Why if I have $100 right now, 10 years later that same $100 will have less purchasing power? Why can’t our money retain its value over time, I’ve earned it but why does the value of my time and effort go down over time?
In: 5591
Because it really does, in most cases, go down over time.
On a fairly short time period, it is reasonable to expect that a currency retains most of its value and represents a stable store of value and acts as a means of exchange.
But, there is every reason to expect that an hour worked today would be worth less than an hour worked in the future. An extreme illustration would be say comparing the output of a farmer 100 years ago with a farmer today. If a modern farmer achieves the same output for the given input of labor as his counterpart did 100 years ago, that would be a VERY unproductive and inefficient farmer.
There are competing forces at work here. The hour someone worked some time ago would be expected to earn much less purchasing power because that hour in the past is, in a sense, compared to an hour worked today. One other way to look at this is with increasing productivity, one could also claim that an hour worked today should produce more purchasing power since there is (generally) higher productivity.
Looking at a long enough period, productivity (through use of better knowhow, technology etc) determines the purchasing power. An economy that grows productivity at a rate broadly greater than inflation will generally result in a situation where purchasing power grows. Inflation can therefore be seen as an inducement to invest and grow productivity.
Latest Answers