What is Inflation?

Imagine in a remote place where you live, there are a 100 gold coins (1 coin= 1$) in circulation, which are used for trading. And you can buy a pair of shoes for 1 gold coin. What the government does is it replaces the 100 gold coins with 100 $  currency notes. Now one note buys you a pair of shoes.

But suddenly the government realizes that it can print more such notes so that they can spend them. The shoe maker believes that the money he is offered, is from the original $100 pool and continues to give a pair for a $1. And the government continues to print and spend because they get something for nothing.

After a while the $100 which was supposed to be in circulation becomes $200 paper currency notes in circulation with in the system. When government does this, it is beneficial for the business, lot more of government funded projects and contracts and people make more money. But suddenly the Shoe vendor realizes that there is more money with everyone so he begins to charge 2$ for a pair of shoe.

In reality the shoe vendor doesn’t get any richer by charging $2 for the pair of shoe, because the purchasing power remains the same.

  • Before excess Notes were printed : With 1$ you got a pair of shoes.
  • After excess Notes were printed    : With 2$ you get a pair of shoes.

Essentially it means with 1$ now you get only your left shoe(or a right shoe). This means the money lost it value. Essentially when government prints and spends more money it leads to inflation or devaluation of currency.

Then why does the government print more notes?

Because the government is always trying to trick the people into selling goods and services at pre-inflated prices with inflated money. To understand How inflation eats away the purchasing power or value of the currency note you have in hand.  Just take a look at the below table.

So unless you don’t grow your money at least at the rate at which inflation exists, you just become poorer as the clock ticks.

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Published by: Mannar

- Technology Analyst at Deloitte - Mechanical Engineer turned IT Professional - Technology-Social Media Enthusiast. - Blogger & Photographer.

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