Deflation

Definition

The increase in prices of goods and services is known is deflation. Deflation is caused due to various reasons such as decline in money supply, government spending, consumer demand, business development etc. The monetary deflation is occurred during the depression in the country. One such deflation was faced by the United States in 1930s. This also brings unemployment in the country. For instance, the price of one Gigabyte in 1980 was around $437,500 which fell to just 3 cents in 2010. This shows that the three decades has gone to major changes. Moreover, the final cost of manufactured product also decreases which uses these products or services.

Causes of deflation

As mentioned above there are multiple causes due to which deflation occurs but the main two factors are: due to decline in aggregate demand and increased productivity.

1.   Decline aggregate demand includes reduced government spending, stock market failure, consumer desire to increase saving and increase interests rates.
2. Increased productivity also heavily affects the economy in terms of finance. For example, due to the bulk production of technology which used in various government, non-government and semi-government organisation which causes increase in unemployment which eventually causes the deflation.