Inflation

Jordan Ross

Economics in a Changing World

Mr. Bloom

12/6/11

 1) What is the purpose of money?

Money provides the economy with a singular form of currency. Instead of trading 4 chickens for 1 cow, transactions can occur through one common function. The main value of modern currency is the "purchasing power." Money allows consumers to gain goods and services from sellers, and money sanctions the trade of products for value.

2) What was the gold standard?  What is money backed by today?

The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.

3) What is inflation? 

"Inflation means, quiet simply, that average prices are rising. The inflation rate, or the change in the consumer price index, is the government's attempt to reflect changing prices with a single number, say 4.2 percent."

4) If prices are higher today than they were 30 years ago does it mean that we are poorer?

No, because "inflation is not that prices are going up, but rather that the purchasing power of the dollar is going down."

5) What is the difference between real and nominal figures?

"The nominal rate is used to calculate what you have to pay back; it's the number you see posted on the blank window or on the front page of a loan document." And a "real interest rate, which takes inflation into account and therefore reflects the true cost of "renting" capital. The real interest rate is the nominal rare minus the rate of inflation."

6) Who gets hurt the worst by inflation?

"Individuals who are retired or otherwise living on fixed incomes," are hurt the worst by inflation. "If that income is not indexed for inflation, then its purchasing power will gradually fade away."

7) Why is unexpected inflation worse than predictable inflation?

Unexpected inflation is worse than predictable inflation because of how devastating inflation can be if the rate of change is very high and no safety measures were taken to protect the economy. "But inflation is not constant or predictable," so unexpected inflation is also more common.

8)  Is there an incentive for politicians to invoke inflationary policies?

There is a lot of incentive for politicians to invoke inflationary policies, especially if they are corrupt. "Because shortsighted, corrupt, or desperate governments can buy themselves some time by stoking inflation. "Governments often owe large debts, and troubled governments owe even more. Plus, "inflation is good for debtors because it erodes the value of the money they must pay back.” And "governments control the inflation rate." All together, "governments can cut their own debts by pulling the inflation rip cord." Governments also utilize "inflation taxes" to "[tax] the people of [a] country - indirectly." "[Governments] have not physically taken money from their wallets; instead, [governments have] done it by devaluating the money that stays in their wallets."

9) Why is deflation bad? Aren’t low prices good?

"Inflation is bad; deflation, or steadily falling prices, is much worse." The "falling prices [of deflation] cause consumers to postpone purchases." "Consumers watch the value of their homes drop sharply while their mortgage payments stay the same. They feel poorer (because they are.)" Plus, "when consumers spend less, the economy grows less. Firms respond to this slowdown by cutting prices further still." Then, "some banks begin to have solvency problems; others just have the less capital for making new loans, which deprives otherwise healthy firms of credit and spreads the economic distress."

Economics Essay Final Draft

Jordan Ross

Economics in a Changing World

Mr. Bloom

12/1/11

Is a Free Market Economy Greedy?

            Mahatma Gandhi once said, “Earth provides enough to satisfy every man's need, but not every man's greed.” In this statement, Gandhi acknowledges the tension between satisfaction and greed. Gandhi essentially separates what people need, from what people want: the need being what is sufficient, and the want being what is selfish. Greed often emerges in relation to the economy. Greed is personified in a free market economy.

            Before understanding a free market economy, one must first define greed. Greed is defined as “An excessive desire to acquire or possess more than what one needs or deserves,” or the wish to gain more than necessary.

            Some economists like to justify a free market economy by using the term, “self-interest.” It is simply a kind twist to the phrase, interested in oneself, or greedy. However, self-interest is a selfishness that transpires to both ends of the free market economy.

            On one end lies the firm, or the buyer. A firm’s greed begins in the production of its service or good. In order to produce a good, a cost of production is charged to the producer. The product is then sold at a price for revenue. The revenue gained, minus the cost of production, creates the profit. In a free market economy, a successful firm is a business with a maximum profit, through low cost of production, and large revenue. But, to achieve a large profit, the firm must rely on greed and selfishness. One can lower the cost of production by cheaper materials, non-educated labor, or outsourced labor, all of which increase the amount of profit, and greed. Firms also falsely advertise goods at higher prices to gain larger revenue, resulting in a larger profit. The attempt alone to increase profit is an act of greed.

            Yet, maximizing profit is not the only selfish tactic used in a free market economy. Competition is another staple of the free market economy that promotes greed. Competition occurs when two or more firms produce the same product. In order to attract the most consumers, the firms will continuously lower prices of their goods and services to make a quick buck of the consumer, while eliminating the competition that cannot keep up. Competition is a bloody and greedy concept that is not only used, but is also promoted in a free market economy.

            Greed is also prevalent on the consumer’s side of an economic transaction. A consumer, or buyer, will always try to maximize their utilities. Maximizing one’s utilities is accomplished through using the least, to attain the most. The greedy consumer’s will buy from the firms with the lowest cost. This not only lowers the profit of the firm they purchased from, but it also negatively impacts the firms they did not decide to buy from by not adding to their revenue. This greedy cycle occurs because a free market economy promotes it.

            Some call the free market economy a necessary evil. This is due to the vast success the free market economy has had on a global scale. While successful however, it is one of the most greedy standards in the modern economy. The greed infested within both the consumers and the sellers tend to balance each other out. The greed of both parties seems to ironically keep them united and honest. The necessary evil of a free market economy will never achieve peace, but then again, not everyone wants it to.