A persistent increase in the level of consumer prices is inflation. How prices rise? we all know the law of supply and demand, which briefly, states that when demand is high, prices will rise, and when supply is high, prices will drop. But there is one more reason why price rises even if supply and demand remains constant.
Decline in the purchasing power of money
How purchasing power of money is decline? Lets look at a small example.
In the beginning of mankind, there was obviously no money. Once there was a small village which had 10 people and 10 gold coins and nothing else. One day, people decided to print 10 notes of 1 rupee each for the transaction purpose. So how much one gold coin worth now?
1 Gold coin = 1 Rs.
Now after a year, these 10 Rs did not satisfied their needs. so they thought that printing money will solve their financial problems so they printed 10 more rupees and pushed it into the circulation. So now how much one gold coin worth?
now 1 Gold coin = 2 Rs.
Again after a year these people became greedy & similarly they printed 10 more rupees and brought to the market.
now 1 Gold coin = 3 Rs.
In this way price of a particular product rises every year.
Moral: It is not actually the price of gold which is going high. The gold is same here (10 coins). It is actually the price of money going down. Whenever, the governments & central banks from all around the world print money, the purchasing power of money goes down & the price of the gold goes up because now more money is available to buy the same amount of gold.
Decline in the purchasing power of money
How purchasing power of money is decline? Lets look at a small example.
In the beginning of mankind, there was obviously no money. Once there was a small village which had 10 people and 10 gold coins and nothing else. One day, people decided to print 10 notes of 1 rupee each for the transaction purpose. So how much one gold coin worth now?
Now after a year, these 10 Rs did not satisfied their needs. so they thought that printing money will solve their financial problems so they printed 10 more rupees and pushed it into the circulation. So now how much one gold coin worth?
now 1 Gold coin = 2 Rs.
Again after a year these people became greedy & similarly they printed 10 more rupees and brought to the market.
now 1 Gold coin = 3 Rs.
In this way price of a particular product rises every year.
Moral: It is not actually the price of gold which is going high. The gold is same here (10 coins). It is actually the price of money going down. Whenever, the governments & central banks from all around the world print money, the purchasing power of money goes down & the price of the gold goes up because now more money is available to buy the same amount of gold.
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