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DEFLATION

Date :- 9/11/2011 GROUP 7:Darshana Raghu Deepa Raghu Deepika Gangdeb Rahul T R Rajath Raveendran Rajesh P G

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Introduction

In economics, deflation is a decrease in the average level of price of goods and services. Deflation occurs when the inflation rate falls below 0% (A negative inflation rate). Deflation is a problem in a modern economy because of the danger of a deflationary spiral People lose confidence due to declining price levels deflating incomes and asset values Businesses are more reluctant to borrow money or to invest 1 May 2012

Deflation can be triggered by combination of the following factors:

A decline in the money supply

An increase in the supply of goods or services, which exacerbate the situation and further lower prices
A decrease in the demand for goods

An increase in the demand for money


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Deflation Spiral

A deflationary spiral is a situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price. 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 worsens its own cause.
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Effects Of Deflation

Decreasing nominal prices for goods and services Increasing real value of cash money and all assets denominated in cash terms May decrease investment if cash holdings are seen as preferable Benefits creditors at the expenses of debtors Benefits recipients of fixed incomes Recessions and unemployment (disputed)
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Contd

Company profits may fall Private domestic capital investment may fall Real value of loans to be repaid may rise

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Implications for business

A low and stable Deflation rate is widely recognized as being beneficial to business and the economy as a whole. There should always be enough policy scope to prevent a negative spiral of deflation. In deflation, companies are the first to suffer, as falling prices squeeze profit margins. Companies in turn act as driving belts of deflationary pressures, by setting in motion the downward spiral of in activity, employment, profits and prices.
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Deflation- Beneficial Or Dangerous???


Deflation itself is neither good nor bad. Deflation raises real wages which are both difficult and costly for management to lower. This frequently leads to layoffs and makes employers reluctant to hire new workers, increasing unemployment. It depends on the cause of the deflation whether people will suffer or rejoice.
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Contd

If the cause is increasing supply of goods that would be good. If deflation is caused by a decreasing supply of money as in the great depression, that would be bad.

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Microeconomic Perspective

From a microeconomic perspective, deflation affects two important groups: 1. consumers and 2. businesses.

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Impact on Business

Develop an action plan that will provide alternatives to any of the business aspects, sectors or costs that will be impacted by deflation Do careful planning on the production of goods and services and inventory reduction Investment planning should focus on higher value goods or services and avoid higher cost/lower value ones

Increase investments that will boost productivity and reduce costs


Re-evaluate all costs and contractual agreements with clients and suppliers and take appropriate action as necessary 1 May 2012

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Impact on the Consumer

Pay down or pay off any non-self liquidating debt such as personal loans, credit card loans etc. Increase the amount of savings out of each paycheck Maintain retirement contributions despite stock market fluctuations Seek out bargains and negotiate down for any durable goods that need to be acquired or replaced If there is a feeling of insecurity concerning job continuation and stability or income generating assets, start seeking out alternative sources of income Go back to school or update skills to enhance personal marketability
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Can Deflation Be a Good or Bad thing for insurance companies

Deflation can actually have a positive effect on insurance companies and consumers, according to financial website Inflation Data. If the quantity of goods increases in the market, prices will naturally lower to reflect the increased supply. This is the good kind of inflation and it is a signifier of a healthy market because multiple companies are able to thrive at once. Quantity of goods can also increase because costs become lower, which increases profits.
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Conclusion

So deflation can be caused by several different things and thus can be good or bad depending on the cause.

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