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Definition: Deflation

Deflation in economics means the fall in the general prices of goods and services in a country. While disinflation is a slowdown in the rate of inflation deflation occurs when rate of inflation falls below 0%. Deflation results in the increase in the real value of the money and thus an individual can buy more goods for the same amount of money.

Deflation may result in more money flowing in the market or there is more supply of goods and services than their demand. While inflation is a period of poor economic growth, deflation is also equally unwelcome as it leads to an increase in the real value of the debt. Deflation results in falling profits and asset prices drop in employment and income and rise in default on loans by individuals and companies as debt repayment becomes more difficult. Deflationary spiral can even lead to collapse of a currency.  

The causes of deflation are stated below

  • A decrease in the aggregate level of demand for product and services or an increase in the supply of the same
  • A decrease in the money supply by the central banking authority in the country
  • A decrease in the velocity of money or an increase in the number of transaction
  • A fall in the personal, government or investment spending

Periods of deflation can be long or short. For example, Japan had a period of deflation lasting decades starting in the early 1990s. The government lowered interest rates to increase inflation but to no avail. Another example is the falling prices in the computer industries and appliances, even though sales have gone up every year. This is because companies have become better in doing what they do and increased competition has resulted in price-wars.

Hence, this concludes the definition of Deflation along with its overview.

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