Deflation
From Economypedia.com
Deflation is the opposite of inflation.
Deflation is characterized by a reduction in prices or the supply of credit in the economy. It is the opposite condition to inflation. A decrease in the personal investment and spending of the government can also lead to deflation. As a result of deflation, the economy can witness increased unemployment as the demand for goods and services in the economy falls.
To counter the deflationary trend, governments indulge in new monetary policies and increase the supply of money in the economy. This induces an increase in the prices of goods and services. Acting as a lubricant, this entices business entities to invest in production to reap benefits through profits. It also reduces the increasing pressure on debtors.
There are several negative effects that deflation has on an economy. Levels of profit made by companies come down significantly. Factories close down and this leads to decrease in levels of employment. Companies and individuals also are not able to pay their loans back at stipulated time.
Contents |
[edit] Definition of deflation
"Deflation is characterized by a fall in the general price level over a specific time period"
[edit] Causes of deflation
Deflation mainly arises due to following causes:
- Decreasing money supply
- Increasing goods supply
- Fall in the demand
[edit] Consumer price index – CPI
Consumer Price Index or CPI is a measurement that is used to examine weighted average of financial worth of a group of consumer goods. Common examples in this case are transportation, medical care and food. Calculations are done by averaging the price alterations of every item.
[edit] Disinflation
Disinflation happens when the rate at which prices go up becomes slower than usual. Disinflation occurs primarily at times of economic recession.
[edit] See also
[edit] Reference
- Investopedia entry on deflation. Retrieved on July 7, 2008.
- Investor words entry on deflation. Retrieved on July 7, 2008.
[edit] External links
- Deflation- Meaning and Practices article in Economy Watch
