3. CONTENTS
•Introduction to Deflation
• Effects of Deflation
• causes of Deflation
• control of Deflation
• Difference b/w Deflation & Inflation
• Inflation is in expenditure
• conclusion
4. DEFINITION OF DEFLATION
According to Crowther, “Deflation is the
state of economy where the value of money is
rising i.e. prices are falling.”
5. MEANING
In Economics, deflation is a decrease in
the general price level of goods and services.
DEFLATION is a situation in which falling
prices are accompanied by falling levels of
employment,output and income.
Deflation usually happens when supply is
high, demand is low.
6. Its important to understand the
difference between 4 types of
situation i.e.
• DEFLATION
• DISINFLATION
• INFLATION
• REFLATION
7. • DEFLATION
• Deflation causes serious
problem of
unemployment and
reduction in output of
the economy.
• Deflation occurs before
the level of full
employment.
• Deflation may reduce
the prices even below
the normal level.
• DISINFLATION
• Disinflation does not
create such problems,
rather it saves the
economy from the
effect of inflation.
• Disinflation occur after
the level of full
employment.
• Here prices can be
brought down to the
normal level with the
help of disinflation.
8. • INFLATION
• Inflation causes a serious
problem of rising prices
without increase in output
and unemployment.
• It occurs after the level of
full employment.
• Here prices rise rapidly.
• Inflation may be due to
natural factors or may be
the result of deliberate
policy of govt.
• REFLATION
• Reflation does not create
such problem,rather it
saves the already shattered
economy from the problem
of deflation.
• It occurs before the level of
full employment.
• Here prices rise slowly.
• Reflation is always
adopted by govt as
deliberate policy.
9. Causes of Deflation
1.Keynes Explation :
Deficient aggregate demand
Less investment expenditure
Fall in MEC
Less consumption
Rise in rate of return
10. 2. Contractionary monetary policy
3. Reduction in government expenditure
4.Heavy taxes
5.Increasing economic inequalities
6.Public borrowing
7.Psychological factors
8. Other factors
11. EFFECTS OF DEFLATION
A)Effects on different sections of society.
1. Producers
2. Traders
3. Investors
4. Salaried and labour classes
5. Consumers
6. Creditors and debtors
12. B) Other effects on the Economy
Tax payers are adversely affected in deflationary
period because due to falling prices, the value of
money rises and real burden of taxation increases.
The government faces an increase in the real
burden of public debt.
Some small business may close down. This results in
unemployment of workers and employees.
The public sector enterprise also suffer losses
during deflation when prices fall.
13. Banking business also suffers during deflation
because the number of borrowers falls sharply due
to general recession in the economy.
Deflationary conditions lead to greater number of
industrial disputes .
During deflation, the pace of economic growth
slows down or even suffers a setback and the
economic, social and political life of country get
disturbed.
14. Various measures can be taken to increase consumption and
investment expenditures in the economy:
1. Reduction in Taxation
2. Redistribution of Income
3. Repayment of public debt
4. Subsidies
5. Public works programme
15. 6. Deficit Financing
7. Reduction in interest Rate
8. Credit Expansion
9.Foreign Trade Policy
10. Regulation of production
16. Meaning of Inflation & Deflation
• Inflation is a situation when the prices of goods and services get a
boost, thus decreasing the buying power of money .It is the
continuous upward movement in the general price level of economy.
•Deflation is opposite of inflation, where by the prices of goods and
services fall and the people can purchase more goods with the limited
money . It is the decrease in the general price level, in the country’s
economy.
17. COMPARISON B/W INFLATION & DEFLATION:
• INFLATION
When the value of money
decreases in the international
market, then the situation is
termed as inflation.
• DEFLATION
It is the situation when the
value of money increases in
international market.
Effects Increase in the
general price level.
National Income It does
not declines.
Gold prices Falls.
Good for Producers.
Consequences Unequal
distribution of income.
Effects Decrease in the general price
level.
National Income It declines.
Gold prices Rises.
Good for Consumers.
Consequences Raise in the level of
unemployment.
18. COUNTRIES AFFECTED BY DEFLATION:
Post panic of 1837 Deflation in US.
The Enormous Deflation in the US.
The great depression in 1930’s.
The Asia financial crisis of 1997.
The Japanese deflation of the 1990’s.
19. Deflation is Inexpedient
Deflation is considered inexpedient Because of the
following Reasons:
Deflation, by reducing prices and output,
leads to a sharp decline in the national
income and thus reverses the process of
economic Growth.
Deflation results in Mass Unemployment.
Reduction in prices and profits forces the
businessman to close down their
Establishment or reduce their production,
thus giving rise to large scale unemployment.
20. Deflation once starts, becomes cumulative. It
goes on Gathering, momentum and the
economic crisis becomes deeper and deeper
with the passage of time
Deflation is undesirable from all sides. It
adversely affects the Social, Economic,
Political and Moral life of the Economy.
Deflation leads to depression in the economy.
21. Inflation is better than Deflation
Though both Inflation and Deflation have undesirable
effects, but inflation is considered better than
deflation.
The Following Arguments justify the preference for inflation:
Inflation, though it redistribute income and wealth
in favour of the rich and causes economic
inequalities, does not reduce national income.
Deflation on the other hand , has the undesirable
effect of reducing national income.
Inflation is a post-full employment phenomenon,
while deflation is an Under-employment
phenomenon.
22. It Is easy to control inflation by adopting various
monetary and fiscal measures, but it is very
difficult to recover the economy from deflation.
Once deflation starts, it gathers momentum and
the cumulative downward process ultimately
takes the economy into severe depression.
Mild Inflation is better than Deflation form the
point of view of economic development.
Moderate monetary expansion by raising the
price level and increasing the expenditures, can
stimulate economic development in a depressed
economy.
23. Inflation is lesser evil.
a) Inflation is a single evil because it redistributes
wealth in a favour of the rich people arbitrarily.
Deflation is a double evil because it is not only
redistributes wealth in the same arbitrary manner ,
though in favour of the poor people, but also,
reduces output and causes, unemployment.
Inflation makes it increasingly difficult for the people
to earn a good livelihood while deflation deprives
the people of their livelihood by rendering them
unemployed.
In the end, it is time that keynes prefers Inflation to
Deflation.
