Why can’t a country print money and get rich? This is how i became rich with forex post from the Suggest a Topic page, and while the original comment had a lot of questions about the overall functioning of an economy, I thought I’d take one question from it, and try and answer that in a post.
Why can’t a country print money and become rich? A lot of people have this misconception that a country’s currency is backed by the gold it holds. So, how does printing money cause inflation? Let’s take a simplified example to understand this. First, think of how demand of a product is related to its price.
That’s fairly easy to do right? 5,000 than they will at 25,000. If you were to draw a graph that shows the relationship between demand and price of a product it would generally look like this. 1 rupee you demand 100 units of a commodity, but at Rs.
You can get fancy and call this a downward sloping demand curve. On the other hand a lot more suppliers will be willing to get into a business if the end product sells at a higher rate. I remember quite a few years ago, a lot of households started planting vanilla in Kerala because vanilla rates had shot up. So, supply will be high at higher prices, and that curve would look something like this. 20, but when the price shoots up to Rs. Feel free to tell your friends that supply curves are upwards sloping. How is the price finally fixed?
In our example this will look something like this. What will happen if the government prints money and hands it out to its citizens? What happens when your income rises? Your consumption or demand of certain things also rises with your income. I see a great example of this with cell phone usage, as I have cousins of varying ages.
Mittal can dedicate at least one cell phone tower to the one who has started earning. The eldest one has gone through the stage of SMS and short calls, and as her income rose, so did her consumption. Your demand for a lot of things will increase since you have this extra money now, and you are rich. 1 and instead of demanding only 1oo unit at Rs.
This will have the impact of shifting the demand curve to the right, and pushing the price of the commodity upwards. The green star indicates the price which will be fixed due to the new realities of increased notional wealth, and people demanding more because their wealth has been increased. Just printing money will also do the same thing. This is a theoretical way to understand the consequence of printing money, and you can see a real example of this with Zimbabwe. As always, feel free to weigh in on the question, and be sure to point out any mistakes that you see. When we speak of Zimbabwe, it was an epitome of Hyper-inflation. What would you say when a country prints 10billion dollar notes which cannot buy you anything.