Now I understand of course supply and demand, and that as an economy is more productive prices decrease. However, will not other prices have to increase as well if the money supply is constant?
When talking about rising prices, the argument is that prices cannot all rise (thus causing a net increase in the "general price level" at the same time unless there is more money being created. This is because if the money supply is constant, when certain prices go up, others will have to come down because people will have less money to demand with in other areas.
Is not the same true when an economy is productive and the story is reveresed? For example, if there are $100 in an economy, and ten different goods all demanded equally, if an increase in production of one good leads to lower prices, people will have more to demand other goods with. If the supply of all other goods is constant, unless money is destroyed the general price level cannot fall. Where does the money go?
One last point, people would likely invest some of that leftover money to save it. Would the price rise be seen in stocks or investment intruments?
In simplest cases, which illutrate what is going on:
Country A has one pizza and one dollar bill. Price of pizza is one dollar.
If it prints 9 more dollars but is not more productive, price of a pizza will be $10. This is price inflation.
If it increases productivity but prints no new money, ten pizzas will be baked. Each one will cost ten cents. Thsi is deflation.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Ok I get it. In my rising prices example, I was holding supply constant as well. In my falling prices example, supply was increases, which allowed for goods to fall in price without other goods rising in price. There are more goods to buy.
However, will not other prices have to increase as well if the money supply is constant?
Here's where you're onto something. Prices won't increase they'll decrease, but I'm getting ahead of myself. In order for prices to fall, the money supply must be kept constant (Historically, there has always been some inflation). What happens when you use your money to purchase goods at the store? Say that you want to buy some apples. (Assume a constant demand) If there are ten apples available (Situation A) vs. one apple available (Situation B), an apple in A will cost less than an apple in B. There it is! Just as you use your dollars to buy apples, the apple vendor uses his apples to buy dollars. Since there are more apples in A than in B, an Apple in A commands less dollars than an apple in B (Apple A has a lower purchasing power than Apple B). Apple B can command more dollars and has a higher purchasing power relative to an Apple from A.
Now consider an analogous scenario in the US economy. All the way up until 1917 when the US entered WWI, there was relatively little inflation (there were a few exceptions). What happened was that the capital structure in the US grew by leaps and bounds which dramatically increased the supply of first order goods (consumer goods). A lot like in A with the apples. Since the amount of goods increased in the US, the purchasing power of the dollar increased. This was back when the dollar stood by it's definition: The term 'dollar' was signified as being 1/20th an ounce of gold (eg the 'Pound Sterling' was defined as 1/4th an ounce of gold; consequently, one pound sterling would be exchanged for five dollars). Once the Fed came in and starting spewing money, the power of the dollar waned and the definition shifted. Now the dollar is worth 1/1,666th an ounce of gold.
If I had a cake and ate it, it can be concluded that I do not have it anymore. HHH