Hi there. In this video tutorial, we will explain what is meant by inflation in an economy
Inflation is simply the increase in prices over time. Let me illustrate that with an
example. Let's suppose you have $10 of salary today, for the sake of argument, and let's
say one loaf of bread costs $6, and one pack of butter costs $2. So this means, at the
moment with your salary, you can purchase one loaf of bread plus two packs of butter, right
Because this is $6, and two packs of butter will cost you $4, and this is equivalent to $10, right
So this is now. Let's suppose one year has passed, and your salary, one year in future, let's say
one year in future, and your salary is still the same, $10. And let's suppose the price of bread
hasn't changed, so it still costs $6. But let's also suppose the prices of butter packs have
doubled to $4. Now, as you can see, you can no longer afford the same bunch of goods, right? The
bundle of goods. So you can still get one bread, which costs you $6, but now you can only get one
pack of butter, $4, and if you add them up, it costs you $10 today. So what has happened is that
because of the increase in the prices of butters in one year's time, or the inflation in butter
prices, you have lost purchasing power. You could afford one bread plus two packs of butter in the
past. Now you can only afford one loaf of bread and one pack of butter. And the rate of inflation
for butter is 100% because its prices have doubled, right? So of course, this is a very
stylized example, but this is in principle how inflation works. And ideally, economies would like
to keep the inflation low, differently at single digit levels, like 3%, 4%, so that there's no price
uncertainty. And it's the job of central banks to maintain that. And some countries time to time
can experience very high levels of inflation, double digit or even triple digit. And this can
lead to a big destruction in those economies. And they will take actions, for example, through
monetary actions like raising interest rates to curb inflation. Okay, I hope you have found this
video useful. And looking forward to meet you in another video