What is inflation and what does it mean when people say the currency in Venezuela is worthless?
In: Economics
Inflation is a general increase in the level of prices in an economy.
Usually, this is primarily driven by there being too many dollars circulating in the economy. The money supply, both by direct government action and the lending of private organizations and individuals, can change. If the amount of stuff being made and sold doesn’t change but the number of dollars people have to spend does, prices will rise (same if the number of dollars grows much faster than the amount of stuff produced).
Extreme inflation, in the form seen in Venezuela, happens when governments openly turn to the printing presses to finance their spending. When a government says it will spend a ton by printing new money, it usually means a ton of new dollars (or bolivars) get circulated into the economy with basically no change in the amount of stuff actually being made. Hence, prices increase. If this is standard policy, prices start to grow very fast. Once this happens, it becomes very hard to slow down because people expect the money supply to keep increasing very rapidly and will raise prices in anticipation.
In Venezuela’s case, at the peak of its hyperinflation, $65,000 at the end of the year would only buy as much as $1 did at the start.
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