i BUSINESS CYCLE 9.1.1. Meaning and Definition of Business Cycle (Busines pte! or trade tei term that describes economic activity variations occurring in an almost regular Time series iv all the capHalist Societies. Various indicators like, volume, of employment, price-level, output and income demonstrates the amgupt of economic activity in a community.(The graph portrays like a(wave When these indicators are plotted on it. (Thus, it is a regular phenomenon of rising aM g 5 each and every movement of rise and fall taken collectively describes a ‘Trade Cycle” or a “Business Cycle’. falling of the economic achivity, w According to Keynes, “A trade cycle is composed of periods of good trade characterise by rising prices and low unemployment percentages altering with periods of bad trait characterised by falling prices and high unemployment percentages.” on a commercial basis. The noun ‘cycles’ bars out fluctuations which do not occur with a measure of regularity.” According to Frederic Benham, (A tr defined rather, badly as a period of prosperity followed by a period of depression. It is not surprising that economic process SHOW f trade being good at some and bad af others.” Generally, Gusiness cycles are defined as altemate periods of prosperity and depréssion of good and bad trade varying from 3-4 years. Business cycles are represented by variations which occur regularly in an unhindered \e repetition of expan feomraction does not have a uniform oF regular period 2) Period of Business Cycle is no Longer than a Year: The period of completion of a particular business cycle is. around 3 to 4 years. But, in some cases the duration of the business cycle is either shorter or longer than that of the duration of a normal business cycle. Those causes that are associated directly or indirectly with the physical season and are due to seasonal fluctuations in economic activity taking place within the period of one calendar year makes it distinctly different. Usually, the period of business cycle is not less than one year. 4 3). Presence of the Alternating Forces of Expansion and ContractiontThe interchangeable forces of prosperity, ~ wression in an economy that are in-built im business cycle. The Torce OF expansion.) phase thrust the ecoriomy to @ high level of activity over a period of time. Initially the force is of low intensity” but finally regained by a counter force which results in contraction, ending up the process with depression. 4) Phenomenon of the Crisis: According to Keynes business cycle is characterised by the event of crisis. It meaasy, that the peak and trough are uneven as the expansion phase of the business cycle ends up suddenly depression slows down gradually. {\ 5) Synchronie: Existence of business cycle is contemporary. They have an enfolding attribute of causing a1Y changes in an individual industry or sector, For example, there is a parallel eccuncrce of ‘eae contraction in all the industries or sectors of the economy. Recession due to the chain reaction overcomes the whole economy from one industry to another. bev,consumption of Non-Duray Men-durable goods and wee Goods'a, 187 seryj Nd Seryi : ' pasiness eyele clearly state, that hich is tog “areeeniieant fear of business cycle is the consumption r of business cycle, Pa: inventories of Goods; J, SA great b; y alternate phases ye ; : AS depresgign ties of '¢ consumption of non-durable goods, oT tooeaeTessiOn goign F Boods a i ea Fluctuate Mo, profits Fluct Pe than g venting from other sources. yenY oth dilficult for businessmen te alance in th largely affected by successive expansion and the required level resulting in the decrease of it Situations yecO@e: Income from profit varies more in terms of income Predict the futuss ots that preva during the occurrence of business cycle making it International in Character: he; M"® €°onomie con tions, 4 peri at ot Port . neces the oy ines ®8Pect of busi i ; rei country exPerier Set of bu it ou siness cycle is that, they are international in ature. As one them. USA, being the large importes neS® SYCle, it exten eS &¥ a aemaltetias rom other oy other counties too due to business relations bevocs inthe demand for imports fron other : +, countries, if undergoes recession resulting into the decrease weesion of 1930's in USA and Gren Coutres eeatively, affecting the exports of oe countries altogether. The ritain has absorbed the entire. Capitalistic economies of the world. 13. Types of Business Cycle suiness cycles have been classi * ajor and Min : cyel i ey CUTS between successive ak allure eis ta to any that sours between succesi mic activity. Therefore errs ss Preeti Betvity of between mage nae maya after a French economist, vs . Another term for majc Clement Juglar during aoe ss gsleal character of business fluctuations, “""iN® 19° eentury. On the bass Fees lat emerge between larger break- jor cycle is ‘Juglar Cycles’ coined of his findings he established the, inor cycles. i_minor-Sownswings. Similarly, the yeles are referred to ‘shorter cycles? average is approximately forty months, N 2) Building Cycles: The longer than that of bi Cycles of building const usiness cycles, cycle was of the duration of 60 years. a, Phases of Business Cycle Meisner nd closely related phases of business cycle are as follows: 2 reso Papasan: In this phase, there exist an “Biistic “feeling between businessmen and plustialists that is represented by enhanced production, ait capital investment in fundamental industries. high prices and high profits. Boom zg £ a sg More than the ngsqnal expansion of ageregue tivities in an economy( The level of economic activi. c PLithich is not being The WaGE-OTKH | "lof YT the “enol = escalates) aia : 7 SNRENEOTS ae motivated in generat To exPa ‘c rocess of mutes and invest more resources in the by these teXtion. The whole process Prepare hry "vlans is named as ‘starters’ oF oT Wh . ie” Wis process gets impetus, econ Hog tPA, employment, inve "sand prices soar coca economic variations Figure 9.1: Phases of Business Cycte consumption,2) Boom or Peak: activity from th ’eak: Prosperity attains the highest level and then the recession of the economic e phase, that is generally represented by retardation in the rate of expansion Fesulting in slowing of the growth ang then reaching the peak. 3) Recession:(The beginning ion. means that boom is over signify ‘of some bank loans, fall in prices, ac liquidation in stock markets, bu 1 ga re rie demand Tor capes BF ECESION isin! As these signals are ot in the fall of psychological factors along with escalated costs leading to steep fal in ie the prevalence of negative sentiments, in prices. The spill-over effect yy. Ultimately recession gaing suspiciou: ing to excess investment, reduced liqu this phase sks liquidation and fall slump in the econom: entrepreneurs they bec real economic factors pertai prices indicates the period of recession. The after effects of reduction in fresh investments, debt recovery by banks, stoc! is on the consumers who defer their purchases causing momentum resulting into depression altogether. 4) Depression: Depression is the(frotective period Where business activities in the country are below normal. Sharp decline in production, mass employment, Tow employment, declining prices, reduction in profits and wages, creit reduction high rate of business failures, creating an atmosphere. of total negativity and hopelessness. Deadlock in the construction activities. However, the consumer goods industry is hot much affected during depression. xy describes Trough. This phase of economy 5) Trough: The period of acute stress and despair in the econom; n ivities are retarded and ultimately come to a halt experiences downward or downtum shift as the economic acti ‘Then once again these activities record an upward swing in the economy. radual increase in business activity is restored, 6) Recovery: When the lowest point of depression has attained the g1 Where the entrepreneur feels positive for the existing economic situation resulting in improvement im busines}, ies Every economic activity like industrial production, volume of employment gathers pace, Prices and 1 as starting of new investment in acti profits raise slowly, wages increase, banks expand their credit base as wel ital goods industry. Pessimistic environment is succeeded by an atmosphere of hope. eres 4.5. Causes of Business Cycle Theimain causes of Trade/ Business cycle are: 2 AN “Dp Banking Operations: Role of banking operations is very important in its contribution to the cycia|\ 1 fain to expansion and contraction of credit, change in discount rates, and | | phenomesion. These operations pert variations in the ratio of deposits to cas ume of money supply sh reserves. The banks,are capable to change the vol ip the economy. ‘ Q PF copia Goods and Consumer Goods:{The caise of business cycles is due to the proportional changes between the production of capital goods and consUmmér goods im Wie economy that Teads to deHcit aner excess ieee o ity in the short ru Purchasing Power: Market maladjustments resulting in cyclical fluctuations are due to isigréomean SHE surchasing power with the expansion and contraction of production. Profit Mania: Profit cravings of producer are another notable cause of the business cycles. Being vey pms, he is under the delusion ofthe volume and accurate description of demand. Ifthe retail rade js fast tein the result is that the tendency of the producer intensified by significantly increasing the volume of | production and resulting into a small boom jn the raw materials and labour markets. If there is a decrease in the Protl rade, the producer Becomes suspicious and immediately resorts to output reduction and termination of tai orders for raw materials, plant, et. thus the processes of rise and fallin prices is intensified. 5) Human Psychology: The human psychology is another contributor to the occurrence of business cycles 7 Likewise human psychology is to withstand frequent changes in a cyclical manner — from excitement © despar den and pessimism ate giving birt to one anther in an endless chain, At the level of boom psychological athe peak into the opposite direction take place. At the bottom of the depression there occurs a tum in H is no generalised explanation of these psychological changes. “opposite direction. ‘There es in WeatherGeather changes also contibute to the evolution of trade eycle-Ggricy Celica Ci the prices ofthese base goods be ConEWnST De wang class a soe ae, contributes to 8 von. and the pri cc and the Price rons it hirer arreels"the Wage Fate, COst Of raw material, ett ction and the Pi prod ot weal ic Fact Ya the economic activity 6)in the purchasing power or value of money. 7 i id i i ice-level. Inflation is primarily a monetary to the substantial and rapid, increase in the general price-level. Infla ae keep on rising due to excess supply of money and lower production of exchangeable goods. In ian sense, true inflation begins when the elasticity of supply of output in response to increase in money ply has fallen to zero or when output is unresponsive to changes in money supply. rding to Crowther, “Inflation is a state in which the value of money is falling, i.e, prices are rising”. g to Pigou, “Inflation takes place when money income is expanding relatively to the output of work done by the productive agents for whom it is the paymént”, 10.1.2. Features of Inflation Is various features are as follows: _ 1) Inflation involves a process of the persistent rise in prices. It involves rising trend in price level. - 2) Itisa state of disequilibrium. ‘tis scarcity oriented. tis dynamic in nature. 4) Inflationary price rise is persistent and are irreversible, _ 9) Inflation is caused by excess demand in relation to supply of all types of goods and services. 7) Itis a purely monetary phenomenon. 8) Itis a post full employment phenomenon. 9) Itis along-term process. 10.1.3. Types of Inflation are various types of inflation which can be categorised under different heads as follows: : ‘Types of Inflation ee ‘According to the Factors Influences Money Supply and Demand for ‘According to Coverage or Scope Point Goods and Services _ ‘According to Government's Reaction ‘According to Keynesian View a Profit Intation Semi-Inflation ‘True Inflation ‘Mark-up Inflation According to Rate of Rise in Pric }) Creeping Inflation: When the rise in prices is very slow like that of a snail or ‘creeper, it is called creeping inflation. In terms of speed, a sustained rise in prices of annual increase of less than 3 per cent per enum characterised as creeping inflation, Such an increase in prices is regarded safe and essential for economic growth,“re a vaising the wages of workers, this contributes to inflation. 101.4. Stages of Inflation neinfation passes through thre different stages ss shown in figure belo Stages of In Pre-Full Employment Stage Full Employment Stage Post-Full Employment Stage ') Pre-Full Employment Stage: Inflation before full employment is beneficial to the economic development of a country. It has been noticed that the rate of increase in prices is not more than 3 per cent per annum. The supply of money causes increase in the national income, which induces more Production. Consequently more employment is available. Thus, unused resources are being fully employed under this stage. This stage of inflation is also called partial or semi-inflation, So long as full employment is not reached, any increase in the Quantity of money is exhausted in rising the level of employment and output and not the general price-level in the economy. Due to bottlenecks in the economy, an increase in money supply may cause cost and Prices to rise Store than the expansion of output and employment. This is the reason why it is also called “bottleneck- inflation’ till the ceiling of full employment is reached.inflationary gap. 7. es of Inflation ate eee Poy of iflation js the imbalance between hed total demand and supply of goods and services in the es excessive demand. These are following causes of inflation: ; F $5 neon in Demand for ‘Goods and Services: There are a number of factors that cause inerease in demand for goods and services inthe country. Some of the factors can be summed up as under: : J) Increase in Public Expenditure: An increase in public expenditure during the time of war or for developmental planning causes increase in the demand for goods and services in the economy and finally result in increase in prices of goods and services causing inflation. ii) Increase in Private Expenditure: An increase in private expenditure, consumption expenditure as well as investment expenditure is an important cause of the emergence of excess demand in the economy. When business conditions are good, private entrepreneurs start investing more and more funds in new business, giving rise to increase in the demand for the service of factor of production. The result is increase in factor prices. When factor income increases, there will be more and more expenditure on consumption goods. Ultimately the effect of an increased input expenditure is to push up the demand for commodities as well as factors of production. Increase in Exports: An increase in the foreign demand for the country’s products reduces the stock of ‘commodities available for home consumption. It is evident that when more and more of commodities are exported to other countries, less and less are available for domestic consumption. This causes the situation of shortage of goods in the country and results in inflation because when demand is more anc si s more the prices are bound to go up and results in inflation in the economy of a country. at suplyess iv) Reduction in Taxation: Reduction in taxation is also an important cause of th i ‘a e emergence of increase in demand. When government reduces tax, itreslts to an increase in purchasing power of the public and thet it is in the position to demand more goods and services for private consumpti : 5 : Se a tion and res ase it prices causing inflation. Pt sults to an increégd Deflation ce 1c Ee ment of Past Internal Debts: 7 nea ot rating powet Oe hated the government repays is past debs tothe public, it results in an public which is used by it for buying more goods and services for ierease © Thi consumption purposes. This ultimately leads to an i i ' aa as with increase in dona he prea onto in in demand in the economy and cause inflation, ig up the level of aggregate ;d Growth of Population: A rapid growth in population results in pushin force and tends to raise the vi) effective demand for goods and services in a country. This acts as an inflationary prices to higher levels peerease in Supply for Goods and Services: The factors that result in reduction in the supply of goods and services May be termed as under: ) Shortage of Supplies of Factors of Production: Occasionally the economy of a country faces or is met with shortage of such factors as labour, capital, equipment, raw material, etc. These shortages are bound to reduce the production of goods and services for consumption purposes. This results to an increase in prices and inflation as the demand is high and supply is less ii) Hoarding by the Traders: At the time of shortages and rising prices, there is a tendency on the part of traders and merchants to hoard essential commodities for profit purposes. The stocks of essential goods often go underground during the period of inflation and rising prices, Mausing further scarcity of goods in the market. ii Hoarding by Consumers: It is not only the tr 0 inflation, the individual consumer also holds essential commodities to avoid pay future, They also hoard essential Commodities to ensure uninterrupted ‘availability for private consumption. ‘This leads to an increase in demand and shortage of goods thus Fesulting in increase in prices and cause jaflation in the economy of the COUNTY: inflationary cot iv) Natural Calamities: It als , Floods and draughts advers® I of prov +The law of diminishing returns operates wh .) ching Returns: a 0 Law at Diminisn more variable factors with fixed factors and given technology. AS 2 RE ‘of production increases hae leading to arse in the prices of production. la the war periods ‘economic resources are diverted t0 the production of war materials. This 9 oe poss supply of goods "ind services for civilian consumption ‘and this leads to the rise in the faces price level. vii) International Causes: ) Foitpe international T° in materials. aders and the merchants who resort to hoarding af time of ents of higher prices in ditions by reducing the production in the economy. ducts and in tum raise their prices. en production is increased by result of this law, 0 creates i ly affect the suppl in modern times, & major cause of inflationary rise in prices in most of the countries pace materials, (e.g. petol) used in almost all the industrial the prices o! conomy as when the demand increases the prices also increase yn in the ecc ire tend (0 go up causing inflation. cause inflation he demand, the prices factors si a ee apply sess thant ent of Inflation tage change in a price em! re lex. A price index m i as te ere ear. We wll scus m +x measures the average price level for a a yred 7 Inflation is measure lative three c ice indi vices We commonly used price indices. The 1d ‘most commonly sue lek for measuring inflation. tis ee to he pcs by a at coms Tilt alse Keown a a cost o ving in fuded in the CPI, but the price of a forklift is not. of ying inden. of Labour Statistics: of goods and service of goods and services the typical consumer buys, about 184 items. To caleulate fh nto each category based on how much of a Bory consumer's budget that i oupmbbelenadvegiinemacioaise0.1.9. Effects of Sas «effec tion ‘iven below: . 7h" Boece robocise Whee Once ara, prodection la encouraged. Producers earn windfall prot eft. Toy invest more it nian of igher profs in thet ae 10 increase employmen’ preducton and income. Bu iis ony ovale to fe el mployment level. Further increase in inves Beyond ths level wl lead to severe inflationary presses with oe economy because prices rise mon: reduction asthe resources ate fully employed Se inflation ahve ore Drouuetion ater the level of fat eelsymedi The adverse effects of inflation on production are discussed below: i) Misallocation of Resoutrees: Inflat from the produ Changes in the System of Transaetions: Inflation leads to changes in transactions Pattern of Tey old a smaller stock of teal money holdings against unexpected conting devote more time and attention to converting mone; iii) Reduction in Productioy Producers, fencies than before. They into inventories or other financial or real assets, : Inflation adversely affects the volume of rising prices along with rising costs of inputs iv) Ball in Quality: Continuous tise in pri 7 Production because the expectation of brings uncertainty. This reduces production, ©) Hoarding and Black-Marketing: To eam more profit from rising prices, producers hoard stocks of thir prodecn cs, Conseauently, an artificial scarcity of commodities is crented in the market. Then the Producers sell their products in the black market which can increase inflati vi) Reduction in Saving: When prices raise rapidly, the propensit needed to buy goods and services than before. Reduced savit formation. Asa result, ty to save declines because more money is production is hindered, ing adversely affects investment and capfial vil) Hinders Foreign Capital: Inflatic materials and other inputs make fc vili) Encourages Speculation: ion hinders the inflow of foreign capital because the rising costs of foreign investment less profitable. Proportion. Since the effect of Social consequences. During inflation, the distrbuace share __ Wage eamers or fixed income eamers, All Producers, traders and speculators "emergence of windfall profits which sri ces tise at a faster Production; wages, interest and rent do not i i) Debtors and Creditors: Debtors because he )) Fixed Income Groups: Inflation hits w: : earners ica eople very hard, Although wage cme" by the grace of trade unions, can chase galloping prices, they seiden Win the race. Since wages do not it : the same rate, and atthe same time, as the general price ios living on past savings, : who invest in debentures and fixed interest bearing securities, bonds, etc. lose tars ore investors in equities benefit because more inflation. > dividend is yielded on account of high P int-stock companies during inflation, made by joint- iv) $eInflation and Deflation (Chapter 10) 21 v)_ Farmers: Farmers are benefited during inflation because of the followi a). the prices of farm products increase, and ae b)_ Increase in the cost of production lags behind the rise in the prices. Farmers who produce food grains and other highly inflation-sensitive prod Q Farmer: in debts repayment repay their old debts along with the rate of interest: a Oey ar eae duets rising prices. They are further benefited as debtors as they pay back lower purchasing power to the eredien., Inflation thus provides double advantages to the farmers. oo 3) Other Effects: Inflation leads to a number of other effects which are discussed as under: i) Government: Inflation affects the government in various ways. It helps the government in financing its activities through inflationary finance. As the money income of the people increases, the government collects that in the form of taxes on incomes and commodities. So the revenues of the government increase during rising prices. Moreover, the real burden of the public debt decreases when prices are rising. ii) Balance of Payments: Inflation involves the sacrificing of the advantages of international specialisation and division of labour. It adversely affects the balance of payments of a country. When prices rise more rapidly in the home country than in foreign countries, domestic products become costlier compared to foreign products. This tends to increase imports and reduce exports, thereby making the balance of payments unfavourable for the country. iii) Exchange Rate: When prices rise more rapidly in the home country than in foreign counties, it lowers the exchange rate in relation to foreign currencies. iv) Collapse of the Monetary System: If hyper-inflation persists and the value of money continues to fall many times in a day, it ultimately leads to the collapse of the monetary system, as happened in Germany after First World War )) Social: Inflation is socially harmful. By widening the gulf between the rich and the poor, rising prices create discontentment among the masses. Pressed by the rising cost of living, workers resort to strikes which lead to loss in production. Lured by profit, people resort, to hoarding, black-marketing, at ‘manufacturing of sub-standard commodities, speculation, ete, Corruption spreads in every walk of fe. this reduces the efficiency of the economy. ate ets an gl ‘litical: Rising pri ncourage agitations and protests by political pa vet a eeiesy gather momentum and become handy they may bring the downfall of the /ernment, Many government have been sacrificed at alter of inflation.DEFLATION pt Meaning and Defini revel hike of commoditis Ge “raion. tis basically demand.supeie itp ation and its opposite, ie. decline in price level is termed as eases te Value OF Money, ie. Ae Duet mshi. When the demrond fo caoe and supply of money is less then it chasing power which is also tema ec appreciation of money. 1on of Deflation e definitions of . ore are many of deflation pj : m ‘There are some other factors wn; eve" PY the economists such as decline in price level but it is not absolutely hich bri ie ae we level cannot be termed as deflation, bring fallin price level without decrease in money supply. Such decline in 102.2. Features of Deflation ing to Artur Cecil Pi . secording £0 BOs Very price level fall cannot be considered as deflation. It occurs when output of goods ervices increase at faster 0 avy supply decreases a the money Supply rate. The following conditions niust be fulfilled for deflation: ee ply pa but output of goods and services remain constant, ys 1 , : 2) Money aoe and output of goods/services decreases but money supply decreases at relatively much faster rate. ee mat - Far apant but output of goods and services ine vases Money supply and output of goods and servieo : Ae aa a ae Services increase but output of goods and services increase at relatively Money supply decreases and outpit af goods and services increase. 4) 10.2.3. Types of Deflation There are four types of deflations as described below: |) Cash Building Deflation: This occurs when people preferring to save money instead of investing in the business due to fear of losses. This reduces the Money in circulation and increase in demand. 2) Growth Deflation: This is due to increase in supply of goods much more than the demand and fall in consumer price index. ») Bank Credit Deflation: This situation arises when banks have crisis of money supply due to bad loans or due to decrease of money supply from Central Bank of the nation. The banks find themselves in a dilemma to disburse loans to public for business activities. ) Confiscatory Deflation: In the condition when the money deposits are freezed and money cannot be used then this results a decrease in money supply. (02.4. Causes of Deflation i i , cancellation of loans and heavy taxation. This Def duction of volume of money supply, cance oa vy “eso xenon fling fae ply, cn odin, hi ation are explai slow: in Gi ion i ‘plained below: dh supply in circulation is less than the demand then the : ; When the money supply 1¢ demand then : Desrease in the Quantity CNT ce index decreases. This will result in rise of deflation, val jates and co! lue of money appreciates ion: When the volume of money supply remains constant but the quantity “| Increase in the Quantity of Produc deflation. Due to less supply of money, the value of money appreciates “! production increases then this few to det fi lown, ; = consumer price index comet tax rates are increased by the government, the purchasing power of the public © Tnerease in Taxation: When the fi fi atom of deflation. ; : 4, lt®es and this arises the situation o when government sll security bonds in publi, this results transfer of ” Open, Market Operations: At - aa ‘commercial banks en ceived . public depo . This results in partial i sults in deflation, bic money to Central Bank and provide credit vo public, which rsu on 5. tiction on commercial banks fakes loan from the public Hes essential reasons then this leads to ) " 4 ire rises in the country, Public Debt: Sometimes the gover and deflationary press = ry, ‘ “ach of money supply in them Inflation encourages production and employment which leads to lang; .ds to Deflation: sult in higher production and ultimately the supply of goods ig ing, tion Ultimately Lea ‘This furthe! in the market. Y ts. oak wease'in income and investment the deflation "ore than the demand. This being a a i ment ( 5i q ( ’ 10.2.5. Effects of Deflation Similar to inflation, deflation affects every section of on different sections of society is deseribed below iitcs pita Inthe Gbddition oF deflation. 7 ® The debtors lose and creditors gain . The 2 cote Debtors and Creditors: re oe money value and they can afford to obtain more goods frm ‘SALREES to the rehson of apps ‘Creditors gain further due to increase in demand forthe cn the existing interest rates. tone ouingeteion period and creditors can charge random interest rte on loans. The producers and farmers are adversely affected due to fall in prices. the society and brings a decline in economic growth. I effect in prices. The consumers become in better position to 2) Effect on Consumers: The consumers gain duc 10 all in prs. ae oes down which eventually makes ‘obtain more goods and services with their ‘existing income. ‘consumers comfortable. ao 3)_Bffects on Wage Earners and Salaried People: Wage earner and salaried peopl gun during fll of consumer ice it effect um. The sf ‘though allowances related to consumer price index also reduce but heir pact ndeigo Toses due to reduction on sale and reduce the losses by offering less employment to the Workers, Thus the net wage rise or the money spent on wages reduces due to reduction of number of employees. 4) Effects on Entrepreneurs and Businessmen: The entrepreneurs and businessmen are adversely affected by deflation due to following reasons: f - . i) The cost of production does not fall as much as the price of finished product in the market. 1 ii) Cost of raw materials do not fall and entrepreneurs pay extra for it but they are forced to sell the finished products at comparatively lower rates. iii) During deflation the demand for the product also goes down, ‘Businessmen suffer losses due to purchase at higher price and sell the product at the lower price. 5) Effects on Agriculturists and Landlords: The agriculturists are the most affected people during the deflation due to fall in prices of agriculture products, However landlords gain because they get fixed rent from their lands. The prices of agriculture products have steep fall and cost of manufacturing goods do not fall at par with agricultural goods. Thus farmers have to pay more for the manufacturing goods. This makes the farmers to suffer the most. 6) Effects on Government and Tax Payers: Deflation disturbs the government finances due to reduction in revenues. The projects which are being developed on short-term heavy investment from inside or outside the Country need financial assistance. The taxes on business people becomes less due to fall in sale and profit. However they have to pay more in terms of raw material and get less returns due to fall in consumer price index. 7) Effects on Importers and Exporters: Deflation adversely affects the international trade. With appreciation of money value, the export becomes costlier and import becomes easier. This gives rise to unfavourable conditions in trade of commodities. 8) Adverse Effects on Banking: Deflation reduces the establishment of new proj i it B ti Projects/business and it reduces the number of borrowers inthe banks. This may even result in crisis in banking sector, 9) Increased Burden of Taxation: The tax paid by the tax ayers puts burde siatic na ake le payers pi len on them due to appreciation of 10) Increase in Unemployment: The business activities are adversely affected during the deflation, Some business collapse while others decrease their production. This results the retrenchment of i unemployment. workers which leads 10 11) Increase in the Burden of Public Debt: During deflation, business activities are reduced and this results in reduction of money receipts by the government against revenue, However, goverment expenditures cannot be reduced to the same extent. This increases the public debt which is arranged by the poveny i security bonds, borrows from World Bank, etc, iged by the government by issuing 12) Social and Moral Consequences: Deflation reduces the business activities whereas disputes between employers and employees are increased during the deflation. This may even lead to industrial disorder in the coutiy. The country suffers an economic slowdown which also disturbs social and political life of the country.ial yb premediny Measur © Cont id prnively OOF ¢ deflati rol Pi can oly Be achieved po enemy DeMation ‘oa by perstding People to sponge Sing the congrbly such means which raise the demand for goods and ‘ More, ‘Umption of goods and investment. This consumption can asures aN be taken to j joi orks Programme: The (2° the leve of aggregate publ ir bridge, buildi, ™MMment sate demand in the economy: Pe = i i ce. 1 react Undertake large projects throvgh public sectors such as 7 ties start es Private see’ WHch are Tange and need huge investment may not be so ities, Mically, Sinnuiptel PrOlects provide jobs to large number of people and ‘Meously, private sectors should also be given incentives to Public Works Py rt ant I the finance $e! The means whi , jects i ar : #8 made available this, Wich ate adopted to finance the public works projects is asng fom public borrowing and deficit mee "¥8h taxation then ft will not beso effective in comparison to h deficit financi ancing. The developmental Projects which are undertaken by the The government Miversely affect the investment in private sectors. hance the purchage Ul reduce the burden of income tax as well as taxes on lasing power of the people which will encourage consumption and ent of Public Debt: Duri ; 4 meine for payment. This will on © period of deflation, goverment should release the public debts which =o ‘ance purchasing power of public and it will encourage business. redistribution of Income: The gover i aI ti qoney in favour of the poor. The geneeal went SPOUld adopt such schemes which confirm the circulation of {orcirculation, 'erdency of poor people to spend is high and this brings back money g & z F & 3 E € 2 5 F — E z z & = é & 3 & 8 = 3 5 8 & d g E g 3 Cedit Expansion: In order to discourage deposits, the interest rates should be lowered in the Central Bank. The enmercial banks should also promote soft loans and make them available easily to encourage business and industries for productive activities. Foreign Trade Policy: The government should encourage export and discourage imports to utilise the over- Foduced goods. To solve the problem of over production, rate of production may be regulated by reduction in working hours and increase in number of holidays in manufacturing units, \ 127, Inflation versus Deflation Se Tesciety is negatively affected by the inflation and deflation, However the comparative study reveals that inflation. “slsser evil than deflation. "27.1. Inflation is Unjust ‘aion may be consi jt following grounds: to be unjust on the following g . \ Mion increase difference between rich and poor. Due to accumulation of profit money, rich become richer 2d poor become poorer. This leads to concentration of money power in selected few rich industrialists. This ,, tes economic i ities in the society. Fi fe . * aetanomie poealaes ti price index which means increase in prices of essential goods and it toss a heavy bundon on poorer section of the society. The poor section ofthe society isthe worst sufferer due ities. an iment for increase in business climate and overall development using ei tion is generated by the bps xy by way of loans from international loan agencies. This excessive Sip 'mancing, i.e., by putting m ‘es of goods and services and value of money goes down. Professor C.N. Vani ot Money increases the Pit invisible robbery. According to Professor C.N, Vakil, “Inflation may be Sap Compared nae) ie the vietim of some possession with the difference that the robber is visyble red to a robber. Botl While inflation oe : mtaton is co «or afew at atime; the victim of inflation are the whole nation; the robber may ers" victim may be one oF “88ed to a court of law, inflatio “ — 4 piietise and shortage of essential commos n is legal”.