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Transcript of Deflation
Since an asset price collapse in the 1990s, Japan has been experiencing bouts of deflation.
Deflation has slowed down the economy. For example consumers putting off purchases because they want to wait for the price to fall.
The government is urged to boost domestic demand and jobs through promoting potential high-growth sectors. For example health care and green technology.
- leads to worsening of Japan's public debt (~200% of GDP)
- Weak demands -> unemployment Definition Deflation The persistent fall in the average level of prices in a economy.
- two kinds of deflation: bad deflation & good deflation Bad Deflation Caused by change in the demand side of the economy.
Fall in AD -> fall in prices -> fall in output
Falling output can lead to rising unemployment. Deflation and Disinflation Disinflation is a falling rate of inflation. Good Deflation Caused by change in the supply side of the economy (increased productivity).
Rise in AS -> fall in prices -> rise in output
Rising output leads to falling unemployment. Costs of Deflation The costs of deflation focuses more on the "bad" type of deflation, so a fall in AD. From the consumer's point of view, we might be pleased to face the falling prices. But there are a number problems which are associated with deflation which some economists say to be greater than the problems cause by inflation. Unemployment Unemployment is the main/major problem regarding deflation.
A fall in aggregate demand causes businesses to make fewer profits, therefore causing them to produce less.
One way for businesses to decrease their supply is by laying off workers.
Consumers will wait to buy durable good because they will be cheaper in the future, further decreasing AD and unemployment. This is known as a deflationary spiral. A good example is Japan. Effect on Investment Fall in AD causes businesses make less profit or in some cases losses
Business confidence would be low and is likely to reduce investment and reduce future growth • This implies to anyone who has taken a loan
• The value of loans rise due to deflation
• Businesses have lower profits and may not be able to pay back loans
• Unpaid loans lead to bankruptcies and will further worsen business confidence Costs of Debtors Task Think of at least two costs of deflation.