Unacademy UPSC Inflation notes (for Prelims) by Ayussh Sanghi

INFLATION AND DEFLATION (Download the complete notes)

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“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” Ronald Reagan, President of USA (1981 – 1989) Mr. Reagan quoted the above amidst USA being in it’s worst economic scenario since the Great Depression of 1930’s. Many of us are aware of the term inflation or “mahangayi” as it is an overused term in context of Indian Economy. But most of us do not quite understand the what it reveals. The figures thrown around are very high at times. Whenever the inflation figures are more than normal (acceptable), there is a huge hue and cry among politicians, government officials and especially consumers. All stakeholders start their blame game but nobody cares for explaining the figures and it’s impact on the economy as a whole. It is interesting to note that inflation is an everyday phenomenon with most countries experiencing it, but inflation (concept) tends to grab the headlines more often than deflation. By reading this section you will understand the economic jargon pertaining to inflation, it’s use and it’s implication on the economy.

Before understanding inflation let’s understand certain basic concepts: INDEX- Index number is defined as the relative change in the value of a variable. When index number is compared with a standardized value or base value over a period of time, the change represented in the index. PRICE INDEX – It is an index number used to measure the variation in the prices in the economy for a given period of time. Price index is two types: General Price Index and Consumer Price Index. [Refer graphic below]