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Sunday, April 12, 2009
Inflation Vs Deflation
We must have heard these words a million times in the past few months.. Lets discuss what they really mean and How are they impacting our lives.. ..Discuss if they are good or bad, and if either/or then Why???
to start with what is inflation?? inflation is the increase in the price of goods and services over the time. A movie ticket was for a few paise in my dad’s time. Now it is worth Rs.50. My dads first salary for the month was Rs.400 and over the years it has now become Rs.75,000. This is what inflation is, the price of everything goes up. Because the price goes up, the salaries go up. If you really thing about it, inflation makes the worth of money reduce. What you could buy in my dad’s time for Rs.10, now a days you will not be able to buy for Rs.400 also. The worth of money has reduced! thus, when my father was a kid, he used to get 50paise pocket money. He used to use this money to go and watch a movie, today, You will not be able to even buy a “paan” with the 50paise!!”
deflation is just the opposite of inflation. it occurs when prices ae declining over the time. money becomes more valuable with the passage of time.
thus, the we must always invest money rather than save it because the value of money will change. the rate at which we invest muct be more than the inflation rate.
Inflation is when prices continue to rise, usually because of economic growth or too much capital in the market creating few opportunities and Deflation is a decline in price levels, often caused by a reduction in the supply of money or credit. Deflation has often increased unemployment in an economy, since the it leads to a lower level of demand in the economy
college professor has told us a very nice story, i would like to share with u,
In earlier day there were coins of 1 paise and even less. people use to buy 40kg of rice for Re1 and today a kilo of rice costs Rs20! 10l of milk cost 50p in those days but today you need at least Rs120 to purchase the same amount. what the passage of time has done. It has eroded the value of money. Having Rs800 today is equivalent to having Re1 fifty years ago. Economists call it a decline in the purchasing power of money.
And the term 'inflation' has its roots right there. When the purchasing power of money decrease with time, is called 'inflation'. Inflation benefits debtors.
Wheres Deflation downside to inflation is that it puts some goods and services out of reach for consumers. Rarely do wages increase the same rate as inflation, so consumers have less money to spend. As the gap between income and expenses closes, so does spending. That situation could eventually lead to deflation. deflation is when the average price of goods falls. When the inflation rate falls below zero, indicating negative inflation, we know that there has been deflation.
Deflation can be a bad thing for consumers and the economy as a whole. For one, debtors end up paying back debts that were borrowed with higher-valued dollars. This effectively increases the amount of the debt. When prices go down, consumers delay purchases thinking that prices will continue to fall. As a result, companies make less money, leading them to layoff employees. When unemployment increases, there is lower demand for products because unemployed consumers can’t afford more purchases. It can become a vicious cycle.
Inflation or Deflation also depends on the Supply and demand cycle. If Demand is more and Supply is less the prices soars and causes Inflation. Conversely, if demand is more and supply is less it causes prices to decline and results in Deflation. So the Goverment always try to match the Demand and Supply cycle.
Inflation & Deflation are two opposite factors impacting the Economy. Lets start with simple definition of Both.
Inflation is the sustained rise in the general prize level of goods & services as a result of Increase in Demand without corresponding increase in supply.
Deflation is the sustained decrease in the general prize level of goods & services.
Inflation leads to a fall in the Purchasing Power of money whereas Deflation leads to an Increase in real value of money.
Incase of deflation consumers spends less money because he thinks that there are more chances of prizes to come down and then it leads to a Deflationary Spiral which is linked with recession & then great Depression so From economical Point of view if we compare Inflation & Deflation, then inflation is better one as in case of inflation there is no such kind of danger.
How the Inflation & deflation rates are calculated what are the causes for Inflation & deflation, what is the impact of both on economy? what measures shall be taken by govt. to avoid this? If we find the answers for these questions then only we can draw conclusion for this topic.
Inflation rate is calculated by CSO, Central Statistical Organisation, they consider WPI & CPI and for calculating this base year shall be consider, and there are certain basic commodities in the series. considering all thses data they calculate indices.
Advantage - 1.people feel richer (money illusion) 2.unexpected inflation benefits borrowers 3.could be from extra growth in the economy or extra money which would lead to lower unemployment rates 4.if prices rise, then a currency devalues which would lead to growth in the export sector.
Disadvantage - 1.people who have signed labor contracts have seen a decrease in their real wage (the amount they can purchase 2.lenders will lose from arbitrary inflation 3.interest rates will feel pressure to change.
LETS US LOOK WITH THE SIMPLE DEMAND AND SUPPLY RULE.WHEN THE DEMAND FOR ANY COMMODITY REMAINS UNCHANGED BUT THERE IS SHORTFALL IN SUPPLY LEADS TO INCREASE IN PRICES OF THE COMMODITY AND THUS LEADS TO INFLATION.WHEREAS DEFLATION IS EXACTLY THE OPPOSITE OF INFLATION.DEFLATION OCCURS WHEN THE THE SUPPLY FOR GOODS GO UP AND THE DEMAND GOES GOES DOWN LEADING TO DECLINE IN MONEY SUPPLY.THUS INFLATION IS UPWARD MOVEMENT IN THE AVERAGE LEVEL OF PRICES WHEREAS DEFLATION IS THE DOWNWARD MOVEMENT MOVEMENT IN THE AVERAGE LEVEL OF PRICES.
Inflation: To control inflation which is due to excess money supply in market/economy, government uses interest rate, CRR, SLR, repo rate, reverse-repo rate as a tool to control inflation. In INDIA, RBI can.. Increase REPO rate so that Bank borrows less money from Central bank Increase Reverse-Repo rate so that Banks are happy to lend money to Central Bank Increase CRR and SLR so that excess money can be absorbed from banking system
Deflation: To control Deflation, Government will want to inject more money in the economy. Hence the steps to control Deflation or negative inflation are exactly opposite to what is done to control inflation.
Inflation in India is around 0.26% (WPI). However, the inflation rate for items consumed by the common man continues to be high. For example, sugar inflation is still at 17% approx. making the the figure of 0.26% meaningless to common man.
Calcultion Methods for Inflation: Inflation is basically calculated on PRICE INDEX.
Two most common price index are: 1)wholesale price index.....WPI....used by INDIA...published in 1902. 2)consumer price index......CPI....used by many developed countries including USA....replaced WPI in 1970s
-WPI basically measures the change in average price level of goods traded in the wholesale market.India basically has 435 such commodities on which WPI is measured.
-CPI basically measures the change in the average price level of goods & services purchased by the consumer.It is also considered as the Cost of Living Index.
There are many economist who argue that WPI should be replaced with CPI in INDIA because: approx 100 commodities out of 435 used in WPI measurement are not related to consumer.So the inflation measured by WPI scheme provides a measurement at wholesale level and not at the consumer level.
But a cross argument says that the time lag for CPI based measurement is too high since CPI is measured on a weekly basis and WPI is measured on a monthly basis.
Therefore Inflation is measured in INDIA on a weekly basis
WHAT IS DEFLATION? A persistent decrease in general price of goods & services. It occurs when the inflation rate falls below zero and stays there for a sustained period
Why Is It Bad? Since the prices of goods are falling, consumers tend to delay purchases until they fall further. This, in turn, leads to lower production, which causes lower wages and demand, leading to further decreases in price. This is called the deflationary spiral, or vicious cycle Even when interest rates drop close to zero, it doesn't help. Instead, it actually makes things worse as investors opt to hoard money rather than make potentially risky investments The Great Depression of the 1930s was a deflationary spiral. More recently, Japan entered deflation in the early 1990s and only emerged after over a decade, called 'the lost decade'
Inflation decreases the value of money and makes it more expensive to buy goods and services. so we will check for the causes of inflation, 1.as demand of a good is high and supply is less so sellers increases the value of good. 2.when prices at manufacturer is increased suddenly the prize at distributor also increases. 3.if federal reserve dose not have control on the money supply it may actually grow at a rate faster than that of the potential output in the economy, or real GDP. 4.a demand for increased salary from wage earners increases the cost of product , which the requires more money for product making wage earners to ask for more increment. This creates artificial inflation. The best example for highest inflation is Zimbabwe with rate at 100000%.
Deflation helps the economy grow and develop at a rapid pace, even faster than the creation of hard money. the causes for deflation are, 1. Decrease in the money supply 2. Increase in the supply of goods 3. Fall in the demand for goods 4. Escalation in the demand for money. The inflation & deflation both at constant rate of change required for progress of economy. But excessive increase or decrease in any one of the terms creates stress in economy.
i wud like to conclude this topic: as stated above by my frnds the definition is clear that overall upward price movement of goods n services in an economy is measured by the consumer price index(CPI) n producer price index(PPI).Current inflation rate till 3rd week of march was 0.43 which is the lowest in last 10 years. The main cause of rise in the inflation rate in india is the pricing disparity of agricultural products between the producers n the consumers in the indian market,which in turn has also affected the food products,mfg products n essential commodities. Deflation on the other hand means a decline in price levels often caused by a reduction in the supply of money. Deflation may be caused by a combination of supply n demand for goods and the supply n demand for the money. So in short, if anything caused at the extreme points it creates INFLATION or DEFLATION in the economy.
I agree with Shika that inflation mens rise in prices of the commodities but inflation also increases the gap between the poor and the rich and in deflation leads to reduction in prices then lower supply of commodities as the companies are not able to gain any profits so it results into Unemployment so comparitively Deflation is bad then inflation
to start with what is inflation?? inflation is the increase in the price of goods and services over the time. A movie ticket was for a few paise in my dad’s time. Now it is worth Rs.50. My dads first salary for the month was Rs.400 and over the years it has now become Rs.75,000. This is what inflation is, the price of everything goes up. Because the price goes up, the salaries go up.
ReplyDeleteIf you really thing about it, inflation makes the worth of money reduce. What you could buy in my dad’s time for Rs.10, now a days you will not be able to buy for Rs.400 also. The worth of money has reduced! thus, when my father was a kid, he used to get 50paise pocket money. He used to use this money to go and watch a movie, today, You will not be able to even buy a “paan” with the 50paise!!”
deflation is just the opposite of inflation. it occurs when prices ae declining over the time. money becomes more valuable with the passage of time.
ReplyDeletethus, the we must always invest money rather than save it because the value of money will change. the rate at which we invest muct be more than the inflation rate.
Inflation is when prices continue to rise, usually because of economic growth or too much capital in the market creating few opportunities and Deflation is a decline in price levels, often caused by a reduction in the supply of money or credit. Deflation has often increased unemployment in an economy, since the it leads to a lower level of demand in the economy
ReplyDeletecollege professor has told us a very nice story, i would like to share with u,
ReplyDeleteIn earlier day there were coins of 1 paise and even less. people use to buy 40kg of rice for Re1 and today a kilo of rice costs Rs20! 10l of milk cost 50p in those days but today you need at least Rs120 to purchase the same amount.
what the passage of time has done. It has eroded the value of money. Having Rs800 today is equivalent to having Re1 fifty years ago.
Economists call it a decline in the purchasing power of money.
And the term 'inflation' has its roots right there. When the purchasing power of money decrease with time, is called 'inflation'.
Inflation benefits debtors.
Wheres Deflation downside to inflation is that it puts some goods and services out of
reach for consumers. Rarely do wages increase the same rate as inflation,
so consumers have less money to spend. As the gap between income and
expenses closes, so does spending. That situation could eventually lead to
deflation. deflation is when the average price of goods falls. When the
inflation rate falls below zero, indicating negative inflation, we know that there
has been deflation.
Deflation can be a bad thing for consumers and the economy as a whole. For one, debtors end up
paying back debts that were borrowed with higher-valued dollars. This effectively increases the amount
of the debt. When prices go down, consumers delay purchases thinking that prices will continue to fall.
As a result, companies make less money, leading them to layoff employees. When unemployment
increases, there is lower demand for products because unemployed consumers can’t afford more
purchases. It can become a vicious cycle.
Inflation or Deflation also depends on the Supply and demand cycle.
ReplyDeleteIf Demand is more and Supply is less the prices soars and causes Inflation.
Conversely, if demand is more and supply is less it causes prices to decline and results in Deflation.
So the Goverment always try to match the Demand and Supply cycle.
Sorry it should be
ReplyDelete""Conversely, if demand is more and supply is also more it causes prices to decline and results in Deflation""
Inflation & Deflation are two opposite factors impacting the Economy. Lets start with simple definition of Both.
ReplyDeleteInflation is the sustained rise in the general prize level of goods & services as a result of Increase in Demand without corresponding increase in supply.
Deflation is the sustained decrease in the general prize level of goods & services.
Inflation leads to a fall in the Purchasing Power of money whereas Deflation leads to an Increase in real value of money.
Incase of deflation consumers spends less money because he thinks that there are more chances of prizes to come down and then it leads to a Deflationary Spiral which is linked with recession & then great Depression so From economical Point of view if we compare Inflation & Deflation, then inflation is better one as in case of inflation there is no such kind of danger.
How the Inflation & deflation rates are calculated what are the causes for Inflation & deflation, what is the impact of both on economy? what measures shall be taken by govt. to avoid this? If we find the answers for these questions then only we can draw conclusion for this topic.
Inflation rate is calculated by CSO, Central Statistical Organisation, they consider WPI & CPI and for calculating this base year shall be consider, and there are certain basic commodities in the series. considering all thses data they calculate indices.
Inflation
ReplyDeleteAdvantage - 1.people feel richer (money illusion)
2.unexpected inflation benefits borrowers
3.could be from extra growth in the economy or extra money which would lead to lower unemployment rates
4.if prices rise, then a currency devalues which would lead to growth in the export sector.
Disadvantage - 1.people who have signed labor contracts have seen a decrease in their real wage (the amount they can purchase
2.lenders will lose from arbitrary inflation
3.interest rates will feel pressure to change.
LETS US LOOK WITH THE SIMPLE DEMAND AND SUPPLY RULE.WHEN THE DEMAND FOR ANY COMMODITY REMAINS UNCHANGED BUT THERE IS SHORTFALL IN SUPPLY LEADS TO INCREASE IN PRICES OF THE COMMODITY AND THUS LEADS TO INFLATION.WHEREAS DEFLATION IS EXACTLY THE OPPOSITE OF INFLATION.DEFLATION OCCURS WHEN THE THE SUPPLY FOR GOODS GO UP AND THE DEMAND GOES GOES DOWN LEADING TO DECLINE IN MONEY SUPPLY.THUS INFLATION IS UPWARD MOVEMENT IN THE AVERAGE LEVEL OF PRICES WHEREAS DEFLATION IS THE DOWNWARD MOVEMENT MOVEMENT IN THE AVERAGE LEVEL OF PRICES.
ReplyDeleteSince we have defined and discussed 'Inflation and Deglation', let us discuess what are the steps taken by the government to control the both...
ReplyDeleteSince we have defined and discussed 'Inflation and Deglation', let us discuess what are the steps taken by the government to control the both...
ReplyDeleteInflation:
ReplyDeleteTo control inflation which is due to excess money supply in market/economy, government uses interest rate, CRR, SLR, repo rate, reverse-repo rate as a tool to control inflation.
In INDIA, RBI can..
Increase REPO rate so that Bank borrows less money from Central bank
Increase Reverse-Repo rate so that Banks are happy to lend money to Central Bank
Increase CRR and SLR so that excess money can be absorbed from banking system
Deflation:
ReplyDeleteTo control Deflation, Government will want to inject more money in the economy. Hence the steps to control Deflation or negative inflation are exactly opposite to what is done to control inflation.
Inflation in India is around 0.26% (WPI).
ReplyDeleteHowever, the inflation rate for items consumed by the common man continues to be high. For example, sugar inflation is still at 17% approx. making the the figure of 0.26% meaningless to common man.
Calcultion Methods for Inflation:
ReplyDeleteInflation is basically calculated on PRICE INDEX.
Two most common price index are:
1)wholesale price index.....WPI....used by INDIA...published in 1902.
2)consumer price index......CPI....used by many developed countries including USA....replaced WPI in 1970s
-WPI basically measures the change in average price level of goods traded in the wholesale market.India basically has 435 such commodities on which WPI is measured.
-CPI basically measures the change in the average price level of goods & services purchased by the consumer.It is also considered as the Cost of Living Index.
There are many economist who argue that WPI should be replaced with CPI in INDIA because:
approx 100 commodities out of 435 used in WPI measurement are not related to consumer.So the inflation measured by WPI scheme provides a measurement at wholesale level and not at the consumer level.
But a cross argument says that the time lag for CPI based measurement is too high since CPI is measured on a weekly basis and WPI is measured on a monthly basis.
Therefore Inflation is measured in INDIA on a weekly basis
Thus if the WPI for the current week is more than the previous week , it is INFLATION and in the reverse case , it is DEFLATION.
ReplyDeleteWHAT IS DEFLATION? A persistent decrease in general price of goods & services. It occurs when the inflation rate falls below zero and stays there for a sustained period
ReplyDeleteWhy Is It Bad? Since the prices of goods are falling, consumers tend to delay purchases until they fall further. This, in turn, leads to lower production, which causes lower wages and demand, leading to further decreases in price. This is called the deflationary spiral, or vicious cycle
Even when interest rates drop close to zero, it doesn't help. Instead, it actually makes things worse as investors opt to hoard money rather than make potentially risky investments
The Great Depression of the 1930s was a deflationary spiral. More recently, Japan entered deflation in the early 1990s and only emerged after over a decade, called 'the lost decade'
Does anybody wish to conclude the topic before it is done by us'???
ReplyDeleteInflation decreases the value of money and makes it more expensive to buy goods and services. so we will check for the causes of inflation,
ReplyDelete1.as demand of a good is high and supply is less so sellers increases the value of good.
2.when prices at manufacturer is increased suddenly the prize at distributor also increases.
3.if federal reserve dose not have control on the money supply it may actually grow at a rate faster than that of the potential output in the economy, or real GDP.
4.a demand for increased salary from wage earners increases the cost of product , which the requires more money for product making wage earners to ask for more increment. This creates artificial inflation.
The best example for highest inflation is Zimbabwe with rate at 100000%.
Deflation helps the economy grow and develop at a rapid pace, even faster than the creation of hard money. the causes for deflation are,
1. Decrease in the money supply
2. Increase in the supply of goods
3. Fall in the demand for goods
4. Escalation in the demand for money.
The inflation & deflation both at constant rate of change required for progress of economy. But excessive increase or decrease in any one of the terms creates stress in economy.
i wud like to conclude this topic:
ReplyDeleteas stated above by my frnds the definition is clear that overall upward price movement of goods n services in an economy is measured by the consumer price index(CPI) n producer price index(PPI).Current inflation rate till 3rd week of march was 0.43 which is the lowest in last 10 years. The main cause of rise in the inflation rate in india is the pricing disparity of agricultural products between the producers n the consumers in the indian market,which in turn has also affected the food products,mfg products n essential commodities. Deflation on the other hand means a decline in price levels often caused by a reduction in the supply of money. Deflation may be caused by a combination of supply n demand for goods and the supply n demand for the money. So in short, if anything caused at the extreme points it creates INFLATION or DEFLATION in the economy.
I agree with Shika that inflation mens rise in prices of the commodities but inflation also increases the gap between the poor and the rich and in deflation leads to reduction in prices then lower supply of commodities as the companies are not able to gain any profits so it results into Unemployment so comparitively Deflation is bad then inflation
ReplyDelete