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What is Stagflation

Written by dipen

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It is an economic downfall where rate of inflation reaches the heights and in results growth of economy stops or settles to extremely slower rate. Other severe outcomes include tremendous unemployment constantly for a long period. The actual problem is in front of administration, whether to start with making efforts to control inflation or to create employment opportunities. Whatever they choose, ultimate result are extremely dangerous, since slower growth rate for such a long period results in humongous dissatisfaction among people in general. As far as originating the term Stagflation is concerned Gunnar Myrdal was the man behind it.


Reasons

One must be wondering what exactly the reasons that it starts are. Economist offer two theories or in general terms causes of immerging the situation called as Stagflation. Have a glance at the prime reasons of occurring Stagflation.

  • Because of any reasons immediate stoppage or slowness may be noticed in a complete economy. The outcomes will ultimately be increasing prices, since cost of production rises to a certain level. Such production is neither profitable for business owners nor for the nation.
  • Inflation along with Stagflation can also be a result of inappropriate methods of implementing economic strategies. The policies crated might not be effective enough to control cash flow within the country. Often it is seem that government policies prove a barrier for development of potentially stronger markets.

Phillip Curve

This theory was the basic cause for several years Stagflation was not believed to be a practical term. According to this Philip Curve unemployment relates to lower rate of inflation and thus, extremely high rate of inflation cannot lead to such huge unemployment in a region. Because, higher rates will require a firm to product and supply more and ultimately more workers will be required for this purpose. First time when world actually faced Stagflation, it was realized there is no hard and fast rule as far as relation between low level of inflation and employment is concerned.

Prevention

Milton Friedman, one of the first economists ever to make prediction regarding Stagflation during 1970s. After thorough researches and discussions among world’s top economist, now it is believed excessive amount of money reaching markets, is the biggest reason of Stagflation. Thus, controlling it an economy certainly prevent from such awful situation. Predictions regarding actual performance of growth rate and overall production play a key role. Situation of recession need to be tackled wisely to make sure Stagflation does not occur.

Outcomes

As far as results of Stagflation are concerned tough initially it seems quite simple to create policies at different levels, but gradually business organizations find it extremely tough to cope and make any sorts of increment in revenues.

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