Deflation, And The Consequences Of A Falling Economy Of Prices

2117 Words9 Pages
This assignment will tackle the ideas of what is deflation, and the consequences of a falling economy of prices, looking at examples in history on the effects of deflation in the economy but also to date. Sloman and et al. describe deflation in two ways, firstly; negative inflation, caused by period/s of declining prices within the economy and secondly; a period of declining aggregate demand within an economy, which is now described as the latter compared to the idea of negative inflation (Sloman and et al., 2013, G:3). Sloman and et al.’s idea of deflation has changed between negative inflation and aggregate demand, due to the measure of which the different definitions take. Aggregate demand talks about the spending on goods and services…show more content…
The idea of deflation for most for example Sloman and et al.’s definition of deflation, is the idea of inflation being negative. Britton and et al. describe inflation as the rising of general prices within the economy (Britton and et al., 2005, 326). However, when interest rates increase, consumers mostly tend to have less money to spend, redistributing wealth. This causes a decline in spending within the economy from decreased spending, therefore causing inflation to decrease, directly corresponding to Sloman and et al. description of deflation. According to Baugh and Essary typically low inflation is not bad, allowing households and business’ still to purchase and invest due to long-term interest rates being fixed. Whilst deflation can cause consumers to postpone their purchases as they believe it will be a better investment in the future, it’s also harder for households, firms and government to service their debt as tax revenues and income tend not to change in the terms of inflation (Blackstone and Buell, 2014, cited in Baugh and Essary, 2015, 77). Deflation is mostly measured by two weighted averages, CPI and RPI, they are weighted averages RPI, is the retail price index, Lipsey and Chrystal calculate RPI by the prices of goods and services that are usually brought by households, measuring a households’ typical cost of living, this index is
Open Document