Inflation Trend in The Economy of Bangladesh (Main Content)

8/3/2019 Inflation Trend in The Economy of Bangladesh (Main Content)

1/25

This report is generated under the academic supervision of Dr. Sameer Kumar Sheel,

Associate Professor, Department of marketing, University of Dhaka. This report is prepared

as the requirement of Macroeconomics course. The topic is Inflation Trend in the

economy of Bangladesh

The main aim of preparing the report is to fulfill the requirement of our course instructor.

The report helps to find out the factors that influence our Inflation and GDP.

The other objectives behind this study are as follows:

To have more clear knowledge about the techniques, rules and standards ofmeasurement of inflation trends to fulfill the partial requirement of the course

Macroeconomics offered in BBA program

To find out the current situation of Inflation and GDP in Bangladesh To compare the inflation fluctuation and its impact on GDP periodically To explore the implication of forecasting technique in the GDP of Bangladesh To find out the causes relevant to that inflation and GDP fluctuation To improve our skills on report writing. As corporate executive put great value on report

writing as an important element in management success, this part of the course will

prepare us to face the future challenges of corporate world

Inflation is that condition of economy whereby general price will be going higher and higher

and constant. In other words, Inflation is defined as a sustained increase in the general

level of prices for goods and services and fall of purchasing power.

Features It will be marked by constant price rising It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.


2/25

As a resultInflation is caused by a combination of four factors:

The supply of money goes up. The supply of other goods goes down. Demand for money goes down. Demand for other goods goes up.

Inflation does not mean that all prices are increasing, even during period of rapid inflation;

some prices may be relatively constant while others are falling. The troublesome aspect of

inflation is that prices rise unevenly, some rises sharply, some slowly and some dont rise at

all. The main measure of inflation is the consumer price index.

History of InflationBangladesh is the youngest country in the South Asian region. The economy has

experienced accelerated economic growth during the early 1990s in comparison with the

1980s. However, after that period, the economy experienced most severe exigency states

like increasing inflationary pressures, deteriorating governments budgetary balances and

decreasing foreign exchange resaves. The GDP growth rate declined moderately during the

second half of 1980s when inflation rate gradually decreased to below 8-percent. However,

a moderate rate of inflation and an increasing rate of GDP growth are observed throughout

the 1990s. Throughout the first half of the 1990s, inflation rate was, on average, 5.37

percent, while GDP growth rate was 4.06 percent. Although inflation rate increased, on

average, to 5.52 percent in the second half of the 1990s, the growth rate of GDP continuedto increase. The increasing trend of inflation rate during the latter half of 1990s had been

corrected since the beginning of the new decade after 1990s and was observed at 4.14

percent, on average, during 2001 to 2005, when growth rate of GDP was, on average, 5.19

percent. So the GDP and inflation rate both the positive and negative relations between

them. The development of the economy largely depends on the proportional development

of middleclass and poor people. And these classes of people are most affected by the

inflation rate or rise in price because of limitation in income. The continuous rise in GDP

holds the GDP growth nearly 6% for couple of year. The price level chart shows that increase

in price is the main constraint of savings and investment by both public and private.

If we look the todays economic giant India and china we see that they were the developing

country and now they are the economic giants. It is surprising but true that both of the

country took almost same strategy for developing their nation and that is Banned foreign

import to protect, retain and sustain the domestic industry . Now china and India open

their market but their own industry established that time and now they share the export

and import in Asian and as well as in America. But Bangladesh has no similar strategy like

that-

Import destroys our local industry. Decreasing the purchasing and standard of living.


3/25

Due to destruction of domestic industry the unemployment rises. Import relates with foreign currency and reserves of foreign currency measure the

exchange rate, huge volume of import decrease supply and decrease the real exchange

rate as well as PPP.

And all this things ultimately affects the GDP, which is the measurement of economic

growth and development.

Recent factsRecent time during fiscal year [2007-2008] the price of the goods and services increase

beyond the capabilities of the poor people. The point-to-point inflation climbed down below

the double digit compared to that in July and August. The point-to-point inflation reached

10.10 points in July for the first time in the last two decades and went up further to 10.11

points in August this year.

Point-to-point inflation soared to its record high of 10.10 per cent in July and inched up by

0.01 per cent in a month, Bangladesh Bureau of Statistics data showed.

Economists and a consumer rights activist said unabated price hike of food items led to the

double-digit growth of inflation and called for urgent steps to give consumers a respite from

skyrocketing prices and restore business confidence.

However, the provisional data prepared by the Bangladesh Bureau of Statistics (BBS) and

sent to the planning ministry showed that food inflation has dropped in both rural andurban areas.

Year Inflation Rate(Consumer Prices) Rank Percent Change Date of Information2003 3.10 % 117 2002 est.

2004 5.60 % 67 80.65 % 2003 est.

2005 6.00 % 160 7.14 % 2004 est.

2006 7.00 % 160 16.67 % 2005 est.

2007 7.20 % 163 2.86 % 2006 est.

The main problem is that the prices increase of daily commodity and essential food items

such as rice, powder milk, soybean oil and grains and vegetables. The prices of the shopping

goods are moderate in terms of daily convenient goods.

Overall inflation rate continues to increase with a 0.85 percentage point increase in April


4/25

compared to the rate in March 0.45 and 1.59 percentage points increase inflation rate of

food and non-food items.

Inflation Rate Rural UrbanFood 8.79 9.44

Non-food 7.83 6.09

Many economists raise their cautionary about price increase, The countrys economy

would head for a state of stagflation if the government fails to cool off some heat and

check erosion in business confidence economist Atiur Rahman cautioned.

Official statistical agencys figures show annualized average inflation kept on creeping up

steadily from as low as 1.66 per cent in 2000-01 fiscal year to 7.1 per cent in 2006-07; Therate was 3.58 in 2001-02 and continued to go up since then, with 5.03 in 2002-2003, 5.64 in

2003-04, 7.35 in 2004-05 and 7.54 in 2005-06, according to the economic survey of the

finance ministry.

The jump was more galloping in point-to-point counts this year, from 5.94 per cent in

January to 10.11 in August.

Bangladesh Inflation Rate (Consumer Prices)Inflation rate (consumer prices):8.1% (2010 est.) 5.4% (2009 est.)

Year Inflation Rate(Consumer Prices) Rank Percent Change Date of Information2003 3.10 % 117 2002 est.

2004 5.60 % 67 80.65 % 2003 est.

2005 6.00 % 160 7.14 % 2004 est.

2006 7.00 % 160 16.67 % 2005 est.

2007 7.20 % 163 2.86 % 2006 est.

2008 9.10 % 184 26.39 % 2007 est.

2009 8.90 % 137 -2.20 % 2008 est.

2010 5.40 % 148 -39.33 % 2009 est.

2011 8.10 % 185 50.00 % 2010 est.


5/25

Inflation (General)

Period Point-to-point 12 month averageWeight End of Period

1996-97 3.96

1997-98 8.66

1998-99 7.06

1999-00 2.79

2000-01 1.66 1.94

2001-02 3.58 2.79

2002-03 5.03 4.38

2003-04 5.64 5.83

2004-05 7.35 6.48

2005-06 7.54 7.16

2006-07 9.2 7.2

2007-08 10.04 9.94

2008-09 2.25 6.66

2009-10 8.7 7.31


6/25

CPIPeriod Food

Weight 58.84

1996-97 103.67

1997-98 114.51

998-99 125.16

1999-00 128.52

2000-01 130.3

2001-02 132.43

2002-03 137.01

2003-04 146.5

2004-05 158.08

2005-06 170.34

2006-07 184.16

2007-08 206.78

2008-09 221.64

2009-10 240.55

0 0 0 0 0 0 01.66

3.585.03 5.64

7.35 7.549.2

10.04

2.25

8.7

0 0 0

3.96

8.667.06

2.791.94

2.79

4.38

5.83

6.48 7.16

7.2

9.94

6.66

7.31

0 0 0

0

00

00

0

0

0

0 0

0

0

0

0

Inflation (General)


7/25

Inflation (Food)Period Point -to- Point 12- Month Average

Weight End of period

1996-97 3.67

1997-98 10.46

1998-99 9.3

1999-00 2.68

2000-01 0.87 1.39

2001-02 1.94 1.63

2002-03 5.22 3.46

2003-04 6.64 6.92

2004-05 8.73 7.91

2005-06 8.81 7.76

2006-07 9.82 8.11

2007-08 14.1 12.28

2008-09 0.25 7.19

2009-10 10.88 8.53

0

58.84

103.67114.51

125.16128.52130.3132.43137.01

146.5158.08

170.34184.16

206.78221.64

240.55

0

50

100

150

200

250

300

CPI Food


8/25

CPIPeriod Non-FoodWeight 41.161996-97 104.47

1997-98 110.73

1998-99 115.1

1999-00 118.64

2000-01 122.25

2001-02 127.89

2002-03 135.13

2003-04 141.03

2004-05 147.14

2005-06 156.56

2006-07 165.79

2007-08 176.26

2008-09 186.67

2009-10 196.84

0 0 0.871.94

5.22 6.648.73 8.81 9.82

14.1

0.25

10.88

03.67

10.46 9.3

2.68 1.391.63

3.46

6.92

7.91 7.768.11

12.28

7.19

8.53

0

5

10

15

20

25

30

Inflation (Food)


9/25

Inflation (Non-food)Period Point -to-Point 12 Month AverageWeight End of period1996-97 4.47

1997-98 5.99

1998-99 3.95

1999-00 3.08

2000-01 3.14 3.05

2001-02 4.14 4.61

2002-03 4.68 5.66

2003-04 4.26 4.37

2004-05 5.32 4.33

2005-06 5.73 6.4

2006-07 8.34 5.9

2007-08 3.54 6.32

2008-09 5.94 5.91

2009-10 5.24 5.45

0

41.16

104.47110.73115.1

118.64122.25127.89

135.13141.03147.14

156.56165.79

176.26186.67

196.84

0

50

100

150

200

250

CPI Non-Food 41.16


10/25

The economy of Bangladesh has been suffering from a double-digit inflation. A shortage of

oil production or energy crisis world-wide, increase in energy prices and cost-of production

in combination with a demand-pull inflation from expansionary economic policies have

caused a persistent inflation. Altogether these have created a supply-side problem bydecreasing the productivity. The situation of Bangladesh has been aggravated due to

political problems and effort of minimizing corruption and a lack of confidence in business

and manufacturing. It is hard to assume that we can ever get back to the single digit

inflation. It is almost clear that we have to live with this double-digit inflation. We must find

out the avenue how to increase output and income, aggregate production and supply of

goods and services in an effort to fight the inflation.

The natural rate of inflation from four to five per cent is accepted in almost any developing

country. But, a double-digit inflation of more than ten percent must have some reasons.

Inflation is the persistent and generalized increase in the level of prices of goods and

services. Consumers are worried about higher or increasing prices of their consumer goods

as their real income, purchasing power and their standard of living is going down.

Producers, manufactures, businessmen and traders are overly concerned about increasing

prices of raw materials, energies including

electricity, gas and oil and the higher cost of production.

Producers would like to maximize their profit by meeting the consumer demand and by

keeping their plant, factories and firms/ farms in operation at higher prices. Producers and

suppliers do not have any other alternative except to charge a higher price

0 0 0 0 0 0 0

3.144.14

4.68 4.265.32 5.73

8.34

3.54

5.945.24

0 0 0

4.47

5.99

3.953.08

3.05

4.61

5.66

4.374.33

6.4

5.9

6.32

5.915.45

0

2

4

6

8

10

12

1416

Inflation

Inflation (Non-food)


11/25

directly from the consumer and indirectly from dealers, whole-sellers and retailers.

The market intermediaries are the last agents to charge higher prices.

Recently most of our economists think that devaluation or depreciation of the exchange

rate of Taka is another cause of inflation, with whom the Governor of Bangladesh Bank (BB)

disagreed. It matters little how the devaluation is related to inflation rate. We are in an

economic stage of recession with lower output and income, higher unemployment and an

unacceptably high instability in prices and inflation. We simply cannot afford to have a

contractionary monetary policy to increase the exchange rate or value of Taka currency.

On the other hand, contractionary monetary policy will further lower the output and

income, increase unemployment and lower purchasing power and further aggravate the

situation, and may not be able to decrease the cost-push inflation.

On the basis of reason1. Cost push inflationInflation can result from a decrease in aggregate supply. The two main sources of decrease

in aggregate supply are

An increase in wage rates An increase in the prices of raw materials etc.

These sources of a decrease in aggregate supply operate by increasing costs, and the

resulting inflation is called cost-push inflation.

Other things remaining the same, the higher the cost of production, the smaller is the

amount produced. At a given price level, rising wage rates or rising prices of raw materials

such as oil lead firms to decrease the quantity of labor employed and to cut production."


12/25

Cost-push inflation occurs when businesses respond to rising costs, by increasing their

prices to protect profit margins.

Possible causes of cost-push inflation

i. Component costse.g. an increase in the prices of raw materials and components. Thismight be because of a rise in global commodity prices such as oil, gas copper and

agricultural products used in food processing a good recent example is the surge in the

world price of wheat.

ii. Rising labor costscaused by wage increases that exceed improvements in productivity.Wage and salary costs often rise when unemployment is low (creating labor shortages)

and when people expect inflation so they bid for higher pay in order to protect their real

incomes.

iii. Higher indirect taxes imposed by the government for example a rise in the duty onalcohol, cigarettes and petrol/diesel or a rise in the standard rate of Value Added Tax.

Depending on the price elasticity of demand and supply, suppliers may pass on theburden of the tax onto consumers.

iv. A fall in the exchange ratethis can cause cost push inflation because it normally leads toan increase in the prices of imported products. For example during 2007-08 the pound

fell heavily against the Euro leading to a jump in the prices of imported materials from

Euro Zone countries.

Illustration

Cost-push inflation can be illustrated by an inward shift of the short run aggregate supply

curve. The fall in SRAS causes a contraction of GDP together with a rise in the level of prices.

One of the risks of cost-push inflation is that it can lead to stagflation.

Important note

Many of the causes of cost-push inflation come from external economic shocks e.g.

unexpected volatility in the prices of internationally traded commodities and large-scale

movements in variables such as the exchange rate. A country can also import cost-push

inflation from another country that is suffering from rising inflation of its own.

2. Demand pull inflationThe inflation resulting from an increase in aggregate demand is called demand-pull

inflation. Such inflation may arise from any individual factor that increases aggregatedemand, but the main ones that generate ongoing increases in aggregate demand are

High costof factors

ofproduction

High costof

production

High Priceof goods

PriceInflation


13/25

i. Increases in the money supplyii. Increases in government purchases

iii. Increases in the price level in the rest of the worldInflation caused by an increase in aggregate demand, is inflation caused by factor 4 (An

increase in the demand for goods). The three most likely causes of an increase in aggregate

demand will also tend to increase inflation:

i. Increases in the money supplyThis is simply factor 1 inflation.ii. Increases in government purchases The increased demand for goods by the government

causes factor for inflation

iii. Increases in the price level in the rest of the world Suppose you are living in the UnitedStates. If the price of gum rises in Canada, we should expect to see less Americans buy

gum from Canadians and more Canadians purchase the cheaper gum from American

sources. From the American perspective the demand for gum has risen causing a price

rise in gum; a factor 4 inflation.

Demand pull inflation occurs when aggregate demand and output is growing at an

unsustainable rate leading to increased pressure on scarce resources and a positive output

gap. When there is excess demand in the economy, producers are able to raise prices and

achieve bigger profit margins because they know that demand is running ahead of supply.

Typically, demand-pull inflation becomes a threat when an economy has experienced astrong boom with GDP rising faster than the long run trend growth of potential GDP. The

last time this happened to any great extent in the UK economy was in the late 1980s.

Possible causes of demand pull inflation

i. A depreciation of the exchange ratewhich makes exports more competitive in overseasmarkets leading to an injection of fresh demand into the circular flow and a rise in

national and demand for factor resources there may also be a positive multiplier effect

on the level of demand and output arising from the initial boost to export sales.


14/25

ii. Higher demand from a government (fiscal) stimulus e.g. via a reduction in direct orindirect taxation or higher government spending and borrowing. If direct taxes are

reduced, consumers will have more disposable income causing demand to rise. Higher

government spending and increased borrowing feeds through directly into extra

demand in the circular flow.

iii. Monetary stimulus to the economy A fall in interest rates may stimulate too muchdemand for example in raising demand for loans or in causing rise in house price

inflation.

iv. Faster economic growth in other countries providing a boost to UK exports overseas.v. Improved business confidence which prompts firms to raise prices and achieve better

profit margins

Demand pull inflation is most likely to occur when an economy is becoming stretched and is

said to be danger of over-heating. This is often seen towards the end of a boom whenoutput is expanding beyond the economys usual capacity to supply, the result being higher

prices and also a larger trade deficit (imports act as a kind of safety valve to take away some

of the excess AD).

On the basis of rate1. Mild inflation

It is a slow rise in price level of no more than 5 percent per annum. It is associated with a

low level of unemployment and is during the upswing phase of a trade cycle. Such

creeping inflation has beneficial effects on an economy. It is a sign of a buoyant

economy or an expanding economy, implying the generation of jobs, output and growth.

2. Strato-inflationThe inflation rate ranges from about 10 percent to several hundred per cent. Many

developing countries particularly those in Latin America experienced this.

3. Hyper-inflationIt is a very rapidly accelerating inflation which is also known as runaway inflation or

galloping inflation. This usually leads to the breakdown of the country's monetary

system as the existing currency may have to be withdrawn and a new one introduced.

Causes of inflation

i. Short in production If the demand remains constant but the supply of the productdecreases then there will be a shortage between demand and supply. In this situation

inflation occurs and as a result price rises. So many of the consumers are deprived from

consuming their required goods.

ii. High in demandIn this case supply remains constant but demand increases because ofincreasing money supply, increasing disposable income etc. As the demand increases the

price of the product also increases.


15/25

iii. Natural calamity In such situation the demand of the country remains same but thesupply decreases because of natural disaster such as flood, cyclone, drought etc. Then

the price of the goods and services will go high.

In agro based country like Bangladesh natural calamity effects very negatively on price

inflation.

iv. Man-made calamity There are some calamity which is created by human being itselfsuch as transportation strike, human strike etc. In this case the supply of the product will

decreases or it will be hampered. It results in price rising. It is one of the most prominent

reasons of price inflation in Bangladesh.

v. Fiscal policy Fiscal policy is related to the income & expenditure pattern of thegovernment.

If the tax of the product is high then the price of the product will also high and priceinflation occurs.

On the other hand if the tax of the product decreases then the price of the product willlow and in such condition price inflation does not occur.

vi. High amount of government development expenditure The expenditure of thegovernment will be the income of the public.

vii. Monetary policyPolicy relating the supply of money and credit control. The central bankcontrols it through its schedule banks.

If cash reserve increases then supply of money decreases. So value of money will go highand price will decrease. As a result price inflation does not occur.

If cash reserve decreases then supply of money increases. So value of money will go lowand price will go high. In this situation price inflation occurs.

viii. Role of banks & financial institutions Now banks and other institutions provide moreloans. It creates higher money supply. So consumer living standard becomes higher & it

creates price inflation.

The more open policy in the market- the more supply of money in the market.This inflation will be welcomed by the country because it grows up the economy of thecountry. But it is not applicable in Bangladesh.

The morethe

developmentexpenditure

of thegovernment

The moreincome

The morespending

The moreexpenditure

of people


16/25

ix. High profit motive of greedy businessmen They want to exploit money for their owninterest.

x. Illegal extortion of money in different phasesAlthough they are not visible but in reallife they exist which ultimately raises the price of the product. It is a very common

reason of price rising in Bangladesh.

Inflation always hurts your standard of living. Rising prices means you have to pay more for

the same goods and services. If your income increases at a slower rate as inflation, your

standard of living declines even if you are making more. Inflation's main consequence is a

subtle reduction in your standard of living. The impact of inflation in different classes of

people is given below:

1. For customerUneven distribution of income or income disparity is caused by inflation on the

customers. As a result, it brings hazards for customer class.

2. For entrepreneurPrice inflation is always a pleasant experience for the entrepreneur class.

3. For debtorAs price increases in a higher rate, it is not favorable for them.

4. For creditorThrough inflation remains, interest rate becomes high. As a result creditor and bank get

profit from inflation.

5. For service-holderFor general people, inflation is unpleasant because it increases their expenditure rather

than income.

High profitmotive

activitieswithout any

reason

Increasesthe price ofthe needed

products

Moreexpenditure

Priceinflationoccurs


17/25

6. For peasant classIn our country, peasant when producer enjoy inflation as they get profit. Peasant when

customer affect adversely as they have to spend money to purchase items.

7. For investorInflation has positive impact on them. When inflation occurs, investors invest more

money which generates employment development in a higher scale; as a result it causes

higher production that leads to higher consumption.

We have studied above that inflation is caused by the failure of aggregate supply to

equal the increase in aggregate demand. Inflation can, therefore, be controlled by

increasing the supplies and reducing money incomes in order to control aggregatedemand. The various methods are usually grouped under three heads: Monetary

measures, fiscal measures and other measures.

1. Monetary MeasuresMonetary measures aim at reducing money incomes.

i. Credit ControlOne of the important monetary measures is monetary policy. The central bank

of the country adopts a number of methods to control the quantity and quality

of credit. For this purpose, it raises the bank rates, sells securities in the openmarket, raises the reserve ratio, and adopts a number of selective credit

control measures, such as raising margin requirements and regulating

consumer credit.

Monetary policy may not be effective in controlling inflation, if inflation is due to

cost-push factors. Monetary policy can only be helpful in controlling inflation due

to demand-pull factors.

ii . Demonetization of CurrencyHowever, one of the monetary measures is to demonetize currency of higher

denominations. Such a measure is usually adopted when there is abundance of

black money in the country.

iii. Issue of New CurrencyThe most extreme monetary measure is the issue of new currency in place of

the old currency. Under this system, one new note is exchanged for a number

of notes of the old currency. The value of bank deposits is also fixed

accordingly. Such a measure is adopted when there is an excessive issue of

notes and there is hyperinflation in the country. It is very effective measure but

is inequitable for its hurts the small depositors the most.


18/25

2. Fiscal Measures

Monetary policy alone is incapable of controlling inflation. It should, therefore, be

supplemented by fiscal measures. Fiscal measures are highly effective for

controlling government expenditure, personal consumption expenditure, and

private and public investment. The principal fiscal measures are the following:

i. Reduction in Unnecessary Expenditure The government should reduce unnecessary expenditure on non-development

activities in order to curb inflation. This will also put a check on private

expenditure which is dependent upon government demand for goods and

services. But it is not easy to cut government expenditure. Though economy

measures are always welcome but it becomes difficult to distinguish between

essential and non-essential expenditure. Therefore, this measure should be

supplemented by taxation.

ii. Increase in TaxesTo 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. Rather, the tax system should provide larger incentives to those who

save, invest and produce more. Further, to bring more revenue into the tax-net, the

government should penalize the tax evaders by imposing heavy fines. Such

measures are bound to be effective in controlling inflation. To increase the supply of

goods within the country, the government should reduce import duties and increase

export duties.

iii. Increase in SavingsAnother measure is to increase savings on the part of the people. This will tend to

reduce disposable income with the people, and hence personal consumption

expenditure. But due to the rising cost of living, people are not in a position to save

much voluntarily. Keynes, therefore, advocated compulsory savings or what he

called `deferred payment' where the saver gets his money back after some years.

For this purpose, the government should float public loans carrying high rates of

interest, start saving schemes with prize money, or lottery for long periods, etc. It

should also introduce compulsory provident fund, provident fund-cum-pensionschemes, etc. compulsorily. All such measures to increase savings are likely to be

effective in controlling inflation.

iv. Surplus BudgetsAn important measure is to adopt anti-inflationary budgetary policy. For this

purpose, the government should give up deficit financing and instead have surplus

budgets. It means collecting more in revenues and spending less.


19/25

v. Public DebtAt the same time, it should stop repayment of public debt and postpone it to some

future date till inflationary pressures are controlled within the economy. Instead,

the government should borrow more to reduce money supply with the public.

Like the monetary measures, fiscal measures alone cannot help in controlling inflation.They should be supplemented by monetary, non-monetary and non-fiscal measures.

3. Direct-action policyi. Straight Method

Here govt. have to take straight methods to work directly to control inflation.

ii. Price CeilingA legally established maximum price that is imposed on a market BELOW the price that

otherwise would be achieved in equilibrium. A price ceiling is placed on a market withthe goal of keeping the price low, presumably based on the notion that the equilibrium

price is too high. If imposed on a competitive market free of market failures, a price

ceiling creates a shortage, or excess demand.

A price ceiling places an upward limit on the price of good. Buyers and sellers can exchange

the good at prices less than the ceiling, but not greater. The primary goal of a price ceiling is

to keep the price of a good low and thus more affordable to the buyers.

Price ceilings are most often placed on markets for goods that policy makers deem are basic

necessities and that the existing price is excessive, perhaps due to market control among

the suppliers. Examples of markets that have been subject to price ceilings include

apartments, gasoline, natural gas, food, and prescription drugs.

How it worksAs luck would have it, the Shady Valley City Council has decided to impose a price ceiling on

the market for 8-track tapes. The current equilibrium condition for this market is illustrated

in the graph presented to the right.

Without the price ceiling buyers and sellers trade 400 tapes at a price of 50 cents each. For

some unknown reason, the Shady Valley City Council feels that 50 cents is simply too much


20/25

to pay for 8-track tapes. Hence they have decided to impose a price ceiling of 30 cents on

this market. What is the market to do? Supply Side

The sellers are willing and able to offer 200 tapes for sale at the 30 cent price, which can

be revealed by clicking the [Supply] button. At 30 cents, suppliers can cover the

production cost of 200 tapes. They are unwilling and unable to sell more.

Demand SideThe buyers, however, are willing and able to purchase 600 tapes at this 30 cent price,

which can be highlighted by clicking the [Demand] button. At this price, demanders canobtain at least 30 cents worth of satisfaction from 600 tapes.

ShortageThe combination of the quantity demanded and the quantity supplied means that the

market has a shortage of 400 tapes. The buyers want to buy 400 tapes more than the

sellers want to sell. This shortage can be highlighted by clicking the [Shortage] button.

Good for Some, Bad for OthersThe usual objective of a price ceiling is to keep a good affordable to the buyers. A 30 cent

price ceiling on the market for 8-track tapes certainly accomplishes this goal. Those who buy

8-track tapes pay 30 cents each, rather than 50 cents. They save 20 cents on each tape.

Good for them.

There is, however, a bit of bad with this price ceiling. Prior to the price ceiling, 400 tapes are

exchanged in the market. With the price ceiling, only 200 tapes are exchanged. Fewer tapes

are exchanged. Moreover, given the low, 30 cent price, buyers are actually willing to buy

600 tapes, 400 tapes more than are offered for sale. While those who are able to buy the

tapes do so at a lower price, a great many buyers do without. They are unable to buy at any

price, low or high, bad for them.


21/25

Although this particular market for 8-track tapes generates a substantial shortage at the 30

cent price, the shortage that might arise in other markets depends on the specific

characteristics of the market. From a sheer graphical standpoint, the shortage is less if the

demand and supply curves are more steeply sloped or less elastic. In other words, if the

demand and supply are relatively inelastic, then the goal of keeping the good affordable,

without excluding a lot of buyers from the market, is more easily achieved.

Result of Price Ceilingi. Illegal ExchangeLike any law, a legally mandated price ceiling can be violated. Some buyers and sellers are

inclined to undertake illegal exchanges at prices above the legal maximum. The result of

such illegal trades is termed a black market.

In fact, the motivation might be so powerful that buyers are willing to engage in illegal

trades, to enter into a black market exchange. On the other side of the exchange, sellers are

always inclined to accept more than the minimum supply price for a good. If the buyers

offer more than 30 cents, then sellers are willing to listen. The price, however, must be highenough to compensate the sellers for the risk of punishment. If the risk is slight, the price

need not be much higher than 30 cents. If the risk is greater, then so too must be the price.

ii. Shortage of supplyiii. low quality of products will be soldiv. Unauthorized productv. Disproportionate amount of product in term of purchasePolicy options / course of actionsTo reduce this gap, created by price ceiling, govt. have to take some policy options.These are:

i. Supply material at the declared priceGovt. must have to be ready to supply required material at the earlier declared price

from its production plant.

ii. Import the required materialGovt. can import the required quantity of goods of its own production set up, from

the foreign under its own mechanism and distribute the product in the market on

this price.

iii. Urge the indigenous peopleGovt. can urge the indigenous people to set up production plant under some benefitpackages given by the govt.

Benefit packages:

Giving khash land with fair price Imposing little tariff Providing tax free income Reducing rate of current plant Giving subsidiary

By offering these benefit packages, people become interested to set up productionplant.


22/25

iv. Urge the private importer or entrepreneurGovt. can urge the private importer or private entrepreneur to supply required

quantity of goods, by importing those items in the market. Govt. at first offer some

benefit packages and then make these packages to urge entrepreneur for importing

goods.

Benefit packages:

Reduce margin ratio Imposing little tariff

Disadvantage:

Dishonesty occurs by remaining product price same Govt. is deprived of tax

v. Use Buffer-StockGovt. can supply the required quantity of goods in the market at the early declaredprice from the buffer stock. Buffer stock is established to reduce the price

fluctuation problem.

Buffer stock:

At the time of setting minimum price (floor price), the govt. purchase products from

the farmer. These products are known as Buffer stock.

Disadvantage:

This does not work properly as the purchase centre of govt. is not open regularlyor show some excuses.

Application of Price Ceiling1. MRP: Maximum Retail Price2. MRP: Minimum Retail Price4. Other Measures

The other types of measures are those which aim at increasing aggregate supply andreducing aggregate demand directly.

i. To Increase Production:The following measures should be adopted to increase production:

One of the foremost measures to control inflation is to increase the productionof essential consumer goods like food, clothing, kerosene oil, sugar, vegetable

oils, etc.

If there is need, raw materials for such products may be imported onpreferential basis to increase the production of essential commodities.


23/25

Efforts should also be made to increase productivity. For this purpose, industrialpeace should be maintained through agreements with trade unions, binding

them not to resort to strikes for some time.

The policy of rationalization of industries should be adopted as a long-termmeasure. Rationalization increases productivity and production of industries

through the use of brain, brawn and bullion.

All possible help in the form of latest technology, raw materials, financial help,subsidies, etc. should be provided to different consumer goods sectors to

increase production.

ii. Rational Wage Policy:Another important measure is to adopt a rational wage and income policy. Under

hyperinflation, there is a wage-price spiral. To control this, the government should

freeze wages, incomes, profits, dividends, bonus, etc. But such a drastic measure

can only be adopted for a short period and by antagonizing both workers and

industrialists. Therefore, the best course is to link increase in wages to increase inproductivity. This will have a dual effect. It will control wage and at the same time

increase productivity, and hence production of goods in the economy.

iii. Rationing:Rationing aims at distributing consumption of scarce goods so as to make them

available to a large number of consumers. It is applied to essential consumer goods

such as wheat, rice, sugar, kerosene oil, etc. It is meant to stabilize the prices of

necessaries and assure distributive justice. But it is very inconvenient for consumers

because it leads to queues, artificial shortages, corruption and black marketing.

Keynes did not favor rationing for it "involves a great deal of waste, both ofresources and of employment."

From the various monetary, fiscal and other measures discussed above, it becomes clear

that to control inflation, the government should adopt all measures simultaneously.

Inflation is like a hydra-headed monster which should be fought by using all the weapons

at the command of the government.

Incidentally, Keynes mentions the following four related terms while discussing the concept

of inflation:

Deflation Disinflation Reflation Stagnation

DeflationIt is a condition of falling prices accompanied by a decreasing level of employment, outputand income. Deflation is just the opposite of inflation. Deflation occurs when the total


24/25

expenditure of the community is not equal to the existing prices. Consequently, the supply

of money decreases and as a result prices fall. Deflation can also be brought about by direct

contractions in spending, either in the form of a reduction in government spending,

personal spending or investment spending. Deflation has often had the side effect of

increasing unemployment in an economy, since the process often leads to a lower level of

demand in the economy. However, each and every fall in price cannot be called deflation.

The process of reversing inflation without either creating unemployment or reducing output

is called disinflation and not deflation. Therefore, some perceive deflation as an

underemployment phenomenon.

Basic theme Lower price Low supply of money Low aggregate demand Aggregate supply is high

Problems Economic depression Unemployment NY is nag Economic will collapse Value of money will be low

DisinflationWhen prices are falling due to anti-inflationary measures adopted by the authorities, with

no corresponding decline in the existing level of employment, output and income, the result

of this is disinflation. When acute inflation burdens an economy, disinflation is implemented

as a cure. Disinflation is said to take place when deliberate attempts are made to curtail

expenditure of all sorts to lower prices and money incomes for the benefit of the

community.

ReflationReflation is a situation of rising prices, which is deliberately undertaken to relieve a

depression. Reflation is a means of motivating the economy to produce. This is achieved by

increasing the supply of money or in some instances reducing taxes, which is the opposite of

disinflation. Governments can use economic policies such as reducing taxes, changing the

supply of money or adjusting the interest rates; which in turn motivates the country toincrease their output. The situation is described as semi-inflation or reflation.

StagflationStagflation is a stagnant economy that is combined with inflation. Basically, when prices are

increasing the economy is decreasing. Some economists believe that there are two main

reasons for stagflation. Firstly, stagflation can occur when an economy is slowed by an

unfavorable supply, such as an increase in the price of oil in an oil importing country, which

tends to raise prices at the same time that it slows the economy by making production less

profitable. In the 1970's inflation and recession occurred in different economies at the same

time. Basically, what happened was that there was plenty of liquidity in the system and


25/25

people were spending money as quickly as they got it because prices were going up quickly.

This gave rise to the second reason for stagflation.

Bangladesh, with its population of 140 million, is one among the few major importing

countries. Most of the consumer- and intermediate goods for manufacturing and

production sectors are imported. Consumption goods, including the goods of necessities,

are also imported.

Generalized increase in prices worldwide has been persistent. Rising prices of goods and

service worldwide and in India have certainly increased the import price and prices of

consumption goods and goods of necessities in Bangladesh. Rising import prices of energies

and oil in particular and other intermediate goods, consumer goods, including goods of

necessities, have clearly caused inflation in Bangladesh.

The International Monetary Fund (IMF) does not want to agree about the reverse effect of

stagflation due to tight money and higher interest rate of the recent past but would like to

blame the recent lack in business confidence. Most economists have agreed that rising

energy prices and cost of production in combination with that tight monetary policy and

higher interest rate and the recent lack of confidence in business are responsible for the

decrease in the productivity, and creation of a supply-side problem, thereby causing a

double-digit inflation.

At last, we can say that it would not have been possible for us to complete the report, but

for the help of our respectable teacher Dr. Sameer Kumar Sheel.

Documents

Inflation Trend in The Economy of Bangladesh (Main Content)