Inflation and Deflation, it's effect on economy of nation?

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Hello guys!

It's my sixth blog, and i was still to lazy to write it. I have a feeling, that you guys are really liking my blogs. Now, i'm not going to bore you with all my nonsense talking. The topic of the blog, i'm about to write is Inflation and deflation, its effect on a nation. I personally make sure, that i'm going to clear your concept about inflation. So, in this blog, i'm going to discuss about inflation, its positive and negative effects and then of deflation and its effects. So, let's just begin.


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                                 "An increase in the general level of prices is an economy, that is sustained over a period of time".

                                     VIDEO CREDIT TO Youtube

Inflation is a persistent rise in the general price level, rather than it not prices increase once for all, but in fact they continue to rise on. When, we talk about increase in prices, we meant by decrease in value of money. Now, i'm going to quotes some definition of some experts.

According to Prof. Milton Friedman

"By inflation is meant a steady and sustained rise in the prices".

According to Prof. F.E Perry

"Inflation means a steady and progressive fall in the value of money, shown by price rise".

According to Silverman

"Inflation is the term given to the expansion of money supply, in excess of the amount justified by the state of the trade, resulting in general rise in prices".

According to Prof. Coulborn

"Too much money chasing too few goods".


Thus, inflation is an phenomenon in which currency of a country exceed the level of production, meaning that, let's suppose something, that production of a country is worth of $3.5 billion and amount of money present in the country is $30.8 billion, in this situation, due to a lot of money supply in country, the prices of the goods & services increases and hence, value of money fall rapidly. So, inflation result in depreciation in the value of money.

                              Effects of Inflation

Inflation can have a positive and negative effect on the economy of any nation. First, i'm going to start with positive effect on economy of inflation.

Positive Effect on Inflation:

Effect of inflation are as following.

1.Increase in Investment:


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Increase in prices of goods & services can cause a effect of increase in investment, in such a way, that we all know that high prices of goods & services mean high profit margin. This increase in profit margin can encourage investors to invest in different business, to earn even more profit. This thing is even better for a country.

2.Increase in Production:

In last point, i talked about increase in investment due to increase in prices of goods & services. As, investors are investing more and more in business, which means business has no funding problems. This can result in, more and more production of goods & services from business, so we can say that inflation can cause increase in production.

3.Increase in Employment:


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As, last two point say, that increase in price or inflation can cause a rise in investment and production of goods & services. So, with these two thing we can say that, business is growing rapidly. Even small scale business could be changed into large scale business, more bigger scale is more employee's business has to hire. So, my point is clear inflation can cause a increase in employment level of a country.

4.Invention and Innovation:

Inflation can attract businessman to invest in businesses. With more and more investors investing in the businesses, businesses would grow, to earn more profit they would invest their money in research and development facilities. Through, which new invention and innovative product would be produced.

5.Economic development:


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With the enhancement of business activities by businessman, business start to grow, their production level increases rapidly, with it employment level also increase. These all thing are very essential in economic development of any country. So, my point is clear, that inflation can cause economic development.

Negative Effect Of Inflation:

There could be many negative effect of inflation on economy, but i'm going to mention a few of them.

1.Increase in cost of living:


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Inflation cause increase in prices of goods & services, which is good for increase in production, investments, employment and economic development, but it's not good for everyone. Rich person would have no problem in buying expensive goods & services, but a person from fixed income group, working class or middle class, it would be very difficult for them to purchase their daily needed goods & services.

2.Unequal distribution of wealth:

Inflation can increase the gap between, a rich and a poor. In such a way, that distribution of wealth in the society, become unequal. Rich continuous to grow more rich, while a poor continuously become more poor, due to all the factors i mentioned above. Businessman earn a huge profit from inflation, while wage earner get nothing out of it.

3.Decrease in saving:


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Inflation make prices of goods & services high. So, the working class are always struggling, they save their money out of every monthly salary. So, what happens, when price increase, they have to use their savings in order to fulfill their daily needs. In this situation, their saving decrease far more than it should and it can create a problem for them, in a form of bankruptcy.

4.Adverse Balance of payment:

Rise in inflation, can cause rise in price, that means foreign countries, who are  demanding your goods & services would not buy your goods & services due to high prices, which would result in decrease in exports. Not only this, even people living in country, would prefer foreign goods & services which are at cheap prices. This can cause decrease in exports and increase in imports which is unfavourable balance of payment and it's is very damaging to economic development.


                             "A reduction in the level of national income and output usually accomplished by a fall in the general price level".

                                         VIDEO CREDIT TO Youtube

Deflation is vice versa of inflation, deflation mean a situation in which prices of goods & services falls, with it level of investment in businesses decrease that can have another effect of decrease in production and downfall of businesses, which means that level of unemployment increase in a country and value of currency increases. As, inflation it can have both effect positive and negative effect on the economy. I'm going to first quote some definition of some Professors.

According to Prof. W.J Baumol

"Deflation refers to a sustained decrease in the general price level".

According to Prof. Samuelson

"By deflation, we mean a time, when most prices and cost are falling".

According to Prof. G. Thomas

"Deflation is a reduction in the general price level due to a decrease in the economic activity of a nation".

                                Effect of deflation

Deflation is absolutely reverse of inflation. It is goods for some people and it's bad for others. So, i'm going to discuss both of the aspects.

Positive effects of deflation:

Following are the positive effect of deflation.

1.Reduce the cost of living:


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Deflation can cause a effect of decrease in price of the goods & services. Which is good for middle class, as value of their money increase and they can save a lot of their money even after fulfilling their every need. Therefore, we can say that cost of living falls.

2.Gain for fixed income group:

Rise in deflation can increase the value of money of fixed income group, that means they can purchase more goods & services or you can say deflation can cause a increase in real income of fixed income group. Due to this increase, they can at least buy goods & services according to their needs and comforts.

3.Increase in saving:

During deflation price fall and people are able to buy goods & services according to their need and comfort and even at a less price. Which is even better for middle class they can save a big proportion from their incomes. Which can result in increase in standard of their living.

4.Favourable balance of Payment:

Deflation is reverse of inflation, deflation can cause decrease in prices of goods & services, that can increase the exports of the country, and people living in the country would prefer more and more domestic goods & service due to low prices. Hence, it can turn the balance of payment favourable for any country.

Negative Effects of Deflation:

There could be many effect of deflation on economy, but i'm  going to mention a few of them.

1.Decrease in effective demand:

Deflation is usually caused by the decrease in demand of goods & services, which can trigger a effect of decrease in price of the goods & services. So, less amount of money, when moves to the hands of same population, the demand at glance falls.

2.Increase in Unemployment:


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Deflation can cause a decrease in price of goods & services, which the contract the business activities and can discourage investors to invest in business. With low level of investment in businesses, downfall of businesses start and with that unemployment level of the countries increase.

3.Decrease in production:

Fall in quantity of money result into increase in unemployment, which mean less growth of business and productive efficiency of the business increases. With less efficiency of the business the production of the business decreases.

4.Losses to the business community:

The producer, the merchant and the speculators lose their finances, due to the fall in the prices of the goods & services. Due to this, they suffer financial loses, some of them go bankrupt or some of them start to invest in foreign countries to gain profit, which is even bad for the economy of the country.




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