This pretty much went over my head:http://en.wikipedia.org/wiki/Deflation
Is there something a bit easier to digest than this? For a non econ student?
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$\begingroup$ Are you having trouble understanding the introduction or the later parts of the article? $\endgroup$– FooBarApr 20, 2015 at 18:15
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$\begingroup$ The later parts of the article. I only understood the part about the negative interest rates. $\endgroup$– Victor123Apr 20, 2015 at 18:34
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3 Answers
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Krugman's classic story of a babysitting co-op never uses the word "deflation" but describes it perfectly. Go read it first.
Basically, if you think of money as a thing that has a price level, just as other things have prices, it's possible to imagine that price level falling relative to other goods (inflation) or doing the reverse (deflation). Inflation is, for some reason, easier for people to understand— it means that if you hold on to a $100 bill for a year, that bill will buy you less stuff next year than it'll buy you right now.
In contrast, if you're in a deflationary world, the money in your wallet will be able to buy more stuff a year from now than it can today, giving you an incentive to hang on to your money and wait to spend it. The problem is, if everyone does that, then the fact that everyone is trying to hold on to cash means that the value of cash continues to go up relative to goods (more deflation), which is known as a liquidity trap.
answered Apr 20, 2015 at 18:21
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1$\begingroup$ But people will always need to buy essentials, so at somepoint deflation will surely hit a floor and then from that point only money will be spent if someone provides something of actual value. $\endgroup$ Aug 6 at 19:05
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Deflation is reduction in price level.
How is price level measured? There are many methods, just imagine checking the price of certain things (maybe gasoline, house rent, butter, etc.) every month and see if, on average, the prices have increased or decreased.
If they have decreased then it's price deflation. If they have increased then it's price inflation.
What causes it? That's complicated, but certainly everyone (?) would agree that money supply (the amount of money in the system) will affect prices. More money in the system, prices will increase and vice versa.
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Deflation is caused by (1) technological advance, given a static (2) employment ratio.
Other than technology and either employment or competition, deflation can also be from the government doing their job in plaintiff payable tax and target margin networks - thereby causing supply and demand to be not lower in total benefit like technology but (3) complement demand which is earned by labor from other markets, or otherwise breakeven marginal cost to rational product revenue.
answered Dec 20, 2022 at 20:33