In this article we will highlight the Universal Causes Of Deflation
What is Actually Deflation:
A situation of the ‘economy in which prices are constantly falling is called deflation. It may be defined in the following words “A persistent decreases in general price level is called deflation ”
Crowther defined deflation as under “Deflation is that state of the economy where the value of money is rising or prices are falling”
This definition explains that deflation is a situation in which prices are falling along with decreasing of employment, output and income.
Causes of Deflation
The process of deflation is opposite of inflationary process. Following are major causes of deflation.
Decrease in Supply of money
When central bank of a country reduces the supply of money, it may causes a decrease in general * price level or deflation in the economy
When production of goods and services in the economy is more than the aggregate demand, then a large portion of goods and services is not sold. This situation cause a decrease in general price and hence deflation in the economy.
If there is illegal inflow of foreign good in the economy, it definitely causes the prices of local goods to fall. Thus smuggling is also a cause of deflation in the economy.
You Must Know The Universal Causes Of Deflation For understanding The Economic Condition:
When an economy faces the problem of high unemployment then there is low purchasing power in the economy. Due to insufficient demand the general price level falls.
When people in economy start saving more to some social or economic change, this eventually causes deficiency of aggregate demand in the economy. Due to fall in aggregate demand prices level and national income also fall in the economy.
Fall in Investment
According to Keynes Investment is determined together by market rate of interest and MEC. The MEC or expected rate of profit depends upon sop many economic, social and political factors. If MEC falls in the economy then investment also falls and this results in decrease of general price level in the economy.
Sometimes economic conditions of an economy change such that circulation of money falls very fast. The availability of credit to business reduces to some minimum level. Due to these circumstances, volume of business also shrinks and price level falls.
There are many other economic and non economic causes of deflation. For example deflationary process is initiated when the level of money Income falls relative to the current supply of goods and services. Another cause of deflation may be disequilibrium in the balance of payments. Sometimes tight monetary policy causes a sharp rise in the rate of interest which results increase in investment and fall in prices and output.