DEFLATION


 DEFLATION

m In economics, ñ
 is a decrease in the

general price level of goods and services.

m Deflation occurs when the annual inflation rate falls

below zero percent (a negative inflation rate),
resulting in an increase in the real value of money ±
allowing one to buy more goods with the same
amount of money
 DEFLATION

m This should not be confused with disinflation, a

slow-down in the inflation rate (i.e. when inflation
decreases, but still remains positive).

m Deflation raises the real value of money over time.

 Effects of Deflation

m Deflation is caused by a shift in the supply and

demand curve for goods and interest, particularly a
fall in the aggregate level of demand.

m Because the price of goods is falling, consumers have

an incentive to delay purchases and consumption
until prices fall further, which in turn reduces overall
economic activity.
 Deflationary spiral

m A situation where decrease in price lead to lower

production, which in turn leads to lower wages and
demand, which leads to further decreases in price.

m Since reductions in general price level are called

deflation, a deflationary spiral is when reductions in
price lead to a vicious circle, where a problem
exacerbates its own cause.
 auses of Deflation

m Deflation may be caused by a combination of the

supply and demand for goods and the supply and
demand for money, specifically the supply of money
going down and the supply of goods going up.

m Fall in prices can result from improvement in

productivity.

m Deflation may arise, if consumers reduce their

spending.
 ounteracting deflation

m Until the 1930s, it was commonly believed

by economists that deflation would cure itself.

m Some economists argued that the economic system

was not self-correcting with respect to deflation.

m The governments and central banks had to take

active measures to boost demand through tax cuts or
increases in government spending
 ountries affected by Deflation

m United Kingdom - During 2nd world war

m United States - In 1836, 1873 -96,1930.

m Hong kong - Late 1997 & 2004.

m Japan ± 1980s & 1990s.

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