DEFLATION
Deflation
is a state when prices are falling down. Deflation is just the opposite of
inflation. According to Crowther deflation is "A state of the economy
where the value of money is rising or the prices are falling." Thus, the
value of money goes up and prices fall in deflation.
In
deflation, quantity of money in the market is less than its requirement. Demand
in the market starts reducing. Thus prices of commodities in the market starts
decreasing.
Trader's,
stock of commodities, remain idle in the go-down as there is no Producers have
to reduces their production. They have to terminate the workers. It can problem
of unemployment in the country. Thus, total economy declines. Hence, deflation
dangerous than inflation.
In
short, deflation is a condition of falling prices, accompanied by a decreasing
level or employment, output and income.
CAUSES OF DEFLATION :-
1. Decrease In Money Supply :- Contraction in currency by monetary
authority causes contraction of bank loans, as a result of the same the income
with the people falls, leading to the decrease in demand of goods and service
and with the supply of goods remaining the same, the result is decrease in the
prices.
2. Excessive Increase In The
Production :-
Industrial as well as agricultural production in the country may be increased
due to technological progress and other reasons. Supply in the market exceeds
demand. It effects the price adversely. Thus the prices declines.
3. Inflationary Measures :-
A country which is suffering from inflation have to implement various
measures to check such inflation. if such measures are implemented in more
percentage and money is reduced from the market there will be lesser demand. In
case of more taxation, no purchasing power will remain with the people, this
will reduce the demand from the market.
4. Central Bank's Monetary Policy :- When the central bank raises the
"Bank Rate" it result in the rise of interest rates in the economy by
the commercial banks leading to decrease in demand and fall in the prices. It
may also be due to selling of securities by the central bank. These are measures
taken to control inflation.
5. Reduction In Public Expenditure :- Government expenditure means
expenses done by the government (construction of roads, dams etc.) which
increase the money supply in the economy and as a result it increases the
purchasing power in the hands of general public. But, reduction in government
expenditure means reduction in money supply and further reduction in the
purchasing power of the people. Thus, supply exceeds demand for goods and
services which rescues the general price level in the economy.
6. Excessive Imports :- Foreign countries and traders may
dump their commodities into the national market. Supply will be more than
demand and their will be deflation. Thus, we find that any activity from the
Government or from the businessman which reduces the money supply and increases
the production will cause deflation in the economy.
7. Speculation :- Speculation regarding future fall in
prices can actually lead to deflation. With the expectation of further fall in
prices demand may not increase with the already reducing prices. This leads to
disequilibrium between demand and supply and this leads to fall in prices.
Post by:- Akshay Shivankar
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