The Effects of Hyperinflation

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Hyperinflation in an economy is a relatively rare occurrence. During times of hyperinflation, the prices of goods and services increase rapidly while currency value decreases. Although the decrease in currency value causes a decrease in demand, the economic money supply continues increasing without any corresponding gross domestic product (GDP) growth.

  1. Definitions

    • Many economists do not commonly quantify hyperinflation because they believe that when hyperinflation occurs the prices of goods and services are increasing so rapidly that they render the concept of inflation insignificant. The International Accounting Standards Board (IASB) defines hyperinflation as when the cumulative inflation rate of a nation's economy is at or near 100 percent over a period of three years. Another widely accepted definition of hyperinflation, as defined by author and economist Phillip Cagan, is when the inflation rate is 50 percent or higher per month.

    Currency Value

    • When there is too much money circulating in the economy and this money supply growth is not the result of GDP growth, the most likely cause is that the government is simply printing more money. This leads to hyperinflation, which effectively decreases currency value. The excessive money supply is further exacerbated because during times of hyperinflation, consumers are spending money for fear of future currency devaluation, instead of saving.

    Purchasing Power

    • Consumers and businesses have less purchasing power during hyperinflation due to currency devaluation and rising prices. Consumers have to spend more money on the same goods and services after the decrease in currency value then they had to prior to the decrease. Businesses have to spend more money on raw materials needed to manufacture their goods. Manufacturers increase the costs of their final product to help absorb the increased costs of the raw materials. This results in an increase in prices for consumers.

    Employment

    • Since the value of money is depreciating during hyperinflation and prices are rising, consumers buy fewer products, leading to an overall decrease in demand. When demand for products decreases, manufacturing companies lose revenue. In response to decreased demand and corresponding decrease in revenue, manufacturers often choose to slow production or shut down plants. This then leads to employee layoffs and an increase in the national unemployment rate.

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