WHAT IS DEFLATION, ITS EFFECTS

WHAT IS DEFLATION, ITS EFFECTS AND HOW TO CONTROL DEFLATION What is deflation?

Deflation is a decrease in the general price level of goods and services. It occurs when the inflation rate falls below 0%. Inflation reduces the value of currency over time, but sudden deflation increases it. This allows more goods and services to be bought than before with the same amount of currency.

Deflation can be caused by a number of factors, including:

  • A decrease in the supply of money and credit in the economy
  • An increase in productivity and technological progress, which leads to lower production costs
  • A decrease in aggregate demand, such as when consumers and businesses become more pessimistic about the economy
  • A decrease in the value of a country’s currency relative to other currencies

Deflation can have both positive and negative effects on the economy. On the one hand, it can lead to lower prices for consumers, which can boost spending and economic growth. On the other hand, it can also lead to a decrease in wages and profits, which can cause businesses to lay off workers and reduce investment.

Deflation can also be a self-reinforcing process. When prices are falling, consumers may delay purchases in the hopes of buying things for less later. This can lead to a decrease in demand, which can further depress prices.

The Great Depression of the 1930s was a period of severe deflation, which contributed to the economic crisis. In recent years, deflation has been a relatively rare phenomenon, but it has occurred in some countries, such as Japan and China.

Here are some of the consequences of deflation:

  • Decreased economic growth: Deflation can lead to decreased economic growth because it can discourage businesses from investing and hiring new workers. This is because businesses are less likely to make profits when prices are falling.
  • Increased unemployment: Deflation can lead to increased unemployment because businesses are less likely to hire new workers when they are not making profits.
  • Decreased consumer spending: Deflation can lead to decreased consumer spending because people may delay purchases in the hopes of buying things for less later. This can lead to a decrease in demand, which can further depress prices.
  • Increased debt burden: Deflation can increase the debt burden of borrowers because the value of their debt increases as prices fall. This can make it more difficult for borrowers to repay their debts.

Overall, deflation is a complex phenomenon with both positive and negative effects on the economy. It is important to carefully consider the potential consequences of deflation before taking any policy action to address it

Deflation may be defined as a continuous fall in the price level of goods and services as a result of a decrease in the volume of money in circulation.

Since prices fall, the value of money rises during deflations. A given sum of money and purchase more goods and services. It should be noted that deflation is the opposite of inflation.

Causes of Deflation

Budget surplus: Budget surplus serves as a device by which the rate of injecting
money into circulation was reduced.

Increase in bank rate: This serves to discourage commercial banks from borrowing from the Central Bank and by so doing reduces the banks’ ability to lend money, leading to a reduction in the volume in circulation.

  • Increase in production: An increase in the production of goods without a corresponding increase in the volume of money in circulation can lead to it
  • Increase in taxation: When taxation is increased, it will definitely reduce the volume of money in circulation, thereby causing deflations to occur.

Effects of Deflation on an economy

 The decline in profits: Deflation causes a decline in profits as a result of the low volume of money in circulation.

 It results in unemployment: Deflation brings about unemployment in the labour market.

Fall in prices of goods: As a result of the decline in the volume of money in circulation, the prices of goods and services tend to fall.

 Reduction in investment: As a result of low savings, the level of investments tends to be reduced.

 Creditors gain: Creditors gain because money has added value during the period of deflations.

 It encourages exports: Goods that are to be exported are generally very cheap during deflation.

It discourages imports: Goods imported are generally more expensive and there is no hope of selling such goods in an economy that is experiencing deflation.

Fixed income earners gain: During the period of deflations, fixed income earners gain because wages are fixed and they are able to buy more goods and services.

 Increase in value of money: There is an increase in the value of money due to the fact that its supply is lower than its demand.

It encourages savings: Savings is encouraged because the value of money increases during deflations.

HOW TO CONTROL OF DEFLATION
  • Reduction in taxation: This practice enables people to have more money, thereby increasing their purchasing power and controlling deflation.
  • Use of deficit budgeting: An increase in government expenditure helps to inject more money into circulation by curbing the effects of deflation.
  • Reduction in bank rate: This will assist investors in borrowing more money from banks, thereby increasing the volume of money in circulation.
  • Increase in wages and salaries:        This will help to inject more money into circulation, thereby controlling deflation.

Use of open market operation: The Central Bank does this by purchasing securities from commercial banks. This makes it possible for commercial banks to be able to lend money out and increase the volume of money in circulation.

In general partnership, partners have equal responsibility and risk in the business. All partners are agents of the firm and they all share the responsibility of running the business.

Hence, they are liable to the full extent of the debts of the firm. The liability of members is unlimited; they all take an active part in the administration and management of the business.

The main features of a general partnership

(i)     All the partners have unlimited liability.

  • Partners are agents of the enterprise.
  •  They have equal responsibility in management.
  •  They have equal power in binding the contract.

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