2017

INFLATION IN
PAKISTAN
PSYCHOLOGY ASSIGNMENT

NAME: SYED MOHTASHIM ALI

SUBMITTED TO: MA’M SARA
22-May-17
 INFLATION IN PAKISTAN

In ordinary sense inflation mean a general rise in prices. A rise in prices is the indication of
inflation. Basically inflation represents a situation whereby the aggregate demand for goods and
services exceeds the available supply of output.

In the Keynesian sense, true inflation begins when the elasticity of supply of output in response
to increase in money supply has fallen to zero or when output is un-responsible to changes in
money supply. When there exists a state of full employment the conditions will be clearly
inflationary, if there is increase in the supply of money. But since we do not subscribe to the
classical view that there is full employment we can say that when money supply increase it
results partly in the increase of output (GNP) and it partly feeds the rise in prices. And when the
supply of output lags for behind, the rise in prices is described as inflationary. In Coulborn’s
words, it is a case of “too much money chasing too few goods” thus inflation is generally
associated with an abnormal increase in the quantity of money resulting in abnormal rise in
prices.

Situation in Pakistan:
Today, inflation is one of the serious problems faced by Pakistan. Rate of inflation in
Pakistan is very high. According to economic survey 2009-10, its rate is 13.3 %, while it was
22.3 % in last fiscal year. According to ESP 2011-12, rate of inflation (CPI) is 10.8%.
 TYPES OF INFLATION:
Following are the main types of inflation, which are different from one another due to their
causes:
1) Demand Pull Inflation
This is demand side inflation. It simply means that when there is an increase in aggregate
demand. Without any corresponding increase in aggregate supply the price level will rise.
2) Cost Push Inflation
It is supply side inflation. If there is increase in prices it will results in fall in aggregate supply.
It is the reason of increase in cost of production.
3) Structural Inflation
Sometimes prices rise in an expanding economy because the supply cannot keep up with
rising demand because of structural inflexibilities. This is also called the Structuralist Argument
for inflation.
4) Imported Inflation
In such inflation local governments are helpless; it is due to an increase in the prices of
imported goods. To control it government may bans the imported items.
5) Open Inflation
If there is no control over rise in prices, it will be determined by free forces of demand and
supply.
6) Suppressed Inflation
If prices are subject to governmental control then their increase is made by the government
action.
7) Ex-ante & Ex-post Inflation
Ex-ante inflation is the expected inflation and ex-post is the actual inflation. For example, if
people of Pakistan expect an inflation rate of 10% it will Ex-ante inflation but actual inflation is 7
% it will be ex-post.

8) Anticipated Inflation
If the actual rate of inflation is perfectly in accordance with the people’s expectations it is
called anticipated inflation.
9) Unanticipated Inflation
If the actual rate of inflation is not according to the people’s expectations, it is called
unanticipated inflation.
10) Profit Inflation
Profit inflation is the result of the greed of businessmen. It usually occurs in such economy,
which are dominated by monopolies.
11) Deficit Inflation
Government has to borrow form banks and non-bank & internal and external resources in
case of deficit financing. It also caused inflation named as deficit inflation.
12) Devaluation Inflation
Devaluation also leads to inflation. Devaluation decreases the purchasing power of our
currency that results in inflation.
13) Ceiling Inflation
Inflation that occurs due to various prices ceiling enforced by government. Price ceiling are
set by government to maintain prices of certain essential goods at a determined level.
14) Income Inflation
If there is an increase in income of the people, it will increase the money supply in the
country that leads to income inflation.
 CAUSES OF INFLATION
Inflation is at its peak all over the world and there are different reasons for it. In the case
of Pakistan, it is the result of monetary phenomenon. The reason is that excess money supply
growth in Pakistan has basically enhanced inflation in Pakistan. According to economic policy
announced in Pakistan, the CPI of Pakistan dropped to 19.1% in March 2009 as compared to
25% in August 2008.
In Pakistan the main reason of inflation is the increase in the prices of regular items, such as
wheat, sugar, ghee and other items. The government has totally failed to control the prices of
these items. Petrol price hikes is the second main cause. When oil prices are increased it
affects prices of its complementary goods too. Such as transportation fares, etc. Thirdly, most of
the industries are closed due to government policies creating unemployment.

Pakistan is a developing country. Inflation is one of the major problems of this country. In fact, it
is the root cause of oodles of problems in the country.

This is to draw the attention of authorities towards the urgent need of such actions that may
decrease the inflation rate in our country.

There are so many causes of inflation in the less developed countries like Pakistan.
Inflation may occur due to any one of the following reasons or causes.

1. Increase in Demand: Due to increase in population or due to change in certain other

factors, the demand for goods and services measures supply remaining the same,
expenditure will increase and inflation occur.
2. Lack of Supply: Due to some unfavorable climatic situations, political, social,
national or international situation production remains low (small) in any particular year
and supply will also decrease, prices will go up and inflation will occur.
3. Increase in the Cost of Production: In certain cases cost of production increases
due to rise in the prices of factors of production, producer rises price level and due to
excessive expenditure inflation occur.
4. Over Population: Inflation also occurs due to the increasing rate of growth of
population. As Pakistan is an over populated country and the rate of growth of her
population is about 3% per year, while the rate of production of goods is very low and
due to this prices of commodities rise and inflation occur.
5. Development Expenditure: In under developed countries like Pakistan major
amount of money is spent on the development programmes and due to increase in the
income of the individuals, their expenditure is the basic cause of the inflation.
6. Food Problem: Pakistan is basically an agricultural country. Near about 30% of
national income is had by agriculture sector. But unfortunately there is an acute
shortage of food grain in Pakistan and so is the case with other developing and under
developed countries of the world. The prices of other commodities are influenced by the
 continuous rise food grain prices and thus inflation occurs.
7. Financial Position of Common Man: In under developed countries, the financial
position of a common man is very poor and there is a lock of saving because the major
portion of income is spent on the purchase of only consumer goods.
8. Import of Machinery: Under developed countries spent lot of amount on the import
of machinery. So the cost of production increase and inflation occur this price of goods
also increase and inflation occur.
9. Expenditure on Defence: Of course defence is very important for every country. A
huge amount of budget is spent on defence requirements in all countries of the world.
Like other countries Pakistan’s major part of budget is spent on defence requirements.
As we only produce 5% of total defence requirements within country and the remaining
requirements are imported from abroad. Due to this reason inflation occurs.
10. Natural Climate: Natural climate play an important role in the economy of any
country. Pakistan is basically an agricultural country we earn near about 30% of national
from agriculture sector. Agricultural products wholly depend upon natural climate. Due
to unfavorable natural climatic conditions when agricultural cross are destroyed or
decreased as a result of this supply decrease and prices increase and inflation occur.
11. Deficit Financing: By deficit financing we mean that there is deficit created in
budget when budget is announced. Expenditure is more than income in actual sense by
deficit financing mean to issue new currency when this new currency came into the
market it increases the demand of goods and services but on the other hand supply
remain the same as a result of this price increase and inflation occur.
12. Decrease in Production: Inflation may occur if production decreases. There are
many reasons of decrease of production e.g. natural climate, political, social conditions,
competition, national and international problems etc which are cause of inflation.

EFFECTS OF INFLATION
Following are GOOD EFFECTS of inflation, if rate is 2% to 4%:

1) There is increase in production due to inflation.

2) Inflation increases the employment opportunities in the country.

3) Inflation enhances the process of economic development.

4) There is more investment in country at the time of inflation.

5) Inflation increases the economic activities that may cause to inventions and innovations.

6) Profit of the producers also increases when there is normal inflation.

 Following are the BAD EFFECTS of inflation:

1) It is a huge problem for employees, taking fixed salaries.

2) It generates unfair distribution of income and wealth.

3) Inflation reduces the saving of the population.

4) It is a cause of unfavorable balance of trade and payment.

5) Inflation increases the rate of interest.

6) It creates a lot of social evils.

7) It is difficult for consumers to purchases more goods.

8) It generates very bad effects on the poor labour force.

9) Inflation reduces the living standard and purchasing power of people.

10) It is harmful for creditors.

11) Inflation reduces the purchasing power.

 SOLUTIONS OF INFLATION
1. Very little can be done to control the international inflation in prices ,all
a country can do is, become more self-reliant and less dependent on
imports.
eg increase crude oil prices is something which effects every country in the
world , but cannot do much to control it.

But it can make it industry less dependent on oil and more dependent on alternate
sources eg Natural gas(who's prices are not linked oil prices) , electricity (mainly
hydel and coal based and not oil produced)

2. If supply is less then demand then price of goods will rise. There is little
can be done control that it, in a free market economy.

But sometimes traders resort to hoarding (illegal accumulation) of goods to earn

more profit by creating artificial scarcity in the market .As is happening in
Pakistan's sugar industry and wheat crop these days.
Sometimes trades hold back good from local market to sell them in international
markets (to earn more profit), lead to scarcity of goods in the country, which in
turn can lead to importing of the same goods from outside at international prices.
This practice can be checked by the govt, if it wants to.

3. In last two year Pakistan govt (SBP) has printed, a huge amount of
money (I do not remember the exact amount) to fund its Budget deficit.
This is the main reason for increase in inflation in Pakistan.

Only solution to this is to reduce budge try spending this year so that govt does not
have to print money again to fund its deficit.

And the extra paper money which was pumped into the economy has to be
taken out of circulation(returned to SBP) to reduce inflation.

Conclusion:
Inflation is everywhere in an economy. Its rate is high in developing countries and is low

in poor developed countries. Effective operation of monetary and fiscal policy is essential to

control the inflation.