The term monetary value is less frequently used in the context discussed here, and the terminology of purchasing power is more popular. Both terms, however, designate the same state. By monetary value is meant the value needed to acquire a particular commodity in a currency area. It is true that the monetary value is variable. The terms for this variability are inflation and deflation.
Inflation and deflation
Inflation, the loss of purchasing power, means that for a given good at a later date, a higher price has to be paid than at an earlier point in time. By contrast, deflation means that less money has to be paid for a commodity at a later date than at an earlier one. If no price change takes place during the same period, the term for constant prices is stagnation.
Determination of the monetary value
In order to be able to measure the monetary value of an economy, every product available on the market can hardly be considered individually. Against this background, the Federal Statistical Office has compiled a representative shopping cart that weights the individual product groups differently. For the year 2010, the percentage composition was as follows:
|1||Food, soft drinks||10.3%|
|2||Tobacco goods, alcoholic beverages||3.8%|
|4||Apartment, water, gas, fuel||31.7%|
|9||Leisure, culture, entertainment||11.5%|
|12||Other goods and services||7.0%|
Price development is measured individually for each of these twelve groups and then included as a percentage in the overall analysis. The weighting of the individual types of goods within the basket of goods is constantly being revised. The share of tobacco and alcoholic beverages, for example, is declining, while the weighting of housing, water, gas and fuels has increased, as these positions place a significant burden on households.
The monetary value in the external relationship
The monetary value can be measured not only in the internal relationship, but also in comparison to other economies. This is done by fixing exchange rates. Although exchange rates for freely tradable currencies result from supply and demand, these two factors are not only based on the monetary value of the currency in domestic trade. Here it should be noted that speculative approaches by investors may cause the external value of a currency to deviate from the actual monetary value in Germany.
The specter of monetary loss
Inflation is the biggest enemy of consumers. All the more desirable would be a deflation, an increase in the monetary value. The opposite is true, however. A deflation is poison for the economy, a moderate inflation of up to two percent of the ideal condition. Deflation is the result of a lack of demand, which in turn results from insufficient disposable income among consumers. Income shortage is usually the result of lack of employment. Companies have to sell their goods, so they have to lower prices, and there is no need to continue to produce. Conversely, inflation is the result of increased demand as demand determines the price. Increased demand results from higher disposable income, which, as seen by the economy, results from a higher level of employment. Against this background, it is thus confirmed that a slight loss of monetary value is ultimately an indicator of a functioning economy.
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