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RUHINA DHAWAN(33)
SAKSHI KHANNA(34)
SANDEEP MALHOTRA(35)
SHILPA SRIVASTAVA(36)
SHRUTI GUPTA(37)

àInflation is when you pay fifteen dollars for
the ten-
ten-dollar haircut you used to get for
five dollars when you had hair.´
hair.´

Sam Ewing quote


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In economic term, µdeflation¶ occurs when


the inflation rate falls below zero percent,
resulting in an increase in the real value of
money.

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Deflation in UK
Deflation in Japan
Deflation in USA
Trends in India
Trends in China
Conclusion
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CAUSES

   
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EFFECTS OF DEFLATION

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àThey are aware of deflation risk. They are
cutting rates very fast & if necessary they
too will turn to helicopters but in the end
they will keep the wolf away from the door´
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USA
The United States of America (US or USA) has the world¶s largest economy. According to the CIA World
Factbook, 2007 GDP is believed to be $13.84 trillion. This is three times the size of the next largest
economy, Japan, which has a GDP of $4.4 trillion.

The recent failure in the US housing and credit markets have resulted in a
slowdown in the US economy. 2007 GDP growth was estimated at 2.2% but in
2008 it is projected to be just 0.9%, down from the 10-
10-year average of 2.8%.

 [
There have been three significant periods of deflation in the United
States.

The first was the recession of 1836, when the currency in the United
States contracted by about 30%, a contraction which is only
matched by the Great Depression. This "deflation" satisfies both
definitions, that of a decrease in prices and a decrease in the
available quantity of money.

The second was after the Civil War,


War, sometimes called The Great
Deflation.. It was possibly spurred by return to a gold standard,
Deflation
retiring paper money printed during the Civil War.

The third was between 1930-


1930-1933 when the rate of deflation was
approximately 10 percent/year, part of the United States slide into
the Great Depression,
Depression, where banks failed and unemployment
peaked at 25%.
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 There is no stable competitive equilibrium in industries


with high fixed costs and low marginal costs ± steel,
autos, chemicals, software, computer chips, airlines and
others.

 Unless companies can achieve a stable pricing structure


or establish unique products, they will lose money. The
airline industry has never earned a normal return on its
capital. DRAM makers are likely in the same situation.

Increased global competition has undermined established


pricing practices in many industries. Things have been
changing for several years, but a weak world economy
and a strong US dollar have intensified the effects.
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Is not a new phenomenon for global world.
Great depression in 1930s was
DEFLATION
What is DEFLATION???
It is a decline in general
price levels,often caused by reduction in
supply of money or credit.
It can be brought about by reduction in
government spending,personal
spending,investment spending.
Falling prices are good for an
economy???
Positive factors:
Increases purchasing power.
Increases demand.
Negative factors:
decreases prices and it leads to
decrease in wages.
increase in unemployment.
decrease in asset prices.
Deflation in Japan:
In 1930s in Japan,deflation reflected
economic collapse and rising
unemployment made worse of economy
which was called
LOST DECADE (1991²(1991²2001).
Similar trend is visible in emerging
economies also like china, inflation was
8.5% in april but in november it was 2.4%
After effects of Deflation in
japan:
Increase in unemployment level.
Decrease in GDP.
Decrease in consumption level.
Decrease in asset prices.
Level of demand.
Fall in prices.
The Japanese Slump


 

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´ 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard 27 of 44



 

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Fundamental Drivers of deflation trend
in Japan :
DEBT: prices decreases and old debt stay
DEBT:
fixed,companies may be facing difficult
times in repaying these debts and it leads
to bankruptcies and increase in
unemployment .banks would suffer more
loans losses and if wages reduces same
will be with house holds.
Deffered spending: if people believe that
prices will be lower next month,they may
wait to buy and if too many shoppers
wait,the economy would coil downwards .
Why Japan¶s economy has fallen
on such hard times,and why has
recovery taken so long?
Surplus in savings.
Policy mis management.
Structural problem.
Yen appreciation.
Global capital flow.
INDIA
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,11[=1850 [[8<
( ) " 57>15
 ) " 57>15 This is basically when the
aggregate demand in an economy exceeds the
aggregate supply. It is also defined as `too much
money chasing too few goods'. Bare-
Bare-boned, it means
that a country is capable of producing only 100 items
but the demand is for 105 items. The more demand
there is, the costlier it becomes for example GOLD
2. Cost push INFLATION ± Due to increase in the
price of various inputs like raw material or semi
finished goods, wages of the labour , interest rate
on loans and borrowings etc and hence these cost
push factors have a direct impact on the price of a
particulare product
As the aggregate
supply
curve shifts from AS to
AS1
(decrease in supply) but
aggregate demand
remains
same price level increase
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1.
1.The
The supply of money goes down.

2.The supply of other goods goes up.

3.Demand for money goes up.

4.Demand for other goods goes down.


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CHINA--SOME FACTS
CHINA

=1= >15 ++


1,329,740,000
5=>158 ++9 4.3% (official); 17% (unofficial )
57>15 4.9% (CPI: 8.7%,Feb 07 - Feb 08)
4.5% (2007 av)
1.7% (2006 av)

:====++2
:==== ++2
$7.8 trillion
:=01=155[++9 Private consumption (36.4 %)
Government consumption (13.7 %)
Gross fixed investment (40.9 %)
Exports of goods/services (39.7%)
Imports of goods/services (-
(-31.9%)

source:wikiepedia
INFLATIONARY TRENDS IN CHINA

Over the past 30 years china had


experienced 4 major periods of inflation.

1988-1989
1988-
1993--1996
1993
2007
2008
DIFFERENT FACTORS OF INFLATION

Mistakes made in the process of formulating and implementing


economic policy,specification,expansion of excess aggregate.

  

a. Budget deficit ĺBorrowing money from the central bank ĺ


Increase of monetary supply ĺInflation

b. Increase in money supply by the central bank that is used to


finance the state-
state-owned firms
POLICIES

Suspend the price reform, mandate the state owned enterprises


and food store to increase the supply and suppress the price.
Credit plan and credit control.
1994 Budget Law (prohibits the government from borrowing from
central bank).
Control the market prices of goods items.
items.
Increase the supply of the shortage products, through government
purchase in the foreign countries.
Relax the capital constrain
CURRENT SCENERIO
SOURCE:BUSINESS TIMES
?5:<China fell into deflation at the consumer level last month
?5:<China
for the first time in more than six years, as ministers painted a
gloomy picture of the economy's near-
near-term prospects.
The 1.6 per cent drop in the consumer price index (CPI) in the year
to February, which was bang in line with a Reuters survey of 26
analysts, gives the central bank ample scope to cut interest rates
further if need be to boost the economy.
Goldman Sachs said now seemed a "natural point" to lower
borrowing costs to ease the financial burden on firms, which are
battling a slump in overseas demand and in domestic construction.
Commerce Minister Chen Deming and Industry Minister Li Yizhong,
speaking at a joint news conference, both used the word "grim" to
describe the immediate outlook for Chinese exports and the
manufacturing sector.
Li said he was encouraged that power consumption had declined at a slower pace in the first two months
of the year.

But he added, "The situation of industrial production remained grim." The year-on-year drop in the CPI,
reported by the National Bureau of Statistics, was the first since December 2002.

Economists worry that, unless China's four trillion yan, or US$585 billion (US$1 = RM3.70), stimulus plan
kicks in soon, these deflationary pressures will intensify because the economy is saddled with excess
capacity at a time of depressed demand.

Consumers who expect more price declines in future may delay their purchases, weakening the economy
and undermining corporate profits.

"I think this is the first sign of deflation," Qing Wang, China economist for Morgan Stanley in Hong Kong,
said of the CPI drop.

"We expect an additional policy response, mainly to prevent deflationary expectations from getting
entrenched."

Shanghai stocks recouped early losses and ended 1.88 per cent higher as investors shrugged off the
slide into deflation and took comfort from strong lending data.

Wang expects consumer prices to decline 1 per cent in 2009.


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