.
- 24. Calculation of Inflation Rate • The inflation rate is widely calculated by calculating the movement or change in a price index, usually the consumer price index (CPI) • In order to calculate the inflation rate for any product or service, you will need the price of the goods or services for the two periods of time, then use the following formula to calculate the inflation rate: Inflation Rate = ((T2 - T1)/T1) x 100
- 25. • Inflation Rate = ((T2 - T1)/T1) x 100 Where T1 = Price for the first time period or the starting number T2 = Price for second time period or the ending number
- 26. For Example Let's assume that average price of the 32-inch flat screen television was $400 last year but is $410 this year. What's the annual rate of inflation for 32-inch flat screen televisions? • Inflation Rate = ((T2 - T1)/T1) x 100 Inflation Rate = ((410-400)/400 x 100 Inflation Rate = (10/400) x 100 Inflation Rate = 0.025 x 100 Inflation Rate = 2.5% increase compare to last year
- 27. • Present Scenario of Rwandan Economy The inflation rate in Rwanda was recorded at 0.20 percent in February of 2015. Inflation Rate in Rwanda averaged 6.23 percent from 1997 until 2015, reaching an all time high of 28.10 percent in February of 1998 and a record low of -15.80 percent in February of 1999. Actual Previous Highest Lowest Dates Unit Frequency 0.20 0.40 28.10 -15.80 1997 - 2015 percent Monthly Feb 2009=100
- 28. Rwanda Inflation Rate from 1994 - 2014