price, euro, europeAccording to the statistics we have north euro-area with average wages higher than in the south countries. Now according to the law of demand and supply the higher are the wages the higher is the demand and so the higher should be the prices yet - paradoxically - the prices in the north are lower than in the south (and so are the inflation rates). How can it be explained?
Imagine two different countries, each with the same number of people and the same amount of currency. Imagine that in both countries the number of people and the amount of currency is held constant.
In the first country (we’ll call it PRIMITIVE) no one saves any money. They spend money as soon as they earn it. Thus, the orange grower, the farmer, the fisherman, etc. all use primitive methods since there is no capital (i.e. savings) available to create tools. The economy never develops new technology, products, etc..
The second country (we’ll call it CAPITALIST) there are savers. The savers use their savings to produce tools to become more productive. As they become more productive they can produce more goods. Additionally, entrepreneurs in this country can use the savings to produce new goods and services.
After 20-50 years imagine what wages and prices will look like in these two countries. In the PRIMITIVE country there are no advances in productivity so prices and wages don’t change. In the CAPITALIST country new products are being introduced and people are becoming more productive, so there is a constant supply of money chasing an ever increasing amount of goods. Thus prices goes down but wages can increase since the people in the CAPITALIST country are able to produce a lot more products with capital equipment which will increase their wages.
There are a lot more factors involved in the real world with fluctuating currencies, trade, government interference but this is a basic example of how prices can be low while wages remain high.
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