How does inflation work?
In: Economics
Imagine you and some others are on a desert island with a tree that only produces 5 coconuts a year. You also have 5 gold coins, which you decide to use as money. It makes sense that 1 coconut is worth 1 coin.
Now someone finds a chest with another 95 coins, meaning there are 100 coins. If you kept trying to trade coconuts for a coin each, you’d run out! So instead the price gets put up to 20 coins. The amount of coconuts hasn’t changed, but the value of the coin has gone down because there are more of them.
Now suppose the tree is less healthy, and only produces 4 coconuts. Since there are fewer coconuts (resources), they become more valuable, and the price goes up up 25 coins.
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