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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? $\endgroup$ – FooBar Apr 20 '15 at 18:15
  • $\begingroup$ The later parts of the article. I only understood the part about the negative interest rates. $\endgroup$ – Victor123 Apr 20 '15 at 18:34
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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.

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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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