Perhaps an example, with small, manageable numbers will help.
We have an economy: E. Remember, an economy is just a group of folk who trade things. To make their trading easier, they invented money: . Remember, money is just an easy-to-use Standard of Scale that lets folk understand the value of many different things in terms of only one thing. To simplify this example, we focus on only one good in this economy: G. Oh, and people: F.
Economy: E
Money:
Widgets: G
Folk: F
Goods are hot items, and everyone wants them; folk will buy Goods so long as they have money for them.
So, we set up our economy. We have:
10F
1000G
10,000
The 10,000 is spread equally over the 10F (100 to each), who, of course, use ALL of it to buy up the 1000G. The price per good: /G = 10,000/1000G = 10/G. We can figure out the REAL VALUE of by comparing it to the # of G that can be bought with it. Since each G costs 10, the value of is calculated as G/ = 1G/10 = 0.10G/, which only tells us that because it costs 10/G, each can only buy 1/10 a G. The REAL VALUE of (as measured in an actual, REAL, goods, G) is 0.10G.
Behold! A second, almost identical economy: E2!
This economy is almost exactly the same, except:
10F
1000G
20,000
As before, all of is divided over the 10F (200 to each this time), who, as before, use ALL of it to buy up the 1000G. This time, the price per good: /G = 20,000/1000G = 20/G. We can figure out the REAL VALUE of by comparing it to the # of G that can be bought with it. Since each G costs 20, the value of is calculated as G/ = 1G/20 = 0.05G/, which tells us that because it costs 20/G, each can only buy 1/20 a G. The REAL VALUE of (as measured in actual, REAL, goods, G) is 0.05G.
Now enter Mr. MoneyBags. He wasn't bright enough to convert all his money () to goods (G), so he only has money. In which economy is his money () worth more? In which economy does his money () have more REAL VALUE? Is this the economy that represents Inflation (where the price/good is higher), or the one that does not represent Inflation (lower price/good)?
In the real world, Mr. MoneyBags is a low-income man on a fixed budget; he doesn't have any goods he can sell, only a fixed income; when the price per goods goes up, the value of his money goes down. Poor Mr. MoneyBags... poor average citizen in an inflation.
INFLATION IS BAD!
Jon
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