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Difference between inflation and deflation

noviembre 29, 2019

In macroeconomics, we study two burning issues that have been experienced by almost every country in the world, namely inflation and deflation. inflation a situation in which the prices of goods and services get an impulse, thus reducing the purchasing power of money. the continuous upward movement in the general price level of the economy.

On the other hand, the deflation opposite to inflation, whereby the prices of goods and services decrease and people can buy more goods with limited money. the decrease in the general price level in the country's economy.

A certain percentage of good inflation, but beyond that, worse for every economy. Furthermore, deflation is the worst condition for an economy. In this excerpt of the article, we have simplified the differences between inflation and deflation in table form.

Comparative graph

Basis for comparisonInflationDeflation
SenseWhen the value of money decreases in the international market, then this situation is called inflation.Deflation is a situation, when the value of money increases in the international market.
effectsIncreased general price levelDecrease in the general price level
national incomeIt does not diminishdeclines
Gold pricesWaterfallsRises
ClassificationDemand inflation, cost inflation, stagflation and deflation.Debt deflation, deflation of the money supply side, credit deflation.
Good forThe producersCustomers
consequencesUnequal distribution of income.Increase the level of unemployment
What is evil?A little inflation a symbol of economic growth in the country.Deflation is not good for an economy.

Definition of inflation

A situation arises due to the variability of the demand and supply of money, which causes an increase in the price of goods and services over time, known as Inflation. When the value of money falls in the world economy, with consequent increase in gold prices, defined as inflation. Due to the presence of inflation in a country's economy, the purchasing power of monetary contracts due to the upward shift in the general price level. Therefore, the common man will have to spend more money to acquire some items.

Many experts believe that inflation will not occur until the increase in the price level is <5% for a long time. The following are the types of inflation:

  • Inflation required
  • Cost Inflation
  • stagflation
  • Deflation

In India, inflation is measured with the aid of the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). Inflation can be caused by increased public spending, large-scale tax evasion, deficit financing, uneven agricultural growth, black marketing, hoarding, etc.

Deflation definition

Deflation is a situation that occurs due to the fall in the supply of money and credit in the economy. This is also known as negative inflation because when the inflation rate <0%, deflation arises.

With emergency deflation in the country's economy, there is a downward movement in the general price level, which means that the price of goods and services decreases and, therefore, the purchasing power of money increases. Because of this, people will now be able to buy more items with a much lower investment. The following are the types of deflation:

  • Deflation of the money supply side
  • Credit deflation
  • Debt deflation

The real reason for the occurrence of deflation is the drop in spending power at the micro and macro levels while the price of goods and services collapses in the economy, so customers wait for their prices to fall further. In this way, customers postpone their purchasing and consumption activity which hinders the entire economic cycle, due to which the investment remains inactive. The result of deflation is the recession, the fall in profits, depression and so on.

Key differences between inflation and deflation

The following points are noteworthy as regards the difference between inflation and deflation:

  1. When the value of money decreases in the world market, inflation, while if the value of money increases, then deflation.
  2. Inflation translates into an increase in the prices of goods and services, while the prices of goods and services decrease in deflation.
  3. Useful inflation for producers or producers. On the other hand, customers benefit from deflation.
  4. There is a fall in national income in the situation of deflation, but this is not the case with inflation.
  5. In inflation, the distribution of income is not even between rich and poor. On the contrary, deflation becomes the cause of an increase in the level of unemployment.
  6. A slight amount of positive inflation for the country's economy. However, deflation creates obstacles in the country's economic growth path.

Conclusion

There are some measures taken by a country's government to control inflation such as monetary measures, fiscal measures, investment control, etc. There are several measures taken by the Central Bank to eradicate deflation from the economy. So, we can say that a lower inflation rate is good, but a situation like deflation that is difficult to deal with because it can lead the country to depression and therefore terrible deflation.

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