Consider the effects of inflation in an economy composed of only two people: Jacques, a bean farmer, and Kyoko, a rice farmer. Jacques and Kyoko both always consume equal amounts of rice and beans. In 2016 the price of beans was $1, and the price of rice was $4. Suppose that in 2017 the price of beans was $2 and the price of rice was $8.

Indicate whether Jacques and Kyoko were better off, worse off, or unaffected by the changes in prices.

Better Off Worse Off Unaffected
Jacques
Kyoko

Now suppose that in 2017 the price of beans was $2 and the price of rice was $4.80. Indicate whether Jacques and Kyoko were better off, worse off, or unaffected by the changes in prices.

Better Off Worse Off Unaffected
Jacques
Kyoko

Now suppose that in 2017, the price of beans was $2 and the price of rice was $1.60. Indicate whether Jacques and Kyoko were better off, worse off, or unaffected by the changes in prices.

Better Off Worse Off Unaffected
Jacques
Kyoko

What matters more to Jacques and Kyoko?

Consider the effects of inflation in an economy composed of only two people: Jacques, a bean farmer, and Kyoko, a rice farmer. Jacques and Kyoko both always consume equal amounts of rice and beans. In 2016 the price of beans was $1, and the price of rice was $4. Suppose that in 2017 the price of beans was $2 and the price of rice was $8.

Since the inflation rate was 100% and affected both products in the same manner, Jacques and Kyoko will be unaffected by inflation.

Now suppose that in 2017 the price of beans was $2 and the price of rice was $4.80. Indicate whether Jacques and Kyoko were better off, worse off, or unaffected by the changes in prices.

Since the inflation rate of beans was 100% and the inflation rate of rice was 20%, Jacquues will benefit from it and he will be better off. Kyoko will be worse off.

Now suppose that in 2017, the price of beans was $2 and the price of rice was $1.60. Indicate whether Jacques and Kyoko were better off, worse off, or unaffected by the changes in prices.

Since the price of beans increased by 100%, while the price of rice decreased by 60%, Jacques will be extremely benefited while Kyoko will be hit extremely hard and will be much worse.

What matters more to Jacques and Kyoko?

Relative prices matter than general inflation level.