Economics Ch 06 – Inflation & Price Index

1. Inflation

Inflation = A **sustained rise in the general price level** of goods and services over a period of time. As prices rise, the purchasing power of money falls.

हिंदी: Inflation = महंगाई – जब सामान्य रूप से ज़्यादातर चीज़ों के दाम एक समय अवधि में लगातार बढ़ते रहते हैं।

2. Deflation & Disinflation

Deflation:

Opposite of inflation.
General price level falls over time.
Often linked with fall in demand and economic slowdown.

Disinflation:

Prices are still rising, but at a **slower rate**.

3. Causes of Inflation (Simple)

Demand-pull inflation: when total demand > total supply.
Cost-push inflation: when production costs (wages, raw materials) rise and push prices up.
Excess money supply, high government spending, etc.

हिंदी: Demand ज़्यादा, supply कम → दाम ऊपर (demand-pull) Cost ज़्यादा (wages, raw material) → दाम ऊपर (cost-push)

4. Price Index – CPI & WPI

To measure inflation, we use **price indices**:

CPI – Consumer Price Index
WPI – Wholesale Price Index

They track changes in the price of a basket of goods over time.

4.1 Consumer Price Index (CPI)

Measures price changes from the point of view of consumers.
Based on a basket of goods and services consumed by households.
Used to measure **retail inflation**.

4.2 Wholesale Price Index (WPI)

Measures price changes at the wholesale level (bulk trade).
Includes prices of primary articles, fuel, manufactured goods etc.
Used earlier as main inflation indicator; now CPI also very important.

हिंदी Trick: CPI = Consumer level की महंगाई (retail) WPI = Wholesale level की महंगाई

5. Effects of Inflation (Short NDA View)

Reduces purchasing power of money.
Hurts fixed income groups (pensioners, salaried employees).
If moderate, may encourage production and growth.
If very high (hyperinflation), can be dangerous for economy.

📘 Practice Questions (NDA Style)

1. Inflation refers to:
a) Continuous fall in prices
b) Continuous rise in general price level
c) One-time increase in prices
d) Increase in production only

2. Which of the following measures retail inflation?
a) WPI
b) CPI
c) GDP
d) GNP

3. Demand-pull inflation occurs when:
a) Total demand exceeds total supply
b) Total supply exceeds total demand
c) Wages fall
d) Money supply contracts

4. Wholesale Price Index (WPI) measures price changes at:
a) Consumer level
b) Retail level
c) Wholesale / bulk trade level
d) Government level

5. Deflation means:
a) Fall in general price level over time
b) Rise in general price level
c) Rise in GDP
d) Rise in foreign trade

Answers:
1 – b) Continuous rise in general price level
2 – b) CPI
3 – a) Total demand exceeds total supply
4 – c) Wholesale / bulk trade level
5 – a) Fall in general price level over time

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