INFLATION AND DEFLATION – WHAT IS IT?

Inflation and DeflationINFLATION IS PRICES GOING UP and deflation prices going down.

Maybe you’ve never heard of “deflation” because it’s not popular for businesses, but it does exist.

Recently, the gas prices hit the roof going up as high as $4.50 a gallon.  That dramatic increase in price is called Inflation.

But, the price of gas suddenly went down to $1.80 a few months later and that is deflation.

INFLATION AND DEFLATION -MONEY OR LESS MONEY

So, yes, you can say that inflation and deflation are what happens to the price of things – they go up or they go down.

There’s another way to look at both of them and it is from 2 other ways: One, there is more money (inflation) or there is less money (deflation) in the system and Two, there are more product in the market (deflation) or less product (inflation).

Let’s clear up the idea of more or less products in the market place.

Each basketball costs $1 and you have $4 and there are 4 basketballs to buy.  Using this as an example, let’s create an INFLATION where there are less products.  Take away 2 basketballs and still have $4.  Now, each basketball will cost $2.  The price for each basketball went up because there were less products available.

Now, let’s take the 4 basketballs and the $4 and add more basketballs, like 4 more, so there are more available to sell.  You still have $4, but now there are 8 basketballs.  That means that each basketball now costs 50 cents, the price for each went down.  That’s DEFLATION.

We can do it from the increase and decrease of money to make inflation or deflation.

With the 4 basketballs and $4, let’s add more money.  Let’s have $8 and 4 basketballs.  Now, each basketball will cost $2 rather than $1, because there’s more money.  That’s INFLATION

If we take away money, so it drops from $4 to $2 and still have the same number of basketballs – 4 – each basketball will cost 50 cents.  That’s DEFLATION.

With the drop in gas prices from $4.50 to $1.80, that is a DEFLATION (but you never heard of that in the news).

The solution by the oil companies was to create a scarcity meaning, announce the fact that there is less oil available so that there is less product which brings the cost of oil back up.  And, you have seen the price for gas increase over the past month.  That price increase is INFLATION and it is based on lowering the amount of product on the market.

This should help you better understand these 2 words, Inflation and Deflation.  That way, when you see prices go up, it means 2 things could be happening: More money in the system, or less product in the market.

Feel smarter?

Great!

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