What would be the outcome, if the government gives five hundred rupee to every citizen of the country each day? This interesting question was put forth to the group of college- going students.
The question attracted equally interesting answers. The poverty would vanish. People would become lazy. These were the answers given by the students. And there came another answer: Prices could shoot sky high, leading to countrywide poverty. And this was the only right answer for the question. Such situation could lead to inflationary trend, which could make prices of the essential commodities jack up many thousand times within couple of days.
The paper currency is not the real wealth of any country. More the paper currency, lesser would be its value, had the government possess appreciable gold reserves. And this is what inflation means to common man. Another vital and decisive factor is the magnitude of the ratio or the proportion of consumer goods to the paper money in circulation. More and more, the paper money does not necessarily buy more and more goods.
The price will go on rising with every quantum of the paper currency, had there be any proportionate rise in the production of goods. So, inflation also means an imbalance or the magnitude of disproportion between the total amount of goods and the total amount of circulating money. Higher pay or higher wages are no remedy for the soaring prices. It is better to freeze the prices and hold the price line, instead of raising wages and salaries or dearness allowances. But, this is not possible unless the production of necessary goods would be adequate to meet the demand.