Inflation

Inflation

Last week in class , we went over a activity that involved us bidding on several different products that were being showcased by the lovely Mrs. Teetaert. As the price of the items increased, less people were bidding on them and towards the end it became a competition of who wanted the item end. Afterwards we learned that the activity showed us how inflation really works.

What is Inflation?

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money, and a loss of real value in the medium of exchange and unit of account within the economy. To simply put it;  inflation is an upward movement in the average level of prices. It is also believed by economists that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. When we look back at our game in the second round, we found out what the items were and figured out the value. When we were introduced to more disposable income in the second round, we watched most students bid high amounts of money simply because they had the cash to do so.

Understanding Inflation

The following is a video defining deflation and relating the term with purchasing power.

Relationship between Inflation and Money

Inflation and its increase of prices will always be linked to money. Inflation is a high level of money pursuing a low level of goods/services. An example of how this works , picture a world that has just two commodities: Apples picked from apple trees, and paper money printed by the government. In a year where there is a drought and apples are limited, we'd expect to see the price of apples rise, as there will be quite a few dollars chasing very few oranges. On the other hand, if there was a high level of apples one year, we'd expect to see the price of apple fall, as apple sellers will need to reduce their prices in order to clear their inventory. These scenarios are inflation and deflation, respectively, though in the real world inflation and deflation are changes in the average price of all goods and services, not just one.

Relationship between Inflation and Money supply

Inflation as well as deflation can be caused by altering the level of money that is in the system. If the government prints large amounts of money, dollars become abundant relative to apples, in the last example. Therefore inflation is caused by the amount of money rising relative to the amount of goods and services. Deflation is caused by amount of money falling relative to goods and services.

In the Real World

In an article posted in January reading "Inflation rate rises to 1.5 in January" by the Canadian press talked about how the inflation rate in Canada raised from the previous month from Decembers 1.2 per cent. The cause of the increase was due to increased shelter, transportation, and food costs. Statistics Canada said seven of the eight major components of the consumer price index were up from a year ago. Higher electricity and insurance costs pushed up shelter costs. This shows how there was an overall demand increase in the growing economy. Demand for goods exceeds the capacity for manufactures to build them and prices rose, which led to inflation rising. While high levels of inflation seems dangerous, deflation in my opinion is even more dangerous. A high level of deflation will cause people to get laid off, spend less, prices become lower, which in my opinion will cause people to wait longer to see if prices can lower further, but consumers have less money to spend so they still buy less. Although inflation raises prices over time, I do believe that some inflation is a good thing.