This question has troubled me for years.
In India, The Reserve Bank of India (RBI) is the authoritative central bank that decides how much money have to be printed based on India's monetary policy. The policy that determines the amount of money that should be in circulation in the country. Determination of such monetary policies is pretty complex as lot of factors have to be considered.
So, the pertinent question, since a country can print its own currencies, why can't they print so much so that everyone has enough currency wealth, thereby eradicating poverty completely?
Assume there is a country with only three people living; Ram, Rahim and Gopal and each has personal wealth of Rs 300, Rs 200 and Rs 100.
So the total wealth of this country is 300 + 200 + 100 = Rs 600.
Consider there is only one commodity available in the country that can be purchased by its citizens. Lets take it as this country has total 60 kgs of rice that its people can buy.
By dividing total wealth of the country and total available commodity (rice), we calculate how much should 1 kg of rice cost. 600 / 60 = Rs. 10 per kg.
At this rate, Ram, Rahim and Gopal can purchase 30kg, 20kg and 10kg accordingly using up all their wealth.
One fine day, they get hold of a currency printing machine and decide to print more to double up their wealth. Now, each has a personal wealth of Rs 600, Rs 400 and Rs 200 and the total wealth of the country is now 600 + 400 + 200 = Rs 1200.
The revised cost of rice is = 1200/60 = Rs 20 per kg.
Now they go to buy the rice. At this new rate, all three could still buy 30kg, 20kg and 10kg rice; only later they realize how futile it was to print currencies to double up their wealth. Though they've increased the personal wealth, they couldn't buy more kgs of rice than before.
Merely printing more currency will do no good to anyone. If they really wanted to become rich, they should've increased the production of rice. With no increase in production and with their wealth doubled, the value of the currency got halved.
You can extend the same concept to any country. For eg, if RBI decides to print more currency and have it in circulation, every one will get money out of nowhere, the cost of goods would also increase accordingly; since everybody is has more cash, everybody would want to buy a Mercedes and the price of a Mercedes would also increase. Simply put, the law of supply and demand.
This could lead to increase in prices of all goods in the country causing inflation and some extreme cases, hyperinflation.
(to buy a loaf of bread)
The economic scene of Zimbabwe in 2015 is the best case example of hyperinflation. Due to printing of more currency than required and with no increase in production, the prices of goods have skyrocketed.
The price of one loaf of bread cost 35 million Zimbabwe dollars and their currency has a value of 35 quadrillion dollars with respect to 1 USD.
Therefore to become rich, the country (its people) has to increase its production. That's the reason why countries are crazy about Gross Domestic Profit-GDP. (a measure of production).
In India, The Reserve Bank of India (RBI) is the authoritative central bank that decides how much money have to be printed based on India's monetary policy. The policy that determines the amount of money that should be in circulation in the country. Determination of such monetary policies is pretty complex as lot of factors have to be considered.
So, the pertinent question, since a country can print its own currencies, why can't they print so much so that everyone has enough currency wealth, thereby eradicating poverty completely?Assume there is a country with only three people living; Ram, Rahim and Gopal and each has personal wealth of Rs 300, Rs 200 and Rs 100.
So the total wealth of this country is 300 + 200 + 100 = Rs 600.
Consider there is only one commodity available in the country that can be purchased by its citizens. Lets take it as this country has total 60 kgs of rice that its people can buy.
By dividing total wealth of the country and total available commodity (rice), we calculate how much should 1 kg of rice cost. 600 / 60 = Rs. 10 per kg.
At this rate, Ram, Rahim and Gopal can purchase 30kg, 20kg and 10kg accordingly using up all their wealth.
One fine day, they get hold of a currency printing machine and decide to print more to double up their wealth. Now, each has a personal wealth of Rs 600, Rs 400 and Rs 200 and the total wealth of the country is now 600 + 400 + 200 = Rs 1200.
The revised cost of rice is = 1200/60 = Rs 20 per kg.
Now they go to buy the rice. At this new rate, all three could still buy 30kg, 20kg and 10kg rice; only later they realize how futile it was to print currencies to double up their wealth. Though they've increased the personal wealth, they couldn't buy more kgs of rice than before.
Merely printing more currency will do no good to anyone. If they really wanted to become rich, they should've increased the production of rice. With no increase in production and with their wealth doubled, the value of the currency got halved.
You can extend the same concept to any country. For eg, if RBI decides to print more currency and have it in circulation, every one will get money out of nowhere, the cost of goods would also increase accordingly; since everybody is has more cash, everybody would want to buy a Mercedes and the price of a Mercedes would also increase. Simply put, the law of supply and demand.
This could lead to increase in prices of all goods in the country causing inflation and some extreme cases, hyperinflation.
(to buy a loaf of bread)
The economic scene of Zimbabwe in 2015 is the best case example of hyperinflation. Due to printing of more currency than required and with no increase in production, the prices of goods have skyrocketed.The price of one loaf of bread cost 35 million Zimbabwe dollars and their currency has a value of 35 quadrillion dollars with respect to 1 USD.
Therefore to become rich, the country (its people) has to increase its production. That's the reason why countries are crazy about Gross Domestic Profit-GDP. (a measure of production).
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