okay what I want to do in this video is finish up our look at or you know are looking at and money and wealth and what I want to do is try to get to a situation where we combine everything in the previous four videos to explain the effects of production prices factors of production money supply and I want to do all of those things and get that into one single equation that we can explain why the general level of prices the prices of all goods and services produced in general change when we take into account changes in the money supply and changes in production so as I said this is the last video of money and wealth and it's the fifth video as well now don't worry your screen is intentionally black no the idea here is that I want to give a quick case study and the first thing I'm going to do is put up this flag now this here is the flag of Zimbabwe okay it's in African nation and it was ruled and by this guy who's a guy called Robert McGavin he took power and and then became a dictator and it's the 8th of December certainly as not as the 8th of September 2019 now when I'm recording this video and I understand Lee just died a few days ago and the the reason why I mentioned this guy is because what we're talking about now are the inflation rates in Zimbabwe since independence ok so what we've got here is in 1980 the inflation rate in Zimbabwe was 7% there for reasons that I'm not gonna go into now and and I suppose I will mention that I don't entirely agree with the the general thinking on this but what most central banks want is an inflation rate between zero and two percent stable prices that are rising slowly now there are reasons that they give for this I actually think that you know I'm not wholly convinced by all of those reasons and but you know we'll go into that at a later stage when we talk about unit which is microeconomics so understanding that the supposed ideal target inflation rate is 2% in 1980 we see 7% and that's you know that means the prices of all goods and services in the economy in general are rising by 7% now some could be am rising by less others could be rising by more orders could even be falling but what we are saying is that overall when you average out the increases and decreases and all the prices in the economy the cost of buying things went up by 7% so the idea there is that if on the first of January and 1980 a bundle a general whatever collection of goods that you would buy cost you a hundred Zimbabwe dollars by the 31st of December 1980 that same exact bundle of goods with no change in quality would buy cost your 107 a Zimbabwean dollars to buy ok so again we're just saying here that the rate of 7% is of both the target rate of 2% if you look at a 1981 we have 14% which is in get again like 7 times higher than what we would have wanted 15% 19% it's getting kind of out of control in 1984 we're 10 percent and that's still way too high but it's almost half the previous year's inflation rate 10 percent again in 1985 way too high but again it looks like they're starting to control it a bit better until we see 1986 and so on we get these you know like like goddamn 1988 of 8% still 4 times higher than what we'd really like but then after that it just really starts to take off now if you know you can continue looking on through these but like 40% in 1992 is absolutely crazy 48% 1998 but if we go across 2004 or what we're gonna see here is 130 2.75% now that's just madness I mean you know that's absolutely incredible you can from the Connolly wood inflation they were near that high and but if we go down to something like 2007 we've got 66,000 to 112 percent I mean like that's just out of control and it gets worse because when you go across the mid November 2008 it's I mean I don't know I don't know what that number is like that's just insane you know that's just crazy so what basically happened so the thing is and I hope we kind of have an inkling into what happened they printed way too much money and I welcome into why am I have opinions and and they seem to be largely the mainstream opinions but the thing is what you have to ask yourself here why do they have denominations of currency that are so high hundred billion Zimbabwe dollars and the reason that they have these denominations so high is because the currency became so worthless that they had to print the currency in much much higher denominations and when you do that and you're continually increasing the money supply well then all that's going to happen is the prices are going to continue to rise and as such you're gonna have to continue to print the currency in even greater denominations if we look at this kid here like he's got stacks of money absolute stacks of money if these were like even these are even like you know five euro notes he would have huge money and could be a would be able to buy a lot of goods and services but the problem is they're not and the problem is that he's not rich because these notes these denominations this currency buys very very little goods and services the next thing here is we have these guys and they're holding up the starving billionaire poster and the first question you have to ask is why are they billionaires well they have billions of Zimbabwe dollars and the next question you have to ask is why are they starving and the reason that they're starving is because these in Bob way dollars by very very little never forgive me for this and I did put in a meme and a meme can be somewhat crass and that's certainly not my intention but and the reason that I put this in because I wanted to show the effects of inflation on exchange rates so the joke here 50 cent the rapper is like I really like 50 cent or as we call them in Zimbabwe for billion dollars and I was actually just thinking about this I I'm quite sure 50 US cent would be worth way more than four billion dollars in that way way more um but you know what happened and the thing that happened was that they printed so much money that the money buys very little goods and services in Zimbabwe and if that's true well then Finers than people that don't use the Zimbabwe dollar they are going to be less willing to give their currency over if you if there's a mob with two boys and bad boy dollars if or exchange them for some bad boy dollars if there's a bad boy dollars air buys less and less and less so if we look at this here we've got on the first of January 2000 Oman let's just say that's about 90s and bad boy dollar slightly less than a hundred per one u.s. dollar and the thing is that it really is a relevant where you're starting from that's the relevant part what the most intelligent part is what is the rate of change and I'm going here and I'm gonna and I'm somewhat rounding off and I'm gonna take the UN and estimate because it's just because the most extreme really but on the first of January 2009 that's eight years later we're kind of up at ten to the power of thirty Zimbabwe dollars per US dollar you don't forget you know the US was printed money as well at this time so they were devaluing their currency as well and yet you have to give over and let's just even say a hundred I'd say a hundred is Ababwa dollars M eight years later you have to give one with thirty zero after us Zimbabwe dollars to get one US dollar so that's the effects of inflation on both prices and currency exchange now a printing money almost always has the effect inflation and the reason that I say almost is very important it almost is true always has the effect of inflation but whatever an increase in production all printing money will do is cause higher prices now this is I mean you know pause the video here for a second and take down this equation this is the equation that's designed to try to bring together everything we've done in the four previous videos in this series I'm into one simple simplistic I'm not saying simple but simplistic and equation are just way of thinking about inflation why prices increase so what we're going to say and I'm gonna put up this equation and everybody panics when I put that up please don't concern yourself with that yet the first thing I want to say is inflation so let's talk about what inflation is it's a raw it's a sustained sustained increase in the general level of prices so if in general prices are going up if in general you have to hand over more of your currency to get the same basket of goods and services that you were buying that's inflation it's a sustained increase in the general level of prices that's what inflation is and this is the equation that links everything together so inflation equals the percentage change in the money supply but take away the percentage change in production and that's really important we know printing more money has the tendency to cause inflation and we know producing more goods and services has the tendency to cause deflation but what happens if both things are occurring at the same time so this is what this equation is designed to tell so we've got this red box here and this here is the Greek letter Delta which means change okay so inflation what is it it's the percentage change in prices in the general level of prices all prices okay so inflation is measured depends on the percentage change the Greek letter Delta for change the percentage change in the money supply it's just a blue box there so each of these boxes underneath are designed to represent the boxes of both them which are written in English and we've got the percentage change in income so in economics m-y means income and you're like hold on a second that's not what you've written here it's production and say absolutely that's a very fair point but the thing is I'm in how do you get your income and you get your income by producing goods and services and selling it on the market and so right now I am producing educational goods and services and I'm selling that on the market so that's how I'm getting my income is the idea and so and we'll also see em in Unit two macroeconomic start for an economy as a whole and it's absolutely true there's no you know weird kind of mental gymnastics to kind of make this somewhat plausibly true it's absolutely true and income is production and just get that in mind production as wealth production as well to why because we can consume what will produce so what the hell were imagine are our wealth is by what we can't consume and we can only consume what we produce and I know that's not a home descent true because you can buy imports and all that and I hope to bring in all of these caveats explain them away in later units particularly for this one here bed imports in unit three which is international economics now we're saying here in this example that the money supply increase by five percent and the production of goods and services increased by three okay well the first thing is water we're trying to measure we're trying to measure inflation which is how much in general prices rose M over a year usually okay so what we're saying is the way to do that in the long run this is this holds true in the long run this equation mmm it's the percentage change the money supply - the percentage change in production well what we're saying here is what's five minus three and the answer is simply two so inflation which is the percentage change in the general level of prices is two percent so if an average basket of goods an average collection of things that the average person I mean is there such a thing is the average person I don't know but the average person buys in a year and from the first of January of that year and they cost a hundred dollars or whatever but let's say a hundred and and by the end of that year 31st December of that year we'd expect them to cost a hundred and two it was no crazy no matte shakes no crazy increase and you know that's kind of where most central banks want to be at and so you know that that's not terrible but it's also not desirable at all and the money supply increased by seven percent in the production of goods and services increased by two percent whoa what are we trying to find when we're trying to find inflation that's what that red box here is so it's an inflation equals the percentage change in the money supply - the percentage change in production and what we have here is that five percent 7 minus 2 is 5 percent so what we're saying inflation would be in this scenario is that on average prices would rise by 5 percent so if something cost you a hundred on the first of January of that year by 31st December we would expect it on average they're not just something I shouldn't have said that if an average basket have got a collection of goods cost you 100 on the first search on you of that year and we expect them to cost 105 by the 31st December of that year onto the next one the money supply increase by two percent so what we are expecting whenever the money supply increases were expecting inflation okay however we know that when production increases we're expecting deflation so but you see that's too simplistic so we're saying what unites them all so that we can get an average predictor of what the change in prices will be and what unites them both is this in this equation here essentially which is this the exact same is this one on the top so what we're actually saying is what's 2 minus 3 and that's minus 1 so inflation is minus 1 and let's be very clear on that inflation is minus 1 deflation is this sustained decrease in the general level of prices and we have deflation of 1 percent not minus 1 percent deflation of 1% or inflation of minus 1% so in this scenario of slump if an average basket or average collection of goods and services on the 1st of January of that year cost you 100 we'd expect by the 31st of December of that year that cost you 99 not bad not bad at all ok and just a few more simple ones and I'm sure you get it just forgive me it's for completeness if the money supply increased by 6 percent and the production of goods and services increased by 10 percent or what's going to happen to prices and what we'd expect was they'd be falling by 4 percent sort of inflation of minus 4 deflation of 4% they I've been saying that this equation here even combines everything that we've talked about well where does the change in production come from the change in the money supply comes from the central bank I mean that's no problem okay the government just prints more money okay that's easy but where does this change the production come from and it comes from the factors of production and that's what we're going to turn our attention to next but the factors of production are the ones that produce these goods and services and so we're talking about changes in production where do they come from well maybe there's been a technological breakthrough maybe yeah entrepreneurs have worked at a better way to combined land labor and capital without any new ones in order to produce goods and services maybe there's just more people a higher labor and so you know then that leads on to or what what happens to GDP per capita maybe there's just more capital so there's no change in GDP per capita well there is excuse me but we're richer because we've produced 10 percent more and with the same population that means that 10 percent that population will buy 10 percent more all right so all of this or this whole thing here is designed to capture headway products all the things that we've talked about thus far and the last one if the money supply increased by 5% but the production of goods and services increased by 5% well then we'd expect prices not to change and inflation would be zero now this is the thing printing money has the tendency to cause inflation producing more and more goods and services has the tendency to cause deflation so what happens when they're both occurring at the same time well this is how we measure the expected change in prices in general of all goods and services when both of these things are occurring at the same time