To establish a theoretic background and
a focus for this study. We shall examine, summarily, the views of others on the
problem in time past. This examination of past literature covers theories.
Principles, conjunctions arguments related to the topic in question directly or
indirectly. However the review into the literary past of the problem is
restricted to the domain of published works.
Inflation is generally defined as a
persistent rise in the general price level. But there are so many definitions
as we know. It is necessary to consider how different groups of scholars are
classified to reflect their opinion on the issue of the causes of solutions to,
and prediction about inflation. Classifying these opinions will do this by
school of thought. Given this scenario, this section will briefly evaluate the
monetarists, the Keynesians, the structuralist and the institutinalists.
In evaluating the theories of inflation,
Okowa (1995) posit that the fundamental theoretical basis for inflation lie in
the fact that price would rise continuously in a competitive setting if the
demand for goods and services continuously outweigh the supply.
Gbosi (1993) presents the theories of
inflation as the Keynesian excess demand and theory, the quantity theory
approach and the cost-push theory and the sector shift theory.
The
Keynesian Excess Demand Theory
The Keynesian excess demand theory, which is also
called “gap analysis” states that inflation results from excess supply. If the
expenditure for goods and services exceeds income at full employment level of
output, a gap exists. This gap between aggregate supply and aggregate demand is
known as inflationary. The result from excess demand generated by increase
expenditure. The theory has been criticized for ignoring monetary factors in
the analysis as well as the effects of rising nominal income on money demand
and interest rates. Besides the theories income expenditure approach
concentrates on excess demand in the commodity market but ignores the roles of
the factors market.
To tackle the problem of inflation,
the theory suggests that aggregate demand should be improved through
improvements in productivity.
In essence, the Keynesian excess
demand theory advocates for demand and supply management as a means fo solving
the inflation problem.
The
Monetary Theory of Inflation
The monetary see inflation as an
entirely monetary phenomenon. The monetary view is traced to the “quality
theory of money’. This is why it is otherwise called” qualify theory approach”.
The approach utilizes the fishers
equation which express as
MV=PQ.
Where
M = money supply
V
–velocity of spending
P=
price level.
Q=the
level of real output
The argument is that at full
employment V and Q are constant. Therefore, price varies directly with the
quality of money. This is to say that changes in price level are informed by
changes in the money stock.
Friedman, the major proponent of
monetarism argued that inflation could be produced only by a mere rapid
increase in quality of money than output with this, he came to conclusion that
P
= f(m)
P
= b0+bim
Bi
> 0
Where
P = general price level
M
= money supply
B0-
bi are coefficient of parameter.
Here
inflation is solved through monetary control.
The
Cost-Push Theory
The cost-push theory declares that inflation occurs as
a result of price increase on the supply sides (increase in the price of factor
inputs)
Inflation therefore is a consequent
of autonomous increase in the prices factors of production especially wages.
Gbosi (1993) said “this is because
by agitating for increase in wages by labour, producers see this as an increase
in the cost of production”. The employers in turn pass on the increase in cost
to the consumers by raising the price. Under the cost push theory there exist
the designation of inflation as profit-push”, “wage-push”. Import price-push” and
tax-push. The problem of inflation according to the theory can be solved by the
use of income policy to control factor costs.