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Explaining deflation considering recent events


What is Deflation?
In plain language, deflation is considered to be the time when prices are falling. More Often people tend to confuse deflation with either 'disinflation' or 'depression' (and the example is "the Great Depression"). While the three terms are related to each other but they are not synonymous.

Deflation is actually a decline in general price level of goods and services; the deflationary phase occur when the aggregate level of demand falls.

It can also happen because of contractions in spending whether it is due to reduction in government spending, personal spending or because of investment spending. Besides falling price, deflation also results increases unemployment for an economy. This process often leads to a lower level of demand in the economy. That is the opposite of inflation.

(If you would like to read about inflation, click here)

Read more about: economy classroom deflation
Story first published: Thursday, August 11, 2011, 16:00 [IST]
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