can inflation be controlled by increasing productivity
You're now subscribed to receive email updates! However, not many economists subscribe to the idea of using price controls as a way to control inflation, as there are many counterproductive effects. For this purpose, the government should give up deficit financing and instead have surplus budgets. Under this system, one new note is exchanged for a number of notes of the old currency. Inflation can, therefore, be controlled by increasing the supplies of goods and services and reducing money incomes in order to control aggregate demand.
The most extreme monetary measure is the issue of new currency in place of the old currency. It is applied to essential consumer goods such as wheat, rice, sugar, kerosene oil, etc. These are ways of controlling inflation in the medium term; i.A reduction in company taxes to encourage greater investment Other Measures.Inflation is caused by the failure of aggregate supply to equal the increase in aggregate demand. He has over twenty years experience as Head of Economics at leading schools. Instead, the government should borrow more to reduce money supply with the public. But due to the rising cost of living, people are not in a position to save much voluntarily.
But it is very inconvenient for consumers because it leads to queues, artificial shortages, corruption and black marketing. Keynes, therefore, advocated compulsory savings or what he called ‘deferred payment’ where the saver gets his money back after some years. One of the important monetary measures is monetary policy. Inflation can be reduced by policies that slow down the growth of AD and/or boost the rate of growth of aggregate supply (AS)i.A reduction in company taxes to encourage greater investmentii.A reduction in taxes which increases risk-taking and incentives to work – a cut in income taxes can be considered both a fiscal and a supply-side policyiii.Policies to open a market to more competition to increase supply and lower pricesRising productivity will cause an outward shift of aggregate supplyGeoff Riley FRSA has been teaching Economics for over thirty years.
Therefore, the best course is to link increase in wages to increase in productivity. Fiscal measures are highly effective for controlling government expenditure, personal consumption expenditure, and private and public investment. Like monetary measures, fiscal measures alone cannot help in controlling inflation. Increased prices will further increase production costs. To cut personal consumption expenditure, the rates of personal, corporate and commodity taxes should be raised and even new taxes should be levied, but the rates of taxes should not be so high as to discourage saving, investment and production. The other types of measures are those which aim at increasing aggregate supply and reducing aggregate demand directly. should be provided to different consumer goods sectors to increase production. When shortages happen, the quality of production decreases and black market operations increase. But is inequitable for its hurts the small depositors the most. It means collecting more in revenues and spending less. To control this, the government should freeze wages, incomes, profits, dividends, bonus, etc. It will control wages and at the same time increase productivity, and hence raise production of goods in the economy. If nominal wages increase faster than increase in labor productivity, we will have inflation in the economy, equal to that differential. However, one of the monetary measures is to demonetise currency of higher denominations. Such a measure is adopted when there is an excessive issue of notes and there is hyperinflation in the country.
Tel: +44 0844 800 0085 If nominal wages increase by 5%, while labor productivity has only increased by 2%, inflation will be around 3%.
Another important measure is to adopt a rational wage and income policy. Rather, the tax system should provide larger incentives to those who save, invest and produce more. Such a measures is usually adopted when there is abundance of black money in the country. To increase the supply of goods within the country, the government should reduce import duties and increase export duties. Monetary policy may not be effective in controlling inflation, if inflation is due to cost-push factors. It is meant to stabilise the prices of necessaries and assure distributive justice. Another measure is to increase savings on the part of the people. It should, therefore, be supplemented by fiscal measures. The value of bank deposits is also fixed accordingly. It should also introduce compulsory provident fund, provident fund-cum-pension schemes, etc. (i) One of the foremost measures to control inflation is to increase the production of essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc. But it is not easy to cut government expenditure. Using price controls to stop or control inflation means that shortages are created.
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