In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index or the GDP deflator) over time.  Inflation has a range of impact on the economy and social-economic factors, such as employment, consumption, investment, wages and prices. In this essay, let’s focus on the impact on wealth gap. Today, almost all countries have central bank, which is responsible of printing their own countries’ currency, in other words, each country has their own currency system. The so-called inflation, from a technical sense, that is, the central bank issued too much money, too much currency in circulation in the economies, which caused the value of money to drop, or we could say the growth of money eroded the purchasing power of people.
This theory is what we called the quantity theory of money in economics. Since everyone can not be separated from the currency, the central bank once issued too much money. It will inevitably lead to a serious and widespread problem. One of them is the currency devaluation: if there are too many supplies of one thing, of course, the price in the market will drop. The most serious consequences of the relative changes in the price are the negative impact on people’s wealth redistribution – the rich people get richer, and the poor gets poorer, in other words, the wealth gap in the society is enlarged due to inflation. Inflation causes negative impact on long term investment plan, retirement plan (i.e. pension fund).
Inflation is the general upward trend in the level of prices. Inflation causes the purchasing power of money to fall. Inflation is categorised in two types being demand-pull inflation and cost-push inflation. One of the main causes of inflation is excess demand. If demand is growing faster than the level of supply, then prices will increase. Output will increase as well, as there is a shift along ...
That is, inflation erodes purchasing power, which makes people’s long term investment / pension fund less valuable. There is one important point here, which is that, inflation mostly affects those long-term investment which return of investment (ROI) is in a fixed rate, such as pension fund, or bonds, this is because if we fix the nominal interest rate of return, inflation will make every dollar in earn less valuable but you have no way to increate the nominal interest rate return on your investment.
Meanwhile, as mentioned, inflation erodes purchasing power, which makes poor people worse-off as inflation makes them even more difficult to pay for even basic commodities. For rich people, the impact is relatively smaller, as the drop on purchasing power does not affect their ability to consume basic commodities; the only impact is on their ability to consume luxury goods. In addition to the “rich people, poor people” paradox as just mentioned, inflation also has impact on the wealth redistribution of resources owners. While inflation is an increase in the average price level, all prices do not increase at the same rate. When this happens, the owners of resource used in the production of goods with above average price increases get relatively more income. Resource owners involved in the production of goods with below average price increases (even declining prices) get relatively less income. The end result is that income and wealth are redistributed from some resource owners to others. For example, suppose that the overall inflation rate is 10 percent. However, health care prices rise by 20 percent while food prices do not change. Labor and other resource owners in the health care industry end up with 20 percent more income that they can spend on production that is only 10 percent more expensive.
Explain what is meant by the term "an economic model" and outline a model of price and output determination in a free market. Examine the effect of a change in real disposable income on equilibrium price and output. An economic model or theory is a simplified explanation and analysis of economic behaviour. It allows us to predict, and therefore intervene, if we do not like the outcome of a ...
Their real income, wealth, and living standards increase. In contrast, labor and other resources in the food industry are forced to pay 10 percent higher prices, but they have the same amount of income. Their real income and wealth decreases. The result is that income and wealth has been redistributed from food resources to health care resources. For another example, suppose that a Student takes out a $20,000 loan at a 7 percent interest rate from Bigbank to attend college. In 10 years, the loan will come due. After his debt has compounded for 10 years at 7 percent, the student will owe Bigbank $40,000. The real value of this debt will depend on inflation over the decade. If the student is lucky, the economy will have a hyperinflation. In this case, wages and prices will rise so high that the student will be able to pay the $40,000 debt out of pocket change.
By contrast, if the economy goes through a major deflation, then wages and prices will fall, and Sam will find the $40,000 debt a greater burden than he anticipated. This example shows that unexpected changes in prices redistribute wealth among debtors and creditors. Is there any way to measure the inequality of wealth? Yes, the Gini-coefficient is the most commonly used measure of inequality of income or wealth. The coefficient varies between 0, which reflects complete equality and 1, which indicates complete inequality (one person has all the income or consumption, all others have none). By World Bank standards, a Gini Coefficient of 0.6 signifies that a country’s economic and social stability is at risk. Let’s look at the Hong Kong case. The graph below is about the composite CPI and Gini Coefficient in Hong Kong.
According to figure above, gini coefficient increases as the composite price index increases and there is a strong positive relationship between the two sets of data. A mechanism through which inflation can affect income inequality is by shifting income from wage earners towards profit. Inflation reduces the real wage of labor and increases the income of rich by speculation and investment. In short, due to the inflation, the poor are relatively poorer and the rich are relatively richer.
Introduction Hong Kong has established its real estate markets since 1841, when it became a colony of the British Empire after the First Opium War. As a small city with only an area of 1,104 square km, but over 7 millions of people, Hong Kong has one of the most prosperous property markets and which has created a huge amount of wealth. According to Forbes list of Hong Kong billionaires 2012, the ...
 Author name(s) N. Gregory Mankiw Title of book Principles of Macroeconomics Date of publication 2008 Publisher South-Vestern, Cengage Learning Page 365  http://en.wikipedia.org/wiki/Gini_coefficient
 Hong Kong Census and Statistics Department: Hong Kong Statistics, Statistical table 052 – Consumer Price Indices  Author name(s) Chui Lap,Leung Shong Tung, Yip Chun Hin Title of article Income Inequality of Hong Kong Date of publication 2011. 12 Page numbers of the article, “pp.