5 Economic Questions You Thought You Understood

02.03.2017 • Investing

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By Iván Carrino – El Diario Del Lunes (Argentina) –

Dear Reader,

The weather is very hot. Those of us who live in Buenos Aires are suffering through a scorching heat wave, with temperatures above 37 degrees Centigrade (99 Fahrenheit). In addition to the heat, there’s the usual Buenos Aires humidity, making it totally unbearable.

In contrast to the weather, though, the financial markets are doing very well indeed. The MERVAL stock market has even risen above 20,000 points. The dollar has strengthened to some degree, but is still far from catching up with inflation. My recommendation is Grupo Financiera Galicia, the banking sector stock showing the best performance so far this year.

As you know, El Diario del Lunes is a weekly newsletter about economics and financial markets.  Sometimes, though, it’s best to start with the simplest matters, as French philosopher Descartes used to say. So in this weekly column I have prepared answers to five common questions about economics ranging from how to explain an economic crisis to whether you should buy or rent your home.

Here are my answers. I hope they’re useful to you!

  1. Does issuing money create inflation?

Yes and no.

For most economists, inflation means widespread price increases. If the price of meat goes up tomorrow, but all other prices stay the same, that’s not inflation. However, if the price of meat, bread, milk, gasoline and a haircut all go up, then we’re living through what is known as an inflationary process.

Defining inflation in this manner is a bit problematic. If we focus on prices, we are putting the emphasis on the consequences rather whatever is driving prices up in the first place.  A second and better definition of inflation: the systematic loss in buying power of the local currency.

If all prices are going up, that means the price of the currency is dropping. That’s what we call depreciation or buying-power-loss. What we need to find out, then, is why the currency is losing value.

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