Wikipedia:Reference desk/Archives/Humanities/2024 October 22

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October 22

Which object is experiencing inflation in this situation?

In a hypothetical economy involving shark scales and Rubik’s cubes, if one Rubik’s cube goes from being exchangeable for six shark scales in fiscal quarter 1 to being exchangeable for three shark scales in fiscal quarter 4, which item is experiencing inflation and/or deflation with respect to the other and by how much? Primal Groudon (talk) 21:18, 22 October 2024 (UTC)

See inflation. It doesn't refer to specific products or prices. It refers to the overall economy. When the general cost of products goes up, buying power decreases, and you have inflation. In your example buying power went from 1 cube for 6 scales to 2 cubes for 6 scales. If cubes is the currency, you have inflation. If scales is the currency, you went from 6 scales for 1 cube to 3 scales for 1 cube. That is deflation. — Preceding unsigned comment added by 68.187.174.155 (talk) 23:29, 22 October 2024 (UTC)

In your hypothetical economy, I assume you mean, shark scales is the currency and Rubik’s cubes is the only product. The price of Rubik’s cube went down from 6 shark scales in Q1 to 3 shark scales in Q4, which means the price of Rubik’s cubes drop by 50% in three quarters (equivalent to an annual fall of 66.7%). As Rubik’s cubes are the only product in your hypothetical economy, the supply and demand of Rubik’s cubes are equal to the AS and AD of the economy, also the change in the Rubik’s cubes price is qual to the change in the general price level, therefore, there is a 66.7% deflation in your economy. Stanleykswong (talk) 09:27, 23 October 2024 (UTC)

My intention was more of a barter economy, but I’ll accept that response. Primal Groudon (talk) 13:39, 23 October 2024 (UTC)

Inflation is purely a monetary phenomenon, it cannot occur in a barter economy Stanleykswong (talk) 16:07, 23 October 2024 (UTC)

Inflation depends strongly on demand, so calling it "purely a monetary phenomenon" is highly misleadiing. In the two-item economy, rather than one where shark scales are currency, one item inflation in value and the other deflated, by an equal (opposite) amount. DOR (ex-HK) (talk) 17:00, 23 October 2024 (UTC)

I suggest you to read Milton Friedman's (1994) “Inflation is always and everywhere a monetary phenomenon”.

Moreover, there is no doubt that inflation is affected by AD, but If AS increases more than AD, economic growth will not bring forth inflation. Stanleykswong (talk) 17:15, 23 October 2024 (UTC)

Inflation is money-based by definition. It is common for people to say something like "gas prices have gone up so there's inflation." Inflation isn't an increase in price of a specific product. Inflation is a decrease in the purchasing power of a currency. Things cost more because the currency has decreased in purchasing power. It isn't that one thing got more expesinve or even two things got more expensive. It is purely the decrease in purchasing power of the currency which has the effect of increasing the price of everything. It can have weird effects. As an example, I purchased Milka chocolates a couple weeks ago. The country I purchased them from is going through increased inflation. Their kroner is losing purchasing power, so the price of the Milka chocolates keeps going up. But, the purchasing power of the dollar has gone up in comparison. So, from one month to the next, the price of the Milka chocolates went down. Inflation is dependent on the currency. From one currency, there is inflation causing the price in a specific product to increase. From another currency, there is deflation, causing the price of a specific product to decrease. I hope that is a good example to demonstrate that inflation is based on currency and not products. 68.187.174.155 (talk) 18:40, 23 October 2024 (UTC)

A problem is that people who are not economists (and even they can get sloppy at times) frequently use "inflation" to refer simply to all instances of "price has gone up". "The Beanie Baby factory caught fire and now the price of Beanie Babies has gone up and my kids need those things! Damn inflation! Damn you, $POLITICAL_FIGURE_OF_PERSONAL_OPPROBRIUM why did you make the prices go up?! I'm voting your ass out next election!" As the good article sez the strict economics definition is "a general rise in prices" in an economy (deflation being the inverse). But in the "modern world" economies tend to be highly "monetized" (ooh that redlink needs to go somewhere), with prices all being specified in a single currency within a given currency area, so people are used to associating "price of X" -> "monetary unit in which these prices are expressed in", and then reifying all "changes in price of X" -> "some quality about the monetary unit has necessarily changed, this being the cause of said effect". Some changes in a price are caused by a change in the unit in which the price is expressed; therefore, all changes in a price are caused by a change in the price unit.

Historical note good to keep in mind, economies with a single stableish monetary unit used for most things are historically aberrant, only things which exist in large (large as in "size of govt apparatus and institutions") centralized states, which can set produce maintain and enforce a reliable monetary standard. (The Bank of England is probably underappreciated as a factor in the explosive growth of British industry and the maritime Empire. As was the US's ability to establish and maintain US dollar stability post-WWII, including as "anchor" of the Bretton Woods system, in its global hegemony.) How many florin (coin) are those shark scales going for, and what's the exchg rate like right now with my pieces of eight?

Also speaking of, understand that barter economies are quite uncommon historically and mostly only existed to facilitate "long-distance" trading networks btwn societies (think for ex the historical North American fur trade). Most economies have always used money of some sorts for most economic activity and most money has always existed as debt. (Debt is simply in its most fundamental sense a promise.) This is being better appreciated these days in econ. --Slowking Man (talk) 19:16, 24 October 2024 (UTC)

Yes, I know Milton Friedman’s work on the US economy, written from a 1970s perspective. I also lived through strong, persistent DEflation, and watched the US money supply expand at double-digit rates … without inflation. I stand by my assertion that demand matters, and absolutes like Friedman's add nothing to this discussion. DOR (ex-HK) (talk) 16:36, 31 October 2024 (UTC)