EFFECTS OF INFLATION ON ECONOMIC DEVELOPMENT

BY: HAMIZA NIZAM [ROLL NO. 17]

INFLATION
DEFINITION
Inflation is a term used by economists to define broad increases in prices. Inflation is the rate at which the price of goods and services in an economy increases. Inflation also can be defined as the rate at which purchasing power declines. For example, if inflation is at 5% and you currently spend $100 per week on groceries, the following year you would need to spend $105 for the same amount of food. Economic policy makers like the Federal Reserve maintain constant vigilance for signs of inflation. Policy makers do not want an inflation psychology to settle into the minds of consumers. In other words, policy makers do not want consumers to assume that prices always will go. Such beliefs lead to things like employees asking employers for higher wages to cover the increased costs of living, which strains employers and, therefore, the general economy. In other words, the rate at which the general level of prices for goods and services is rising, and, subsequently the purchasing power falls, is called inflation. Central banks attempt to stop severe inflation along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. In mainstream economics, the word inflation refers to a general rise in prices against a standard level of purchasing power. Previously, the term was used for an increase in the money supply, which is now referred to as expansionary monetary policy.

HOW IS INFLATION MEASURED?

Inflation is measured by comparing two sets of goods at two points in time and computing the increase in cost, not reflected by increase in quality. Measuring inflation is a difficult problem for government statisticians. To do this, a number of goods that are representative of the economy are put together into what is referred to as a "market basket." The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a

percentage of the cost of that identical basket in the starting year.

INFLATION AND INTEREST

Whenever you hear the latest inflation update on the news, chances are that interest rates are mentioned in the same breath. In the United States, interest rates are decided by the Federal Reserve. The Fed meets eight times a year to set short-term interest rate targets. During these meetings, the CPI and PPIs are significant factors in the Fed's decision. Interest rates directly affect the credit market (loans) because higher interest rates make borrowing more costly. By changing interest rates, the Fed tries to achieve maximum employment, stable prices and a good level growth. As interest rates drop, consumer spending increases, and this in turn stimulates economic growth. (To learn how trade currencies using these economic reports, read Forex Walkthrough: The Fed.) Contrary to popular belief, excessive economic growth can in fact be very detrimental. At one extreme, an economy that is growing too fast can experience hyperinflation, resulting in the problems we mentioned earlier. At the other extreme, an economy with no inflation has essentially stagnated. The right level of economic growth, and thus inflation, is somewhere in the middle. It's the Fed's job to maintain that delicate balance. A tightening, or rate increase, attempts to head off future inflation. An easing, or rate decrease, aims to spur on economic growth.

EFFECTS OF INFLATION ON ECONOMIC DEVELOPMENT

Inflation effects both economy of a country and its social conditions. The effects of inflation on economy are described below: 1. TIME VALUE OF MONEY Price inflation has immense effect on the TIME VALUE OF MONEY (TVM). This acts as a principal component of the rates of interest, which forms the basis of all TVM calculations. The real or estimated changes occurring in the rates of inflation lead to changes in the rates of interest as well.

2. TREASURY Inflation exerts economic impact on the treasury of a nation as well. In USA, Treasury inflation-protected Securities (TIPS) ensures safety to the American government, assuring the oublic that they will get back their money. Howerver the rates of interest charged by TIPS are less compared to the standard Treasury notes. The most immediate effect of inflation is the decrease in the purchasing power of currency and its depreciation. Inflation influences the investments of a country. 3. INCOME ALLOCATION Inflation changes the allocation of income. This exerts maximum effect on the lenders than the borrowers at the time of persisting inflation, because the loans sanctioned previously are paid back in the form of inflated currency. Inflation leads to a handful of customers in making the extensive speculation, to derive advantage of the high price levels. Since some of the purchases are high-risk investments, they result in diversion of the expenditures from regular channels, giving birth to a few structural unemployments. 4. INFLATION AND INVESTMENTS When it comes to inflation, the question on many investors' minds is: "How will it affect my investments?" This is an especially important issue for people living on a fixed income, such as retirees. The impact of inflation on your portfolio depends on the type of securities you hold. If you invest only in stocks, worrying about inflation shouldn't keep you up at night. Over the long run, a company's revenue and earnings should increase at the same pace as inflation. The exception to this is stagflation. The combination of a bad economy with an increase in costs is bad for stocks. Also, a company is in the same situation as a normal consumer - the more cash it carries, the more its purchasing power decreases with increases in inflation. The main problem with stocks and inflation is that a company's returns tend to be overstated. In times of high inflation, a company may look like it's prospering, when really inflation is the reason behind the growth. When analyzing financial statements, it's also important to remember that inflation can wreak havoc on earnings depending on what technique the company is using to value inventory. ixed-income investors are the hardest hit by inflation. Suppose that a year ago you invested $1,000 in a Treasury bill with a 10% yield. Now that you are about to collect the $1,100 owed to you, is your $100 (10%) return real? Of course not!

Assuming inflation was positive for the year, your purchasing power has fallen and, therefore, so has your real return. We have to take into account the chunk inflation has taken out of your return. If inflation was 4%, then your return is really 6%. This example highlights the difference between nominal interest rates and real interest rates. The nominal interest rate is the growth rate of your money, while the real interest rate is the growth of your purchasing power. In other words, the real rate of interest is the nominal rate reduced by the rate of inflation. In our example, the nominal rate is 10% and the real rate is 6% (10% - 4% = 6%). As an investor, you must look at your real rate of return. Unfortunately, investors often look only at the nominal return and forget about their purchasing power altogether.

PAKISTAN INFLATION RATE:

The inflation rate in Pakistan was last reported at 10.1 percent in January of 2012. From 2003 until 2010, the average inflation rate in Pakistan was 10.15 percent reaching an historical high of 25.33 percent in August of 2008 and a record low of 1.41 percent in July of 2003. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. This page includes: Pakistan Inflation Rate chart, historical data and news.

CONCLUSION:
Inflation is a negative impact on a countrys economy and prosperity. It decreases the purchasing power of the people and negatively impacts on time value of money, treasury , cost and profits, income and investments. The government should take appropriate measures to control the money supply in the country devise a monetory policy which can minimize inflation.

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Title: Author(s): Citation:

Diversification: best practices of the leading companies Graham Kenny, (CEO of Strategic Factors, Mosman, Australia) Graham Kenny, (2011) "Diversification: best practices of the leading companies", Journal of Business Strategy, Vol. 33 Iss: 1, pp.12 - 20 Corporate culture, Decentralization, Diversification, Performance measures,Return on equity, Strategy Research paper 10.1108/02756661211193776 (Permanent URL) Emerald Group Publishing Limited

Keywords:

Article type: DOI: Publisher: Abstract:

Purpose This article aims to take a fresh look at diversification a growth strategy often disparaged by managers and commentators alike, yet one that is followed successfully by some major organizations. Design/methodology/approach Data were gathered from a number of successful diversifiers, such as GE, to determine the practices they follow and how these might be applied by other organizations. Findings Successful diversifiers have seven features, which all CEOs, boards and executive teams can learn from. They select capable division managers; secure competitive advantage at division and business-unit levels; establish a supportive corporate center for their divisions; install appropriate performance measures; set effective incentives for managers; align the corporate culture to

strategic direction; pay the right price in acquisitions; spend time and resources integrating acquisitions with the existing organization. Originality/value The value of these findings is that organizations in all sectors business, government and not-for-profit can benefit greatly by emulating the practices of successful diversifiers and thus boost their own performance.