Money - How Its Value Changes (1971)

[Music] e [Music] men invented money to help them in their business of exchanging goods and services money serves as a useful middle step you can exchange almost anything for money and that money can be exchanged immediately or at a later time for almost anything else this can be done over and over as long as everyone who uses the money agrees on what it's worth but if its value changes then that causes problems why might the value of money change well suppose there's a tape recorder you could buy for $100 what would $1 buy you can say that each one of your dollars can buy one 100th of the recorder but now suppose the price of that recorder increases to $200 now each dollar buys a smaller part of the recorder only one2 200th of it in effect your dollar has gotten smaller the dollar may look the same but it has shrunk in value changing prices change the value of a dollar if prices of items go up the value of a dollar spent for these items goes down of course the opposite is also true what happens if prices go down the value of each dollar spent for these items goes up with the decrease in prices a dollar will buy more of each item if the prices keep going down now if the prices of enough items go down then what you can buy with a given amount of money changes this means your money changes in value there are ways of keeping track of this change in value of the dollar one way economists do it is by selecting certain goods and services that an average city family buys the changing prices of this Market Basket of items determines what is called the cost of living say that these items can be purchased for a certain amount of of money if the prices of these items overall go up then the same amount of money can buy less of them to buy the same amount of goods and services you have to spend more dollars the value of your money goes down the cost of living goes up on the other hand if if the prices of the items generally go down then it takes less money than it did before to buy the same amount of goods and services the value of your money goes up the cost of living goes down so changing prices affect the value of money but what changes prices well suppose factory makes automobiles it makes five cars and sends them to five car dealers each car is meant to sell for $2,000 and it just happens there are five people who want those cars and each has the $2,000 to pay for a car if these five people buy these five cars and pay their $2,000 each for them there is no reason for the car dealers to change the prices but suppose the factory keeps turning out automobiles suppose now that there are more cars than there are people who want them suppose the people who want the cars each have $2,000 to spend and each car dealer would like to get2 ,000 for his car but even if each of these people buys a car some of the dealers may be left with cars unsold to make sure he sells all his cars one dealer might drop his price a little other dealers faced with the possibility of having no buyers may also cut prices in this way overproduction can force prices down if prices fall too low manufacturers May reduce production and let some workers go this may continue until production more nearly equals demand there are less cars for sale but laying off workers can cause other problems one of the workers may not want to spend his money for a car now production again exceeds demand so prices may continue to fall if this is General throughout the economy it is called a recession if it continues long enough with many factories slowing down or shutting down with many workers laid off you can have a depression now suppose just the opposite happens suppose the supply of cars drops there might be a shortage of workers to make the cars or a shortage of materials for them or a war that demands workers and materials for other things but the buyers are the same or suppose the Supply stays the same but advertising creates enormous consumer demands whatever the reason now the supply is less than the demand there are many buyers for The Limited products prices don't have to be lowered to attract customers in fact prices might even be boosted slightly and even if that discourages some customers the car dealers can still sell all their cars another factor that affects the cost of goods is the supply of money when credit is easy to get when money is easily borrowed at low interest rates when payments can be delayed on purchases the supply of money increases if it increases faster than the supply of goods then prices tend to go up and up workers find they don't have enough income to buy all the goods and services they need they demand higher wages which might push up the cost of goods and services if this condition of rising wages and prices is General throughout the economy it's called inflation if inflation goes on for an extended period of time other problems develop think about a bank and the savings a person has there money carefully saved in an account begins to decrease in value as the prices of goods and services begin to rise people on pensions and other kinds of fixed incomes can buy less for the same amount of money in effect the size of their check shrinks it reduces in value even though the amount is the same people want the government to do something but the problem unfortunately is that there is rarely clear agreement as to just what the government should do the economic system is so complicated no one is sure just what will happen when the government tries to make adjustments but the problem is related to money and some people think it is related quite simply to the amount of money available at any given time suppose this represents all the people in our country who need and want to purchase goods and services and suppose this represents all goods and services available the government may try to control the available money supply in order to regulate all these exchanges of goods and services the government can reduce the amount of money in the Public's Hands by increasing taxes people can still borrow money but the Federal Reserve board can increase interest rates that might discourage some people so there is less money for purchasing homes that take many years to pay for there is less money available for loans to build homes so the building trade suffers there isn't money to expand and modernize factories when that happens additional jobs may not be created for young people measures to controlled inflation may help people on fixed incomes but it may also harm business and industry and caused the laying off of workers economists social scientists politicians each affected citizen has his own ideas of just what the best way is to maintain the value of money but because no one is absolutely certain he really knows the right way people in government tend to move cautiously to avoid upsetting the economy too seriously yet they all agree that the value of money is important even though money has no use or value in itself only in what can be bought with it and what can be bought with it depends on what people agree among themselves it is [Music] worth of course part of understanding how the value of money changes is based on understanding what money is and that's another [Music] story