Task 3
DEFLATION
Deflation is a condition of continuous decline in prices that spread rapidly, causing difficulties in consumer and business expenditures related to delays for continuous decline in prices (transactions). This is the opposite of the Inflation condition, when prices are rising continuously, but not unlike the disinflation conditions, which are depicted by the falling inflation rate. Deflation occurs when the annual economic headline is focused on an indicator of inflation - usually the consumer price index (CPI) is in a negative area.
And sometimes it is stated as a period of falling prices and wages in general. Deflation may arise when the amount of money or deposit money in circulation is small, compared to the amount of goods and services offered, or when there is a fear of future or any other causes that cause the loss of consumer expenditure materially, thus speed Money supply is reduced.
Here is a reaction and correlation Deflation in each economic indicator:
1. With the continuing decline in inflation (influenced by falling commodity prices, especially oil) will ultimately lead to the occurrence of the threat of deflation.
2. Debt The private sector will be appreciated by periodic interest rate reductions.
3. Consumer spending and the private sector are constrained by tight credit markets or high interest costs to be borne by consumers and the private sector.
4. The unemployment rate will rise as business activity and the real economy fall.
5. The decline in retail sales is impacted by the decline in consumer and corporate income.
6. The level of economic growth and GDP will fall in the coming year because the economy does not run in the Full Employment category.
7. Interest Government bonds will rise as the government needs to print money and issue long-term debt.
8. The fall in the consumer confidence index over the economic performance caused by the impact of the crisis.
CAUSE DEFLATION
Deflation is a rare phenomenon and is not included in the normal economic cycle. If this situation happens there is something wrong in the economy. There are several factors that cause deflation, all rooted in demand and supply. We know that the prices of goods and services are influenced by demand and supply. If demand falls then the price will also fall. In general, the causes of deflation are:
1 Too many producers with the same product - If too many companies produce the same goods or services then the competition will be tight so the price will tend to fall. This is because the easier the producers get loans from the bank so that it will trigger expansion or produce new goods. This factor can be caused by low interest rates or bank policy changes.
2 Innovations in the production process lead to increased efficiency and productivity, ultimately leading to price declines.
3 The decrease in the money supply that causes the prices of goods and services to fall in order to meet the needs of consumers.
IMPACT OF DEFLATION ON ECONOMY AND CURRENCY
Impact of deflation on the economy:
1. THE DOWNLOAD OF BUSINESS SECTOR INCOME
In order to remain competitive the price should be lowered, and if this situation persists then the profits of the business sector covering industry, manufacturing, trade and even housing and services will decline sharply, even lose.
2. SABILITATION OF SALARY AND TERMINATION OF EMPLOYMENT (PHK)
As a result of point 1, many companies will reduce expenditure in various ways including stopping some of their business, reducing the salaries of employees, laying off temporary employees who are considered less functioning and even termination of employment. This is far worse than the impact inflation causes.
3. CHANGES OF CONSUMER EXPENDITURE PATTERNS
The relationship between deflation and consumer spending is relatively complex and difficult to estimate. In general, however, in the deflationary state they will initially utilize the decline in prices so that consumer spending rises sharply.
4. THE INVESTMENT INJECTION AND STOCK PRICE
As a result of point 1, investors will certainly hold their funds while waiting for a post deflationary opportunity. Since many companies are losers, of course, their stock prices decline, and this domino effect will take place quickly until the stock price index plummets. The investors certainly will not hold its portfolio in stock.
5. DECREASE CLIMATE CREDIT
As a result of point 1 and point 2, the creditors will limit their credit score or stop new credits. Many leasing companies (property, cars and others) are experiencing difficulties during deflation due to many default borrowers. Banks have lowered borrowing rates, but few are willing to borrow.
