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CAUSES OF INFLATION — Economics Keypoint

CAUSES OF INFLATION

TOO MUCH MONEY IN CIRCULATION – This is a situation in which the volume of money in circulation is greater than the available goods/services. The too much money is chasing too few goods resulting to a rise in price.

EXCESSIVE DEMAND – When workers salaries and wages are increased, there tend to be a sharp increase in demand without a corresponding increase in the supply of good/services.

INCREASED COST OF PRODUCTION– Increase in the general price of factors of production especially labour (wages) tend to increase the cost of production which in turn increases the price of goods/services produced by the factors.

EFFECT OF WAR – This occurs during war time when all resources are concentrated on the production of war equipment, which tend to reduce the supply of consumer goods, and as a result of the short supply of goods, prices go high.

HOARDING AND BLACK MARKET – When goods are hoarded with the sole motive of maximizing profit, the prices of the few goods displayed tend to go high.

EXCESSIVE IMPORT RESTRICTION – This occurs when there is increase in import duties, licenses, quota, pre-import deposits or total ban which reduces the quantity of imported goods when there is no local substitute provided.

POOR AGRICULTURAL HARVEST – This occurs as a result of the shortage of food production due to poor and inadequate development of agriculture among West African states.

INCREASE IN WAGES AND SALARIES – This occurs when increase in salaries and wages is greater than the workers’ marginal productivity. This situation can be traced back to the Udoji award which doubled workers salaries without taken cognizance of the aftermath effect.

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