| Economics of Deflation and Inflation Essay
This paper provides an argument which is postulated by the ever-changing decrees of both inflation and deflation economics of a given country. The explanation for the numerous conditions which favor both inflation and deflation of an economy is depicted with an insight and critical approach. In terms of definition, inflation is defined as an economic condition which fosters an upward trend in the prices of commodities due to decrease in production activities hence supply.
On the other hand, deflation is the economic condition which is brought forth by the lowering of prices due to increase in production activities hence a resultant increase in the supply of the already produced commodities.
In the article provided there have been numerous instances listed, which have been laid out to expound on these forms of economic conditions. It should be noted that a fair economy thrives positively in a free-market economy, where the commodities supply and demand are brought about the changing prices of the goods, as a whole. The change is prices can be both artificial so that it is human-driven, or can occur naturally.
According to Goodman (1), there is a newer threat of economic decline coming-up which is to be characterized by accumulation of commodities which will be waiting for potential buyers to be purchased, along with immense decrease in the prices of the aforementioned commodities, downgrading introduced investments, as well as rise of high-levels of unemployment. Notably, the condition derived in this situation is indicated as deflation.
For instance, in Japan there was a deflationary period which was experienced immediately after the Depression of the 1930s. In the course of this deflationary period of Japanese economy, there was a crisis formulated due to surging in the prices of the real-estate business environments. If take a closer look at the global economies, it is evidently clear to assume that there has been a significant reduction in the demand for such commodities as oil, copper, furniture, as well as accommodations. As a result, their respective prices have been brought down immensely. Meanwhile, there Japan has also experienced a reduction in the prices of such products as appliances, tools, as well as hardware. Statistically, the US policy-makers projected a downward trend of the inflation figures from 5.6 % to 4.9 % due to the release of the ever-rising product prices in Japanese economy, in the course of 2008 period (Goodman 1).
There have been worries that, with the successful end in the inflationary period experienced in the US economy, another menace is perceived as having taken a center stage: deflation. It is noted that this condition is characterized by slightly increased levels of employee retrenchment; thus, consumers will be deprived of their purchasing power across the globe. In turn, there will be a substantial decrease in the prices of commodities. However, since consumers will have reduced power to purchase, the trend will lead to business lowering their production activities hence resulting in lay-offs; thus depriving the economy of the numerous paychecks and the economy being weakened further, due to resultant weakened demand (Goodman 1).
In case of deflation, there are numerous threats attributed, as well, which result from reluctance of putting more investments into the economy, due to significantly lower prices. Notably, it is argued that there is no apparent remedy to off-set its deflation effects given it cannot allow for normal operational activities of an economy. Unlike inflation, deflation cannot be off-set with elements of lowering interest rates or prices in that matter. In the course of 2003, the United States experienced deflationary period, which was off-set by the government pumping money into the economy, as well as lowering the interest rates to the low point (Goodman 1).
However, with the pumping of money into the economy would lead to inflationary periods within the economy of the United States. The result was inflation, which could not be contained anymore throughout the globe, so that competent and promising firms were rejected financial support from lending institutions. It should be noted that the transition from inflation to deflation is a progressive movement, which transforms from global economic developments into a deflationary period marred with unpromising investments. As these institutions put effort to increase their capital base, they thus stop with lending of loans to a substantial number of |ers and in turn demanding faster loan repayment from other loaners. (Goodman 1).
Because of consistent panic on the part of the growing economy, the financial institutions dump their assets, as well as other investment linked with mortgages. The immediate and unplanned selling of assets pushes prices down hence leading to the loss of their values. As a remedy to off-set the effects of inflation, in 1994 and 1997, Mexico experienced economic recession and later managed to remedy the situation through extensive exports to the United States. However, in 2008 the American-consumer had lost the purchasing power; and thus; capability to borrow and access credit cards were diminished. Therefore, there is no expected remedy this time. China and India will enhance the downward falling of prices since they will be desperate to sustain their industry operations and thus keep employment rates high (Goodman 1).
Albeit American companies like Caterpillar are perceived to be effected with mixed exceptions. First, because the American population will not require more demand for the products. Second, because such mining-attributed countries as Brazil and Australia with intensified mining potential will require earth-movers from the Company. Moreover, it is argued that, although China continues with its operating activities, the demand for their products has reduced significantly especially because most of their commodities are sold into the US, Japan and Europe. There is also a perceived lower demand for flat-screen television sets from Samsung which has lead to a subsequent decrease in the production of flat-glass by the Company. In that case, there has been a state of over-supply which has been escalated to the point that has pushed prices for flat-panel glass even further down (Goodman 1).
Currently, in the US, the deflationary period is being witnessed due to such observed instances as the absence of new orders for trucks to be used by businesses across the globe and a dropping trend in the investment of industrial equipment. In addition to this state, most companies operating within the US economy have witnessed constant piling-up of inventories.
In respect to deflation, over-supply of commodities, piling-up of investments have been perceived as having lead to conditions attributed with higher pricing strategies. This situation has, in turn; lead to reduced revenue being pumped into the economy since demand for the products has become elastic over time.
With respect to inflation, there is perceived decrease in the supply of products which have lead to shooting-up of product prices hence increasing revenue. However, it should be noted that the increase in revenue is off-set by such attributes as the Companies paying-high interest rates for loans borrowed as well as increased pricing of raw materials and other input factors.
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