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When the "richs"* get richers, the "poors"* get poorer... assuming:

h1) a constant volume of money,

h2) a constant volume of people,

h3) a close separation between the two groups of people,

h4) a constant influx of money from rich to poors (salaries) c1, and a constant influx of money from poors to rich (profits from stuff sold to poors) c2, such that c2 > c1

this means that the volume of money the richs have access to gets bigger over time and the volume of money the poors have access two gets smaller, therefore, also assuming:

h5) constant prices,

this means each person in this poor group has individually access to a smaller amount of money. Therefore despite a constant salary, they can afford to buy less things.

Could we therefore says that richs experiment a deflation and poors an inflation? If not, is there a more befitting name to describe this phenomenon?

Are the assumption realistics, or is the reasonment flawed?

Example:

  • 100 persons, divided in R and P, with respectively 20 and 80 persons
  • 1000 euros total volume of money
  • time t1: R has 500 euros, P has 500 euros
  • time t2: R has 700 euros, P has 300 euros
  • the prices remain constant at t1 and t2, e.g. 1 euros bread, 2 euros meat, 3 euros gas

at t1: people in P and R have on average respectively 25 and 6.25 euros

at t2: people in P and R have on average respectively 35 and 3.75 euros

therefore, despite constant salaries for people in P:

at t1 they can afford both bread, meat and gas

at t2 they can afford only bread and meat

*: I put quotation marks, because being rich or poor is subjective, but within a closed social group we can assume that such a distinction can be agreed upon.

Nicolas
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  • There are so many assumptions here that I doubt an answer would have any relation to reality. Review your assumptions; remove some; explain why the others remain. – paj28 Nov 20 '15 at 14:53
  • Hi paj28, I am sorry but I have verry little background in economics, and I am looking for answers helping me understand these matters. As you noticed, I also asked wether the assumptions are correct: that is because I don't know - I therefore can not review them as you are asking me to do! I am really interested in the answer. Please contribute elements if you have them (e.g. explain what is wrong with them or give me useful pointers) and would also ask you to reconsider the -1 if you are indeed the one who did it: I believe my question is precise and new and doesn't break any rule. – Nicolas Nov 20 '15 at 17:05
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    Wealth and money are not the same thing. the rich can get richer without having more money. – Giskard Nov 20 '15 at 17:05
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    How can you assume constant prices with no inflation? Inflation is a long-term rise in price. I think you mean to be talking about purchasing power. – Kitsune Cavalry Nov 20 '15 at 17:21
  • because inflation is the fact that money is worth less overtime, meaning you can buy less stuff with a given amount. If the amount of money you have to buy stuff diminishes, therefore you do buy less stuff. The effect seems quite similar to inflation. – Nicolas Nov 20 '15 at 17:26
  • This question by @KitsuneCavalry seems very relevant. http://economics.stackexchange.com/questions/8481/differing-inflation-rates-for-separate-income-groups-literature – Giskard Nov 20 '15 at 21:01
  • @Nicolas Okay, but an individual's income decreasing isn't inflation. Inflation decreases the ability to purchase that item for all consumers. – Kitsune Cavalry Nov 20 '15 at 23:01
  • It looks like one would need to build a model to answer this question. I would begin by formally defining variables, then define inflation, "rich", "poor", etc. using those variables. Then put them all together, do the math, and see what happens. – Arthur Tarasov Nov 21 '15 at 04:22
  • Hi Arthur, I am not sure what is a model (a numerical simulation?), but I made the hypothesis and conclusion clearer following your remark. – Nicolas Nov 21 '15 at 09:38
  • For my idea to stands looks like, it also need to either:
    • have people live of their savings (I am more interested in this case)
    • money volume not being constant, but created by richs and paid back by the poors to the rich (debt)
     – Nicolas Nov 21 '15 at 11:26
  • I'm hung up on the fact that c2>c1. If c1 is the poor person's wage, how can they spend more than that on goods? Is there a social welfare program built into this example? – DornerA Nov 22 '15 at 15:01
  • Hi DornerA, honestly, how exactly I don't know. It just happens that in the world richs get srichers, and I was trying to see if by having a super simple model of the world (constant money volume and people), if this means infation for the poors. However, you are right the modle lacks something for the moment, I see two alternatives, listed in the comment just above yours, but I am not wise enough to see which one makes more sense to include. – Nicolas Nov 22 '15 at 15:15
  • @arthurtarasov is correct in stating that you would need to create your own model, and you could try to incorporate some social welfare plan such as food stamps or something of the like in order to account for c2>c1. However, this leads to the need for government in the model, which complicates the model further. – DornerA Nov 22 '15 at 18:07

2 Answers2

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This is not an answer that will state exactly which assumptions are valid/invalid but rather a guide to find answers to your question.

Here are various scientific articles about the topic:

These first two papers take what is called a Political Economy perspective on the matter. They assume that the central bank controls inflation, but the central bank is to some extent controlled by the population. If the population has higher income inequality, it prefers higher inflation and thus countries with higher inequality will face higher inflation.

Albanesi, Stefania. "Inflation and inequality." Journal of Monetary Economics 54.4 (2007): 1088-1114.

Dolmas, Jim, Gregory W. Huffman, and Mark A. Wynne. "Inequality, inflation, and central bank independence." Canadian Journal of Economics/Revue canadienne d'économique 33.1 (2000): 271-287.

This paper is also interesting, since it considers the different inflation faced by different income classes. It is somewhat orthogonal to your question, however.

Hobijn, Bart, and David Lagakos. "Inflation inequality in the United States." review of income and Wealth 51.4 (2005): 581-606.

However, to my knowledge, there are no papers written on income inequality as a direct cause of inflation without the involvement of the Political Economy argument above. This is mainly because in Economics our models usually tell us that the central bank has almost perfect control over inflation (except for negative inflation rates).

PS: If you find the readings above too difficult, consider reading a textbook on monetary economics: Mishkin, Frederic S. The economics of money, banking, and financial markets. Pearson education, 2007.

HRSE
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  • Thanks a lot for the references. I'll need some time to go through them. I note that the first paper starts its study from the empirical constatation that countries with higher inequalities have higher inflation. – Nicolas Nov 23 '15 at 14:31
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Could we therefore says that richs experiment a deflation and poors an inflation? If not, is there a more befitting name to describe this phenomenon?

You are overthinking the definitions of inflation and deflation. There is much simpler terminology for this effect: "getting richer" and "getting poorer".

I won't repeat the definition of inflation; it appears you understand what it is. But it only refers to the changing nature of prices; it doesn't account for people's ability to afford things.

Regarding your assumptions:

h1) a constant volume of money,

h2) a constant volume of people,

These seem reasonable. While they won't be constant in a real-world economy, making these kind of simplifications to build a model is completely reasonable.

Bear in mind that you've not specified constant resources. So if someone finds a diamond, they get richer. There's still a constant amount of money, but they are better off.

h5) constant prices,

This is not a reasonable assumption. Constant prices would imply that there is government control of prices, in which case none of the usual economic models apply.

h3) a close separation between the two groups of people,

h4) a constant influx of money from rich to poors (salaries) c1, and a constant influx of money from poors to rich (profits from stuff sold to poors) c2, such that c2 > c1

I don't really understand these.

Community
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paj28
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  • Your response to the first quote seems off: there is indeed a difference between simply getting richer/poorer and heterogeneity in inflation rates for different goods consumed by different income classes. – HRSE Nov 23 '15 at 15:05
  • @HRSE - I agree that heterogeneous inflation is a phenomena, but that is not what OP is asking about. He's say "the volume of money the richs have access to gets bigger over time and the volume of money the poors have access two gets smaller" which is simply getting richer/poorer. – paj28 Nov 23 '15 at 15:19