If you go to a market or a supermarket with your mom, you may have seen ice cream that was 500 won but went up to 700 won. If 500 won ice cream went up to 700 won, what would the value of the money be? The value of the money has decreased because I have to spend 200 won more. If the price of other necessities goes up besides the price of a notebook, you'll have to spend more money than you do now, so the value of the money will decrease and you'll need more money. This rise in prices and fall in value of money is called inflation. If your income doesn't rise that much at home, your income will be cut, so your life will be difficult.
The Causes of Inflation
- Demand-pull inflation: It's inflation that happens because demand increases significantly and supply doesn't increase accordingly. When households have more money, consumption increases, but it happens when goods are not supplied. This is called excess liquidity supply.
- Cost-push inflation: When the production cost of a product goes up, the price of the product goes up, and the overall price goes up. For example, if the price of imported oil goes up, all oil-related products will go up. This is cost inflation.
- A simple shift in demand, a rise in utility bills, and a lack of supply due to low productivity are also causes of inflation.
The Effects of Inflation
Inflation can be seen as a steady rise in prices, an expansion of money volume, and a decline in the value of money. That's why inflation is also called the malignant cancer of the economy. There are four main effects of inflation.
- Office workers who get paid lose money. It's a good thing if you raise your salary as prices have risen, but most of them don't. Therefore, the income gap widens, and the phenomenon of the rich and the poor also causes social instability.
- Those who pay their debts are at an advantage, and those who receive them are at a disadvantage. It's because it's easier to pay off debts due to the decline in the value of money. People who are in debt are economically challenged, so it can be said that they play a role in redistributing wealth.
- If the price of the product becomes higher, we have to export it at a higher price, so the export is not going well. Also, if domestic goods become more expensive, more people will use imported goods. It can be a factor that makes the trade balance in the red.
- If the value of money decreases over time, you will lose money if you save it, so you will save less. As a result, banks do not receive funds, which reduces loans due to lack of capital and hinders economic growth.