Denmark's 2006 public finances has a surplus of 6% of GDP

[Barnabas]

Alberta is the femminine of Albert, doesnt sound like the name of an indian girl

[VetLegion]

On economy overheating, courtesy of wikipedia, the free encyclopedia

http://en.wikipedia.org/wiki/Overheating_(economics)

Causes

High levels of aggregate demand tend to be the cause of overheating. If aggregate demand exceeds aggregate supply, then the excess demand for goods must be met via the over-employment of resources. This may be achieved by employing workers for extra shifts or using machinery beyond their recommended working hours. This type of production is considered unsustainable because the over-employment cannot be supported indefinitely.

Effects

Overheating is generally preceded by lower than average economic growth. Demand pull inflation occurs as suppliers try to capitalize on the excess demand which cannot be met via existing production constraints. These higher prices tend to reduce aggregate demand and exports (since goods and services become relatively more expensive abroad) leading to reduced consumption. Central banks often simultaneously tighten monetary policy in response to increased inflationary pressures, reducing investment expenditure, which in tandem with decreased consumption, can lead to economic recession.

Basically I think overheating is bad because of inflation. As people demand more stuff prices of everything are going to rise. I'm puzzled as to what happens next.

Inflation is a monetary phenomenon - no matter what the economy does there can be no inflation unless the money supply is increasing (= state is printing money). If no money is printed, prices should readjust making stuff in demand more expensive, but there should be no inflation overall.

Which leads me to speculate that when economy is overheating, government is somehow also pressured to print more money (maybe to pay higher wages to civil servants?).

This would indeed mean inflation, and that inflation is bad needs no explaining.

[Kontiki]

Originally posted by VetLegion
If no money is printed, prices should readjust making stuff in demand more expensive, but there should be no inflation overall.

That's a completely self-contradictory statement. If stuff in demand becomes more expensive, you have inflation. It's the very definition of it.

You seem to be caught in the middle of a monetarist and Keynesian viewpoint.

[VetLegion]

Nope, inflation is a measure of general price increase, not increse in price of a particular good. And all prices can't increase without government printing money. Money is a good like any other. If something becomes more expensive and is bought (and the amount of money is fixed), something else must become cheaper or go unbought.

[LordShiva]

Originally posted by VetLegion
Nope, inflation is a measure of general price increase, not increse in price of a particular good. And all prices can't increase without government printing money. Money is a good like any other. If something becomes more expensive and is bought (and the amount of money is fixed), something else must become cheaper or go unbought.

No. Not all money goes towards consumption.

[Kuciwalker]

And all prices can't increase without government printing money. Money is a good like any other.

See the "reserve requirement."

[VetLegion]

Originally posted by LordShiva


No. Not all money goes towards consumption.

Not all money goes towards consumption, nor is gold all that shines, nor are your friends who you think they are.

What does it have to do with my point?

[Dinner]

You can have inflation even without printing more money. If demand for a product out paces supply growth then prices rise. That's the definition of inflation; rising prices.

[VetLegion]

You can have inflation even without printing more money.

Never happened in the course of human history.

[LordShiva]

Originally posted by VetLegion


Not all money goes towards consumption, nor is gold all that shines, nor are your friends who you think they are.

What does it have to do with my point?

Your point is that if more money is being spent on one good, it's necessary that less is spent on another. This is not true.

But there's an easier way to show that you're wrong: the transaction equation states that M(t).V(t) = Y(t).P(t), where M is money supply and P is price level. As you can see, it's quite easy to manipulate the price level without touching the money supply, since P(t) is proportional to money velocity and inversely proportional to real output.

[VetLegion]

Right, if you produce more goods and money supply is fixed, goods will become cheaper. But also will wages fall. This is called deflation.

In our case, we have the output fixed (economy is at full capacity, thus overheating), we have the money supply fixed (government not printing more) and thus - we have no inflation (the price level stays fixed).

[Dinner]

You are so wrong. The price of the goods will fall but typically wages will not as the company is now producing more goods using the same work force. That's an efficency gain which gives the company more profits (of course that depends on the severity of the price declines).

[LordShiva]

Originally posted by VetLegion
In our case, we have the output fixed (economy is at full capacity, thus overheating)

An overheating economy means it's growing faster than it's natural rate.

Now if you go and fix everything in the equation as constant, then obviously there will be no inflation. But you're arguing that "when there is no increase in money supply, there is no inflation." And that's false.

[VetLegion]

Your point is that if more money is being spent on one good, it's necessary that less is spent on another. This is not true.

I'm all ears. This could help me with personal finances, so please share

[LordShiva]

Sigh.

OK, neglecting taxes for a moment, individuals can do two things with money: they can spend it ("consume"), or they can save it ("save").