I was going to find Milton Friedman's definition of inflation. I thought that would be a good place to go next. But before I even got started, I got email from Greg. If you leave a comment on the blog, I get it as email so I don't miss it. And Greg left a comment on the blog:
Actually Art inflation is most commonly defined as a sustained rise in the general price level over time.
So there ya go. That's pretty much word-for-word what I was attributing to Friedman. I'm still looking for that one. But meanwhile, I found this from Investopedia:
Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.
The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power... When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year.
Okay. Except a pack of gum is still a nickel, right?
The company did not raise the original five cent price of a five-stick package of Wrigley's Spearmint, Juicy Fruit, and Doublemint gums until 1971. Management reluctantly did so by creating a seven-stick package and charging a dime for it.
Oh. Never mind. Come to think of it, I probably haven't bought gum since the 1960s.
9 comments:
Art
"The value of a dollar is observed in terms of purchasing power"
Yep
"The value of a dollar does not stay constant when there is inflation."
Nope, needs some tuning.
"The value of a dollar does not stay constant when observed in terms of purchasing power."
At the Marco level if the general price level increases 2% and household nominal incomes increase 2%; purchasing power is constant. If the value of the dollar is observed in terms of purchasing power, then inflation in this situation does not change the value of the dollar.
Art
This is why I made this statement on another of you threads.
"You are using increases in the price level as a proxy for increasing nominal income, but you have not connected your arguments about inflation to income levels."
"At the Macro level if the general price level increases 2% and household nominal incomes increase 2%; purchasing power is constant."
At the Macro level if the general price level increases 2% and household nominal incomes increase 2%, the purchasing power of households is constant. But it takes 2% more dollars to maintain the purchasing power of households. So the purchasing power of a dollar has fallen.
Art
"But it takes 2% more dollars to maintain the purchasing power of households. So the purchasing power of a dollar has fallen."
My goodness you have to stop thinking of the unit of account as a commodity.
It does not matter how many more dollars it takes.
The value of the dollar only changes when observed in terms of purchasing power.
The dollar itself has no intrinsic value.
Why do I care how many dollars it takes if my purchasing power is constant or increasing.
The dollar stop being a store of value when the dollar was no longer convertible to gold.
I'm having a little trouble understanding your remarks, OT.
At 9:19 you offered a little scenario that ended with these words: inflation in this situation does not change the value of the dollar.
At 11:30 I repeated your scenario with clarifications to show that the value of the dollar DOES change.
As I see it, I did the math a little better than you did, and came up with the right answer.
Yours of 3 PM takes an entirely different approach. Now you say "It does not matter how many more dollars it takes." And you say "Why do I care how many dollars it takes"...
If my arithmetic is correct, then in your scenario it DOES take more dollars to maintain the same level of purchasing power after 2% inflation. Whether you care or not is not at issue. What is at issue is whether we can say that inflation changes the value of the dollar.
I like to think prices are about what people are willing to pay for things and not about the value of money.
Where I live prices are generally lower than in a place like New York City. I think that is not because dollars in the Mid West are worth more e than the dollars that people in NY have.
Where you live, Jim, do prices go up? If so, how would you describe rising prices, in terms of the purchasing power of the dollar? How would you describe it in terms of the value of the dollar?
I think inflation or "value of the dollar" is used as the biggest boogie man there is.
Its a boogie man not in the sense that it isnt real, its a boogie man because its always thrown out there as something that is gonna get us and we've been conditioned from youth to fear it.
Most all economists and politicians want to scare us with inflation fears when the problem is not too many dollars chasing too few goods, its too many dollars in too few hands. Getting all of us to talk about and fight inflation...(BTW ever notice how inflation fights always involve shrinking the money in someone elses bank account)keeps us from talking about the real issue which is diversion of incomes from the 90% to the 10%
We will spend weeks on end arguing whether our dollar is being debased or having its purchasing power stolen and just ignore what is happening obviously right in front of us, the middle class being stripped of power and assets. Its not inflation that is ripping off the masses, however you want to define it, its gross inequities in incomes relative to useful work done.
i guess that about sums it up, Greg.
Post a Comment