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Which prices are important to economic behavior?
submited on 09.06.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 09.06.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
Since mid-2007 the topic of inflation began to accelerate in the domain of media popularity. In the last few moths this popularity gradually turned into irrational obsession. That is what it is all about.
Inflation is a monetary phenomenon. In other words, it is characteristic of money. We talk about inflation when the value of money declines due to increase of their quantity. When gold was money, inflation was driven by the fast increase in the metal supplies. With cash money, printed by central banks, inflation is the increase in money supply. Certainly, one of the effects of inflation is the growth of the prices of some or all goods and services. When for example BNB printed money at fast rates in 1996, the consumer prices indexrose 5 times. In recent memory the easy monetary policy of the Federal Reserve lead to rapid devaluation of the dollar against the other major currencies.
From the perspective of households the focus on the price growth of the consumer basket, as monitored by the official statistics, is only to certain extent meaningful. There is probably an “average” household, which bought the same exact compilation of goods and services – and therefore the consumer price index reflects correctly the change in expenses. But consumers are different and that is the reason why they follow changes in different prices – some buy more food, whereas others spend mostly on clothes and electronics. In the last 28 moths food prices in Bulgaria have risen at 35% on the average, furniture and household appliances – at 10%, and communications’ price went down by 1%.
On the other hand, monetary inflation induces change in relative prices. Some goods and services’ prices go up more rapidly than others – event to an extent of a balloon.
When credit is cheap and accessible as a result of the policies of the central and commercial banks, shares and real estate increase in value. Thus they become relatively more expensive –for example measured in labor hours, pairs of shoes or television sets.
Relative prices are important, because they help reallocating resources in the global economy. When the wages of IT specialists grow faster than those of physicians, more young people start studying informatics at the expense of medical sciences. When housing price rise more rapidly than automobile companies stocks, more savings are allocated to investments in real estate and construction at the expense of new automobile factories. Price signal for relative scarcity of a good or a commodity – thus for example, the rapid growth in ferrous metals and oil in recent years provide information for growing insufficiency of these commodities against the expected consumption.
If we look globally, the “price” of the fast growth of the Asian economies in the last 20 years is the growth in the prices of energy, food and commodities. In other words, the integration of the Chinese economy sharply reduced the prices of clothes and electronics, but the growth of income in these production areas increased demand for fuel and more qualitative food – thus cheap laptops are “paid” by expensive oil.
Inflation is a monetary phenomenon. In other words, it is characteristic of money. We talk about inflation when the value of money declines due to increase of their quantity. When gold was money, inflation was driven by the fast increase in the metal supplies. With cash money, printed by central banks, inflation is the increase in money supply. Certainly, one of the effects of inflation is the growth of the prices of some or all goods and services. When for example BNB printed money at fast rates in 1996, the consumer prices indexrose 5 times. In recent memory the easy monetary policy of the Federal Reserve lead to rapid devaluation of the dollar against the other major currencies.
From the perspective of households the focus on the price growth of the consumer basket, as monitored by the official statistics, is only to certain extent meaningful. There is probably an “average” household, which bought the same exact compilation of goods and services – and therefore the consumer price index reflects correctly the change in expenses. But consumers are different and that is the reason why they follow changes in different prices – some buy more food, whereas others spend mostly on clothes and electronics. In the last 28 moths food prices in Bulgaria have risen at 35% on the average, furniture and household appliances – at 10%, and communications’ price went down by 1%.
On the other hand, monetary inflation induces change in relative prices. Some goods and services’ prices go up more rapidly than others – event to an extent of a balloon.
When credit is cheap and accessible as a result of the policies of the central and commercial banks, shares and real estate increase in value. Thus they become relatively more expensive –for example measured in labor hours, pairs of shoes or television sets.
Relative prices are important, because they help reallocating resources in the global economy. When the wages of IT specialists grow faster than those of physicians, more young people start studying informatics at the expense of medical sciences. When housing price rise more rapidly than automobile companies stocks, more savings are allocated to investments in real estate and construction at the expense of new automobile factories. Price signal for relative scarcity of a good or a commodity – thus for example, the rapid growth in ferrous metals and oil in recent years provide information for growing insufficiency of these commodities against the expected consumption.
If we look globally, the “price” of the fast growth of the Asian economies in the last 20 years is the growth in the prices of energy, food and commodities. In other words, the integration of the Chinese economy sharply reduced the prices of clothes and electronics, but the growth of income in these production areas increased demand for fuel and more qualitative food – thus cheap laptops are “paid” by expensive oil.
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