The Truth behind Inflation | Explained by Dhruv Rathee

Summary

This video delves into the concept of inflation, illustrating how a 100 rupee note's value could diminish to 1 rupee 20 paise over 60 years due to economic changes. It explores four primary causes: economic boom leading to 'demand pull inflation', rising raw material costs causing 'cost push inflation', increased salaries or 'wage push inflation', and currency depreciation. The video also discusses the impact of inflation on unemployment, the ideal inflation rate for economic stability, and the measures central banks can take to control it. It challenges the idea of 0% inflation and the potential consequences of unchecked inflation, such as hyperinflation seen in Venezuela and Zimbabwe.

Takeaways

• 💡 Inflation erodes the purchasing power of money over time, as illustrated by the example of a 100 rupee note from 1958 being worth only 1 rupee 20 paise today.
• 📈 Economic booms can lead to 'demand pull inflation' where increased demand for goods and services causes prices to rise.
• 🌾 'Cost push inflation' occurs when the cost of raw materials increases, forcing businesses to raise the prices of their products to maintain profits.
• 💼 'Wage push inflation' happens when salary increases lead companies to raise the prices of their goods to compensate for higher labor costs.
• 💸 Currency depreciation, often due to excessive money printing by governments, can lead to a loss of value and trigger inflation.
• 🌎 The current global economic slowdown has led to reduced demand and consequently lower inflation rates.
• 💰 Governments can control inflation by adjusting interest rates, taxation, and public spending, which in turn affect the money supply and demand.
• 🔄 The Phillips Curve illustrates the inverse relationship between inflation and unemployment, suggesting a trade-off between the two.
• 🎯 An optimal inflation rate, around 2-6% for India, is considered to maintain price stability and low unemployment.
• 🏦 Central banks, like the RBI in India, use monetary policy tools such as interest rates to manage inflation and stabilize the economy.

Q & A

What is the impact of keeping a 100 rupee note hidden for 60 years due to inflation?

If you kept a 100 rupee note hidden for 60 years, its value would have reduced significantly due to inflation. In 1958, 100 rupees would be equivalent to 1 rupee 20 paise in today's value, meaning that the purchasing power of the note has drastically decreased.

What is inflation and why does it occur?

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. It occurs due to several reasons including economic booms, increase in raw material prices, increase in salaries, and currency depreciation.

How does an economic boom lead to inflation?

An economic boom leads to inflation because when there is good economic growth, people have more money to spend, increasing the demand for goods and services. This high demand can lead businesses to raise prices to maximize profits, resulting in inflation known as 'demand pull inflation'.

What is 'cost push inflation' and how does it occur?

'Cost push inflation' occurs when the prices of raw materials or inputs necessary for production increase, such as due to bad weather affecting crop prices or new taxes. Companies then pass on these increased costs to consumers by raising the prices of their products, leading to inflation.

Explain 'wage push inflation' and how it is related to salaries.

'Wage push inflation' happens when companies or governments increase the salaries of their employees. To maintain profitability, these businesses then increase the prices of their products, which can lead to inflation. This type of inflation is directly linked to wage increases.

How does currency depreciation contribute to inflation?

Currency depreciation, often caused by the government printing more money, leads to a decrease in the currency's value. This makes imports more expensive and can lead to higher prices for goods and services, thus causing inflation.

What is the significance of the Phillips Curve in relation to inflation and unemployment?

The Phillips Curve illustrates an inverse relationship between inflation and unemployment. It suggests that when the economy is growing and inflation is high, unemployment is low, and vice versa. However, this relationship has its limits and can be influenced by other factors such as political instability.

What is the ideal inflation rate according to central banks of developed countries?

The central banks of developed countries aim to maintain an inflation rate of around 2%. This is considered the optimum level that balances price stability with economic growth and low unemployment.

How can a government control inflation?

A government can control inflation through various means, such as adjusting interest rates by the central bank, controlling the money supply, imposing taxes, and managing government spending.

What is 'stagflation' and how does it differ from typical economic scenarios?

Stagflation is an economic situation where the inflation rate is high, the economic output is low, and unemployment is high. It differs from typical scenarios where inflation and economic growth are positively correlated or where deflation accompanies economic contraction.

Why might distributing money for free during a recession not lead to inflation?

Distributing money for free during a recession might not lead to inflation because the increase in spending power might not be significant enough to drastically alter the demand for goods and services. The overall demand has typically fallen so much during a recession that the additional money does not push up prices significantly.