Deflation

In economics, deflation is a decrease in the general price level of goods and services.[1] Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but deflation increases it. This allows more goods and services to be bought than before with the same amount of currency. Deflation is distinct from disinflation, a slowdown in the inflation rate; i.e., when inflation declines to a lower rate but is still positive.[2]

Economists generally believe that a sudden deflationary shock is a problem in a modern economy because it increases the real value of debt, especially if the deflation is unexpected. Deflation may also aggravate recessions and lead to a deflationary spiral (see later section).[3][4][5][6][7][8][9]

Some economists argue that prolonged deflationary periods are related to the underlying of technological progress in an economy, because as productivity increases (TFP), the cost of goods decreases.[10]

Deflation usually happens when supply is high (when excess production occurs), when demand is low (when consumption decreases), or when the money supply decreases (sometimes in response to a contraction created from careless investment or a credit crunch) or because of a net capital outflow from the economy.[11] It can also occur when there is too much competition and too little market concentration.[12][better source needed]

  1. ^ Robert J. Barro and Vittorio Grilli (1994), European Macroeconomics, chap. 8, p. 142. ISBN 0-333-57764-7
  2. ^ O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall. p. 343. ISBN 0-13-063085-3.
  3. ^ Harry Wallop, Harry Wallop (18 November 2008). "Deflation: why it is dangerous". The Daily Telegraph. Archived from the original on 2022-01-12. Retrieved 20 September 2016.
  4. ^ "The Economist explains: Why deflation is bad". Economist. Economist magazine. 7 Jan 2015. Retrieved 20 September 2016.
  5. ^ Krugman, Paul (2 August 2010). "Why is Deflation Bad?". The New York Times. Retrieved 20 September 2016.
  6. ^ Walker, Andrew (29 January 2016). "Is deflation such a bad thing?". BBC. Retrieved 20 September 2016.
  7. ^ Thoma, Mark (8 April 2014). "Explainer: Why is deflation so harmful?". Moneywatch. CBS. Retrieved 20 September 2016.
  8. ^ Hummel, Jeffrey Rogers. "Death and Taxes, Including Inflation: the Public versus Economists" (January 2007). [1] Archived 2009-03-25 at the Wayback Machine
  9. ^ Blanchard, O.; Dell'Ariccia, G.; Mauro, P. (18 August 2010). "Rethinking macroeconomic policy". Journal of Money, Credit and Banking. 42 (1): 199–215. CiteSeerX 10.1.1.153.7293. doi:10.1111/j.1538-4616.2010.00334.x. S2CID 14824203.
  10. ^ Bordo, Michael D.; Filardo, Andrew J. (2005-11-01). "Deflation in a Historical Perspective" (PDF). Rochester, NY. doi:10.2139/ssrn.860404. S2CID 153344185. SSRN 860404. {{cite journal}}: Cite journal requires |journal= (help)
  11. ^ "What Causes Negative Inflation (Deflation)?".
  12. ^ "Market Models: Pure Competition, Monopolistic Competition, Oligopoly, and Pure Monopoly".

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