When nominal price stays the same but things around you change, it’s like having a fixed allowance while your favorite candy gets cheaper or more expensive.
Imagine you have $10 every week to buy snacks from the store. One day, the price of your favorite gummy bears is $2 per pack. That means with your $10, you can buy 5 packs, that's 5 gummy bear packs for the same money.
But if the price of gummy bears goes up to $5 per pack next week, and your allowance still stays at $10, then you can only buy 2 packs. Even though the nominal price (how much it costs in dollars) is different now, your allowance hasn’t changed, that’s like having a fixed amount of money when everything else moves around you.
What Does This Mean?
- If prices go up and your money stays the same, you can buy less.
- If prices go down and your money stays the same, you can buy more.
It's just like how sometimes your piggy bank has the same number of coins, but what you can buy with them might change.
Examples
- A loaf of bread costs $2 every year, but your salary increases by 10% each year.
- Your favorite candy stays at $1 per piece for years, even though the cost of living goes up.
- The price of a movie ticket doesn’t change, but more people can afford to go.
Ask a question
See also
- How Does Here’s Who to Really Blame for High Inflation Work?
- Why Cutting Interest Rates Causes Inflation Explained?
- Why everything feels more expensive now?
- Why Can't We Just Print More Money?
- How Does ‘Inflation’ Really Work in Daily Life?