Wednesday, January 9, 2019

Money and Inflation

Money is a commodity that is in huge demand and needed by everyone in the society but in limited supply. Money is what that is needed to satisfy all needs this is able to buy what you want or wish for. This should be supplied consistently and in enough amount then only we can meet our needs timely and fully. But over the period of time the demand for money increases to satisfy those same needs. It may seem to be strange but this true. And more shocking truth is that everyone wants same to happen and governments support this.

Why? Why we need more money to buy the same article? Does the value of money deteriorate over the time?

The answer is yes. The value of money decreases over time that is the reason why we need more money to buy the same article with same utility. So why does the value of money deteriorate over time while value of any investment increases. The answer is inflation. It is the inflation that brings the value of money down over a period of time.

In language if finance it is called time value of money. With time the value of money changes. We cannot buy the same quantity of article for the same amount of money on two different times. There lies very logical and genuine reason behind this.

Every trader needs some incentive to continue his trading activities. So how this incentive will come in to him? These is incentives will come in form of profits. Although the trader had always been making some profits but over the time they need more profits to continue the trade so over time to satisfy his increasing needs as trading is the only source of income and he finds only this way to increase earnings. So the trader increases the prices of his articles or services to satisfy his increasing needs or something else. When all the traders so this, the price level of all the articles and services go up. This phenomenon of price increase is called inflation in general.

It is very much important for one to keep the value of his money at least intact if cannot surpass the inflation. To achieve this target one needs to keep increasing the value of his money. Only by increasing the value of money one can fight with the devil of inflation. This is achieved by investing the money in interest yielding investments. This investment should be able return more money than invested. This extra money should be more or at least equal to rise in prices. Then only money is safe.

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