If the value of the money increases or decreases due to the increase or decrease in the prices of goods and services in the country, then this situation is called as variation in the value of the money. If the amount of money in the country increases a lot, but on the other hand, the increase in general goods and services does not increase in the same proportion, then the general level of prices rises. And the value of the money falls. This kind of change in the value of money is called inflation.
On the contrary, if the quantity of money decreases in comparison to goods and services in the country, the general level of prices falls and the value of money increases. This situation of decrease in the value of currency is called as deflation.
Causes of Changes in Money Value:
There are eleven causes of changes in money value.
- A change in the quantity of money leads to a change in the value of the currency because when the quantity of money in the country increases, the prices of common goods and services increase while the value of the currency decreases. Conversely, if the quantity of money decreases, the prices of common goods and services decrease, but the value of money increases.
- Changes in the quantity of money also affect the value of money. Because an increase in the amount of money in a country creates inflationary conditions that lead to an acceleration of the speed of money circulation. That is, one unit of money is used to buy a commodity more often than before. This drives prices higher and lowers the value of the asset further. In contrast to this situation, if a state of deflation occurs in the country, the demand for goods and services falls, as a result of which the speed of currency circulation decreases, which causes prices to fall to normal levels.
- If there is no change in the quantity of money and the speed of its circulation in the country, but the quantity of goods and services increases, the general level of prices falls and the value of money increases. But if the quantity of goods and services decreases, their prices increase and the value of currency decreases. Since the quantity of goods and services does not increase as fast as the quantity of money increases, their prices continue to rise and the value of money continues to depreciate.
- If the aggregate demand for the total goods and services produced in the country during a particular period increases, the aggregate expenditure of the people on them increases, which raises the general level of prices in the country and depreciates the value of the currency. Conversely, if people's spending on aggregate demand for total goods and services decreases, the general price level falls and the currency appreciates.
- If the country lacks productive resources but the population is increasing rapidly, the demand for goods and services will be increasing rapidly and the prices will be increasing rapidly due to which the value of gold will be decreasing. If the situation is the opposite, i.e. productive resources are increasing rapidly but the rate of population growth is very slow, then the demand for goods and services will be decreasing rapidly and the price level will be falling rapidly. Due to which the value of the currency will be increasing.
- If the labor unions in the country are fully organized, they unite and force the employers to raise the agricultural wages of the workers. Thus the cost of production of goods increases which raises the general level of prices. This depreciates the currency. On the contrary, if employers reduce the money wages of workers, the value of money increases as the cost of production of goods decreases.
- If the government increases the rate of indirect taxes like sales tax, excise duty and custom duty, the cost of production of various goods increases. This leads to an increase in the prices of goods and a decrease in the value of the currency. On the contrary, if the government reduces the rate of indirect taxes or gives exemptions in certain taxes to encourage businessbusiness activities. So the cost of production decreases, the prices of common goods decrease and the value of currency increases.
- Changes in investment also cannot remain without affecting the value of money. When business conditions are favorable, when employers increase investment by obtaining more loans from banks, the speed of money circulation increases, which increases the prices of goods and services but decreases the value of money. . Conversely, in depressed business conditions, when employers withdraw from an investment in view of a bleak future, the prices of goods and services fall but the value of the currency rises.
- In this case, its annual expenses will be less than the expected income. The government either spends this surplus revenue to repay old debts or keeps it lying around. Thus, the price level is normalized and the value of the currency increases.
- If domestic imports exceed exports, the country's balance of payments goes into deficit, which requires an increase in exports to correct. For this purpose the government sometimes has to devalue the external value of its currency. This increases exports but reduces the availability of goods and services in the country while there is no reduction in demand. In this way, the prices of goods and services in the country increase, but the value of the currency decreases.
- If imported goods consist mostly of capital goods, changes in their prices affect domestic goods and services. This change also leads to a change in the value of the currencySource.
So, Inflation is a sustained increase in the price of level or a fall in the value of money and deflation occurs when the overall price level of goods and services decreases.