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EFFECTS OF DEFLATION

Both INFLATION and DEFLATION are harmful for the economy but still we can say that relatively INFLATION is better because INFLATION is a single evil but DEFLATION is a double evil.

  • Reduced business revenues
  • Wage Cutbacks
  • Changes in customer spending
  • Unemployment
  • Discourages both investment and expenditure
  • Decline in the national income

INFLATION IS BETTER

  • Inflation, though it redistributes 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.
  • It is easy to control inflation by adopting various monetary and fiscal measures, but it is very difficult to recover the economy from deflation.
  • Inflation is a post-full employment phenomenon, while deflation is an under-employment phenomenon.

EFFECTS OF INFLATION

  • Price rise
  • Strain on the financial system
  • Unbalancing of Payments
  • Discourages Saving activity by making consumption more attracttive than saving
  • Inequality of incomes and wealths

PRICE INDICES

Wholesale Price Index (WPI):- It represents the price of goods at wholesale i.e. goods that are sold in bulk and traded between organizations instead of consumers. The criticism with this is that it doesn’t reflect the amount of pressure faced by general public.

Consumer Price Index (CPI):- It measures the price change from the perspective of retail buyer. It is real index for common people.

INFLATION IS UNJUST WHILE DEFLATION IS INEXPEDIENT

CAUSES OF INFLATION

INFLATION MEASUREMENT

  • Increase in demand, Demand-Pull Inflation
  • Rise in prices, Cost-Push Inflation
  • Supply and Demand pressures
  • Growth rate of money supply relative to the growth of the economy

To measure inflation, a number of goods that are representative of the economy are put together into what is referred to as a "market basket." The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the starting year.

INFLATION

Inflation is a phenomenon of rising prices without causing change in the levels of employment and output.

INFLATION IS BETTER

  • Inflation is a single evil because it redistributes wealth in favour of the rich people arbitrarily. Deflation is a double evil because it not only redistributes wealth in the same arbitrary manner, though in favour of the poor people, but also, reduces output and causes unemploy­ment.
  • Once deflation starts, it gathers momentum and the cumulative downward process ultimately takes the economy into severe depression but in case of inflation it is not so.

CAUSES OF DEFLATION

  • Increased productivity
  • Reduction in Government spending
  • Deflationary spiral
  • Escalation in the no. of competitors
  • Decrease in money supply

THANK

YOU

DEFLATION

Deflation is a phenomenon of falling prices accompanied by a fall in the levels of employment and output.

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