CAIIB ABM 2024 EXAM NOTES PDF | MONEY SUPPLY AND INFLATION

ABM 2024 EXAM NOTES PDF | MONEY SUPPLY AND INFLATION | FREE CAIIB MATERIAL

This article will talk about the meaning of money supply and inflation. These two topics are taken from the syllabus of the CAIIB EXAM 2024 Exam paper. Money supply and inflation, how they both are related and some of the related terms of money supply and inflation are the topics that are discussed in this article to provide a quick text to revise for the upcoming ABM Paper 2024. 

If you want to read more on the syllabus of the CAIIB Exam 2024, then you can easily find more of these kinds of articles on CAIIB’s all papers i.e ABM, BFM, HRM, IT or Retail Banking on our website. You will also find some of the article links and the end of this article which we think as a CAIIB aspirant you might be interested in.

WHAT IS MONEY? 

If it can perform the following functions then it can easily be referred to as money. 

• Medium of exchange: It is a convenient way through which individual goods and services or other physical assets can be priced in terms of money & can be exchanged with money.

• Store of value: One can use it as a measure to store value over a period of time & can be used so that future payments can be financed.

• Measure of value: It can be used to measure and record the worth of the goods & services.
• Standard for deferred payments: It can also be used as an agreed measurement of future payments & receipts in case of contracts.

MONEY SUPPLY

It can refer to the stock of money in the economy at a given point of time. The Reserve Bank of India publishes the recorded money supply on a fortnightly basis. The supply of money affects the price level of goods, exchange rate, and business cycles running in the economy. It is also one factor that affects the growth of Gross Domestic Product (GDP). 

When nominal GDP is compared with money supply, it is called as well as the velocity of money i.e. ratio between nominal GDP and money supply.

MEASURES OF MONEY SUPPLY

There are many measures (indexes) with the help of which one can be measured. We have discussed them in the following paras:

WHOLESALE PRICE INDEX (WPI) 

It’s a measure that tells us about the changes in the prices of goods sold and traded by wholesale businesses to the businesses. Unlike other indexes such as CPI (consumer price index) which records the prices of goods and services which are purchased by the consumers, WPI- wholesale price index tracks or records the prices at the gate of the factory before they can reach the retail market or sellers. 

New series of WPI

A whole new series of WPI has been made effective from April 2017 with the intention to align the index with the base year of other important economic indicators such as GDP and IIP (Index of Industrial Production). In this new series, the base year was updated from 2004-2005 to 2011-2012. 

Calculation of Wholesale Price Index:

The numbers shown by WPI are the average price changes of goods which are usually expressed in percentages or ratios. This index is driven from the wholesale prices of a few commodities relevant for the index.

These commodities are usually significant goods in the region and represent various strata of the economy. The selected commodities are expected to provide a comprehensive value for WPI. The change to the base year 2011-12 uses around 697 items.

CONSUMER PRICE INDEX

CPI which stands for consumer price index is an index used to measure inflation in the retail market in the economy by collecting data about the changes in the prices of most common goods and services which are consumed by the consumers. 

It is also called a market basket and is calculated for only a fixed list of items. The list of items includes items of home appliances, apparel, food, electronics, medical care, transportation, education, etc. 

It has to be kept in mind that the data related to the prices are collected periodically and therefore, the syntax is used for the calculation of inflation levels in the economy as well as for the computation of the cost of living. 

One can also understand from the same text as to how much an average consumer can spend/ expense to be on par with the changes in the prices. 

We have to remember that CPI is different from WPI because the wholesale price index is a measure of inflation at the wholesale level while CPI is a measure of inflation at the consumer level. 

Calculation of Consumer Price Index:

Its calculation is done in reference to a base year (the base year being used as a benchmark). The changes in the prices are of that year. 

While doing its calculation, we have to remember that the price in the basket in the first year has to be divided by the price of the market basket inter base year first and then to be multiplied by 100.

Consumer Price Index formula:

CPI = Cost of basket  Cost of the basket in the base year×100

The annual percentage change of CPI is also used to determine or assess inflation. 

GDP DEFLATOR

GDP deflator is a measure of the level of prices of all-new, domestically produced, final goods and services in an economy.

The GDP price deflator (gross domestic product), also known as the GDP deflator or the implicit price deflator, measures the changes in prices for all of the goods and services produced in an economy.

It is a tool to measure the level of prices of all the final goods and services which are domestically produced in an economy. The gross domestic product price deflator is also known as the implicit price deflator. 

It basically represents the total of goods and services which are produced. But this index does not take into account the impact of inflation or rising prices as the GDP of the economy rises and falls. 

Instead, the GDP price deflator tries to resolve this issue by presenting the effect of changes in prices on GDP, firstly, by giving a base year, secondly, by doing the comparison of current prices with the prices which were prevalent in the base year.

In simple terms, the GDP deflator shows how much of a change in GDP is dependent on the changes in the price levels in the economy.

Calculation of GDP Price Deflator:

The following formula is used to calculate the GDP price deflator:

GDP Price Deflator = Nominal GDP Real GDP×100

So, we hope you must have understood the meaning of money supply and inflation and by whom these are calculated as well as how they are calculated. If you liked this article, do tell us in the comments as it will keep us motivated to keep posting such materials for CAIIB 2022 exams.