Overview
This lecture concludes the topic of money and wealth by combining concepts from previous lessons to explain how changes in money supply and production affect general price levels (inflation and deflation), using the example of hyperinflation in Zimbabwe.
Case Study: Zimbabwe’s Hyperinflation
- Zimbabwe experienced rapidly increasing inflation rates, starting at 7% in 1980 and reaching astronomical levels by 2008.
- High inflation led to currency denominations in the billions, making the Zimbabwe dollar nearly worthless.
- Printing excessive money without corresponding increases in production led to currency devaluation and extreme price hikes.
Inflation and Money Supply
- Inflation is a sustained increase in the general level of prices for goods and services.
- Central banks typically aim for a stable, low inflation rate (about 2%).
- Printing more money almost always leads to inflation unless matched by increased production.
The Inflation Equation
- Inflation = Percentage change in money supply - Percentage change in production.
- If money supply rises faster than production, prices increase (inflation).
- If production rises faster than money supply, prices decrease (deflation).
- Examples:
- Money supply +5%, production +3% → inflation = 2%
- Money supply +7%, production +2% → inflation = 5%
- Money supply +2%, production +3% → deflation = 1%
- Money supply +6%, production +10% → deflation = 4%
- Money supply +5%, production +5% → no change in prices
Factors Influencing Production
- Production changes originate from factors of production: land, labor, and capital.
- Technological advances or more resources (people, capital) can increase production, affecting price levels.
Key Terms & Definitions
- Inflation — Sustained increase in the general price level of goods and services.
- Deflation — Sustained decrease in the general price level of goods and services.
- Money Supply — Total amount of money available in an economy.
- Production — The total output of goods and services (measured as income in economics).
- Factors of Production — Inputs (land, labor, capital) used to produce goods and services.
- Delta (Δ) — Symbol representing change (in percentage terms) in a variable.
Action Items / Next Steps
- Review the inflation equation: Inflation = % change in money supply - % change in production.
- Prepare for next unit on factors of production and their impact on economic output.