Glamor Economics

Chapter 165

Chapter 21 Your wallet is full, have you really become rich——Inflation and deflation
After the first order of dishes, the price of the dishes will increase—inflation
Customer: "Why is your meal so expensive? It's much higher than the price on the menu. Did you include a lot of taxes in it?"

Boss: "Where, I didn't calculate the tax at all. After you order the food, the price of the food will go up!"

Customer: "Nonsense, could it be that the price has increased after I have been eating for a while?"

Boss: "That's right, you don't know the current inflation. We have no choice but to adjust the price at any time."

It's unbelievable that the price is different before and after the meal, and the price rises so fast.In fact, this is not a joke, but a real thing that happened when an expert traveled to Bolivia in 1982, and it was published in the New York Times.In that year, Bolivia's inflation reached 24000% within a year, that is to say, prices rose at a rate of 65.8% per day.Assuming that the restaurant is open for 10 hours a day, the price per hour will increase at a rate of nearly 7%. Of course, the price when ordering is different from the price when checking out.

Now if you talk about inflation with an old farmer in the vegetable market, he may tell you that when measuring the price of an item, don’t look at money, otherwise you will be fooled by money.The best way is to use the exchange price of barter to calculate, so that, for hundreds or even thousands of years, the prices of the items with the minimum living standard can be guaranteed not to change greatly.For example, take soybeans as a standard commodity and use it to measure the prices of various necessities of life in various decades of the 20th century, and you will find that what the old farmer said is correct.

black rice soybean tea wages
Nominal variable (based on RMB) 2 yuan/jin 1 yuan/jin 5 yuan/jin 5000 yuan

actual variable
（以1斤大豆为衡量基准）1斤大豆=0.5斤黑米1斤大豆=0.2斤茶叶工资=5000斤大豆

actual variable
（以1斤黑米为衡量基准）1斤黑米=2斤大豆1斤黑米=0.4斤茶叶工资=2500斤黑米

In general, the prices of all goods are expressed in money, which economists call "money prices."For example, if we say that a coat is 50 yuan and a pair of shoes is 100 yuan, the 50 yuan and 100 yuan here refer to the currency price.But how many shoes are equal to a coat, or how many catties of black rice is equal to a catty of soybeans in a list, this is the price of one item relative to another, and economists call it "relative price".

It can be seen that the price of an item can be expressed not only in money, but also in another item.When the currency symbol is removed, we can compare the prices of two items arbitrarily, for example, 1 catty of soybeans is equal to half a catty of tea, or 1 catty of tea is equal to 2 catties of soybeans.The prices here are relative prices.

In economics, the monetary price of an item is called a "nominal variable" and the relative price is called a "real variable".According to economists, the supply of money only affects the nominal variables of goods and not the real variables.That is to say, for decades, assuming that soybeans cost 1 cent per catty at the beginning, and 1 catty of soybeans equals half a catty of black rice. After decades, soybeans will become the current price of 1 yuan per catty. Although the price has increased by 5 times, But 1 catty of soybeans is equal to half a catty of black rice.

For another example, when everyone's wages double, the entire price level also doubles, and the central bank supplies double the money.This is the principle of monetary neutrality, that is, the currency supply changes while the real variable remains unchanged.

However, when the government doubles the money supply, will the money remain neutral?uncertain.Economists have observed that in the short run, i.e. a year or two, a sharp increase in the quantity of money can have a large effect on the real variable of the good, but in the long run, say 10 years later, a change in the quantity of money will only affect Nominal variable, and will not affect the actual variable, 1 catty of soybeans is still equal to half a catty of black rice.

In economics, inflation generally refers to the depreciation of banknotes caused by the issuance of banknotes exceeding the amount of money actually needed in commodity circulation.Its direct reflection is that prices continue to rise.If you go into the market and the price of rice or pork has gone up, you can't say that inflation has happened; but when you look around and see that the prices of most things have gone up, you can tell that inflation has happened up.

So what exactly causes inflation?
First, insufficient supply causes inflation.When there is a shortage of raw materials in the market, commodity prices will definitely rise, which is inflation caused by shortage of supply.But this kind of inflation does not last long, because there is no continuous demand, it can only be short-lived.

Second, inflation caused by excessive demand.This kind of inflation is that people's demand continues to heat up, while the supply of goods remains the same, causing the prices of goods to rise crazily. This kind of inflation is more troublesome.At this time, many speculative businessmen will appear, hoarding goods and selling them at high prices, exacerbating the shortage of supply, "fanning the flames" for rising prices, and making prices rise even more.In turn, more speculators will come in, the price rise will intensify, and the goods will become harder to buy, forming a vicious circle.

Third, there will be inflation caused by insufficient demand due to excess fiscal expenditure or inflation supply.Also, too much public reserve funds that cannot be recovered will also cause inflation.

Every time inflation occurs, it is "frozen three feet, not a day's cold", and there will be certain signs before, but people's desire for profit makes them lose their rationality, thus bringing inevitable disasters to themselves.

[links to related words]

Currency illusion is the American economist Owen?What Fisher proposed in 1928 is the inflationary effect of monetary policy.It refers to a psychological illusion that people only respond to the nominal value of a currency and ignore changes in its actual purchasing power.

When inflation first occurs, individuals cannot know the extent of inflation or price rise, and can only judge by the prices of a few commodities in the local area that they come into contact with.Under such circumstances, personal price information is incomplete, and individuals can only focus on their own monetary income, which is prone to monetary illusions.For example, when workers negotiate wages with companies, they may regard the nominal wage increase promised by the company as the actual wage increase.In fact, because inflation has already occurred, real wages have not actually risen, that is to say, the actual purchasing power has not risen, or even declined.In this way, the business obtains additional profits through the illusion of money.

(End of this chapter)