Deflation – Types and effects

Deflation refers to a persistent fall in the general price level of most goods and services.

Since price falls, the value of money rises during deflation.

Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money – the currency of a national or regional economy. This allows one to buy more goods and services than before with the same amount of money.

CAUSES OF DEFLATION

1. Excess supply over demand
2. Restriction on bank lending
3. Excessive use of budget – surplus
4. Increase in taxation
5. Under – population
6. Excessive price control

EFFECTS OF DEFLATION

1. Fall in price of goods and services
2. Reduction in profit
3. Decrease in investment
4. Fixed income earners will gain
5. Money lenders gain at the expenses of borrowers.
6. Reduction in production
7. Encourages export of goods
8. Discourages importation
9. Increase in value of money

HOW TO CONTROL DEFLATION

1. The adoption of an expansionary monetary policy by the central bank.
2. Use of deficit – financing by the government
3. The government could reduce taxation on incomes
4. A physical measure of controlling deflation is to increase the wages or salaries of the people.
5. Reduction in taxes.

Assignment (Post your answer and question title using the box below for evaluation and discussion)

Write short note on the following:

1. Inflationary gap
2. Dis-inflation

• Reflation

1. Open inflation
2. Slumpflation
3. Price instability