Pigou effect facts for kids
The Pigou effect is an idea in economics that talks about how the economy can get a boost. It means that when prices go down, people feel like they have more money, so they start spending more. This extra spending can help create more jobs and make the economy produce more goods and services.
What is the Pigou Effect?
The Pigou Effect is named after a famous economist, Arthur Cecil Pigou. It's a way to understand how the economy might fix itself, especially when prices are falling. Imagine you have $100. If the prices of everything you want to buy suddenly drop, your $100 can now buy more things than before. This makes you feel richer, even though you still only have $100.
How Does it Work? The Real Balance Effect
When prices fall, the money you have (like cash in your wallet or savings in the bank) can buy more stuff. Economists call this your "real balance" or "real wealth." It's about the actual buying power of your money.
- If prices go down, your real balance goes up.
- When people feel wealthier because their money buys more, they tend to spend more.
- This increase in spending helps businesses, as they sell more products.
- To meet the higher demand, businesses might hire more people and produce more goods. This helps the economy grow and creates more jobs.
This idea is also sometimes called the "Real Balance Effect" because it's all about how the real value of your money changes.
Pigou's Idea vs. Keynes's Idea
Arthur Cecil Pigou came up with this idea partly to add to the work of another famous economist, John Maynard Keynes. Keynes had a big theory about how economies work, especially during tough times like a recession. Pigou thought that Keynes's theory was missing something important: the "wealth effect." Pigou believed that if prices fell, people's increased real wealth would naturally lead to more spending. This, he argued, would help the economy recover on its own, without as much help from the government, more than Keynes had predicted.
