NATURE OF INFLATION IN A DEVELOPING ECONOMY
Developing countries in their bid to raise the standards of living of their people through development plans have often found themselves in the grip of inflation.
But the nature of inflation in under-developed but developing economies is quite different from that found in advanced or developed countries. As discussed above, in advanced countries true inflation starts after the level of full-employment is attained. But in under- developed countries like India huge unemployment and inflation exist side by side. In other words, in under- developed countries, serious inflation is in evidence long before the level of full-employment is reached. This is so because the nature of unemployment in under-developed countries differs from that which prevails in developed countries during times of depression. In order to get the economy out of depression, governments in advanced countries take various steps to increase the level of investment. The additional investment expenditure leads to an increase in effective demand depending upon the magnitude of the multiplier.But this increase in investment and effective demand docs not generate serious inflationary pressures because of the elastic nature of the supply curve of
output. Instead, increase in investment and effective demand helps a great deal in removing depression and unemployment which arc caused by the lack of effective
demand. This is the case of developed economies. In advanced countries, during dcpre . ion, there is a lot of excess capacity in the system so that an increase in output presents no difficult problems. Thus, when the supply of output can e increased easily so as to match increase in effective demand, there need be no inflationary pressures. The situation in under-developed countries is, however. different. Here an increase in investment does create additional demand but a corresponding increase in the supply of output cannot be taken for granted .Unemployment in under-developed economics is not due to t e lack of effective demand hut due to the dearth of real capital. In these countries, level of national income can be increased and the unemployment can be removed by accumulating more real capital. But increase in the rate of capital formation requires stepping up the level f of investment. Now, under-developed countries, under their devcl osment plans, arc making huge investment expenditure to increase the rate of capital formation and thus to obtain rapid economic growth. This huge inv:stment expenditure leads to a sharp increase.