Question

What is the difference between a relative price change and inflation? Give one example from internet research of a country that experienced inflation following a stimulus to spending (either private or government). Explain why the stimulus occurred

Answer 1

Difference ibetween ia iRelative iPrice iChange iand iInflation:

Relative-price ichange iis ia ichange iwhich iarises iin imarket ieconomies ias iindividual iprices iadjust ito ithe iflow iof ithe idemand iand isupply ifor ivarious igoods irather ithan imonetary iphenomenon. iRelative iPrice iChanges iinforms iabout ithe iscarcity iof iparticular igoods iand iservices. iA irising irelative iprice iclassifies ithat idemand iexceeds isupply ibut ia ifalling irelative iprice iindicates isupply iexceeds idemand. iDue ito irise iin irelative iprice ithat ilead ito iconsumers ito ishift ion ithe isubstitutes igoods iand ialso, iincrease iin ithe iprofit iopportunities, iadvantageous iproducers ito ibring imore iof ithe igood ito imarket. iIt ican ibe isaid ithat irelative iprice ichanges iwhich idirectly iimpacts ion ithe ibalance isheets iof ibusinesses iand iconsumer's iincome. i

In icontrast, iInflation irefers ito iany iincrease iin iprices iof igoods iand iservices icaused iby iconstantly ichanging isupply iand idemand iconditions. iIt idoes inot iprovide iuseful iinformation ito iour iconsumption, iproduction, ior ilabor ichoices. iIf ianything ihappens, iinflation ican itemporarily imislead irelative iprice ithat ilead ito ipeople ito imake iunsound ieconomic ichoices. iEven, iit ican icause ipeople ito ishift itheir itime iand iresources iaway ifrom iactivities ithat iimprove iproduction iand ilong-term ieconomic igrowth ithat iprotect itheir iwealth irather ithan iexpand iit.

We ican itake iexample iof iZimbabwe icountry ithat iexperienced iinflation ifollowing ia istimulus ito ispending i(either iprivate ior igovernment). iBetween ithe iperiod iof i2004 iand i2009, iZimbabwe icountry ihad iexperienced iinflation. iDuring ithis iperiod, ithe igovernment iof izimbabwe iprinted imoney ito ipay ifor ithe iwar iin ithe iCongo. iAlongside, ithe idroughts iand ithe ifarm iconfiscation irestricted ithe isupply iof ifood iand iother ilocally iproduced igoods. iThe iconsequence iof ithis, ithe iinflation ibecame iworse ithan iin iGermany. iThe iinflation irate iwas ireached iat i98% ia iday iand iprices ibecame idoubled ievery i24 ihours. iFinally, iit iis iended iwhen ithe icountry ichanged iits icurrency ito ithe iU.S. idollar.