What is inflation and what does it mean when people say the currency in Venezuela is worthless?
In: Economics
Inflation is generally when money is worth less than what it was. Almost all economies inflate. Hence why $1 back in the day was worth a hundred today. In the U.S. our average inflation per year has been around 3%. Meaning every year our dollar is worth 2-3% less than it was the previous year. Most government jobs see a raise of 4-6% per year to compensate for increased inflation as well as increased experience in that job.
The reason inflation exists is that more money enters circulation than the money that leaves circulation. If there is only $100 in a town of 10 people, each dollar would be worth a lot. You would have to pay pennies and your entire livelihood would be between $2-5 with one person most likely holding onto $30-50. If that town were to print more money it wouldn’t necessarily mean anyone would be getting paid more, it would just devalue their money. There would still be 10 people in a town fighting to survive. $2-5 would just be $20,000-50,000 with one person who has $300,000-500,000.
When you get to other countries they tend to have a value they control through trading. This used to be tracked in gold. Every country could make whatever currency with whatever value but their amount was determined by the amount of gold they had. If they wanted to increase their country’s value they would trade something to another country to get more gold. These days it is done with GDP, exports and Loans mostly.
It doesn’t really work that way anymore but I like explaining it that way because it’s easier to explain as. Venezuela has a lot of currency, but very little gold. So other countries don’t respect their currency so it is devalued to the point that if you want to order something that is $50 in the U.S. it would require about $500 in Venezuelan currency. That isn’t the most inflated currency in the world, but Venezuela is often a hot topic in politics because of their current governing style.
Inflation isn’t always a bad thing though. If countries compensates correctly, you can inflate all you want and still have strong economies. Sweden for example has more millionaires and billionaires per capita than most countries, including the U.S. (using U.S. currency as an indicator) and their currency is worth about an 8th of the U.S. Dollar. Meaning if you want $100 in the U.S. you would need to earn $800 in Sweden to have $100 in the U.S. Which seems like a lot more work, yet Swedish people get paid significantly hire in the middle income area than those in the U.S.
I know this was a longer text, but you asked two questions, explaining inflation alone wasn’t enough in my opinion.
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