Money Illusion

Illusion is a deceptive appearance, where we generally miss some of the minute important points. We live a significant part of our life in thoughts, not in reality. A sign that we like illusions.

Rolling back to the topic, money illusion is an economic theory that people have the tendency to see their wealth in nominal rupees terms, rather than in real terms. As we probably, don’t take into account the inflation in an economy. For us the 100 rupee note is still the same today as it was yesterday or a month back. However, we cannot buy the same amount of petrol today as we could have a month back. In real terms, the value of rupee has decreased and we would need to spend more. We mistook the face value for our purchasing power.

The term was coined by Irving Fisher in his book Stabilizing the dollar. Later on he also pen downed a book named Money Illusion. In the book, he gave a vivid example of the illusion. During those times, Germany’s currency was depreciating due to the hyperinflation post World War I. At the time, a German woman was profiting by selling the shirts above the cost price. She bought them a year back. She was happy that she was able to make so much of profits. But as the currency was depreciating in purchasing terms she lost money.

As we go ahead, in the second half of this year, the prices are bound to rise as businesses are running at loss and they will incur those losses from the consumers i.e. us.

Leaving you with a quote by Voltaire, “Illusion is the first of all pleasures”