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A trend of rising prices or an increase in the general price level of an economy is known as inflation. It is also referred to as the sustained increase in the price level. The general perception is that inflation is a bad phenomenon and is detrimental to the growth of an economy.
However inflation cannot always be termed as "bad" if seen in terms of higher money incomes. The higher prices of everything would result in higher receipts for resource suppliers and hence a growth in their income levels.
Inflation usually results in the standard of living to decline because it now costs more to buy the same amount of goods and services. However there are some cases where the rising prices do not necessarily mean declining living standards. Following are some of the factors:
Nominal Income: If the economy is suffering from a period of rising prices and at the same time there is a commensurate rise in the level of income, this would not lead to a decline in living standards. This is because the increase in prices is offset by the proportionate increase in income, resulting in an unchanged consumption pattern. This is assuming everything else is constant.
Real income: This is the income that is adjusted for inflation. In cases where the nominal income is rising but the rate at which it is growing is less than the inflation rate, it would not lead to a boost in the standard of living. This is because the inflation will erode the purchasing power of money and people will be spending the extra income in the purchasing of the same amount of goods and services. ...
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