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Tuesday, 29 June 2010

Money versus real value

In practice, money has a specific real value for a month at a time in an internal economy or monetary union during low inflation and deflation. It changes every time the CPI changes. A monetary note or monetary coin has its nominal value permanently printed on it. Its nominal value does not and now cannot change.

Today monetary units are mostly created in economies subject to inflation. The Japanese economy is regularly in a state of deflation. The Japanese Yen increases in real value inside the Japanese economy during deflation.
Money refers to a monetary unit used within the economy or monetary union in which it is created. This does not refer to the foreign exchange value of a monetary unit which is not the subject of this book. The foreign exchange value of a monetary unit refers to its exchange value in relation to another monetary unit normally the monetary unit of another country or monetary region.

The real value of money would remain the same over time only at sustainable zero per cent annual inflation. Money would thus have an absolutely stable real value only at sustainable zero per cent annual inflation. This has never happened on a permanent basis in any economy. Now and then countries achieve zero annual inflation for a month or two at a time. But never for a sustainable period of a year or more.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith