Expert Chaslau Koniukh
  • Companies
  • Global investment
  • Investors
  • Terminology
  • Economy
  • Stock Market
  • World exchanges
  • Tech and Marketing
Notion of deflation
Market terminology

The concept of deflation: causes and consequences

15.10.2020
2 min read

Deflation: how does it affect the economy?

The notion of deflation characterizes an increase in the actual value of cash and a decrease in the overall price of goods and services. This process is the opposite of inflation. Deflation primarily affects the activities of banking institutions and enterprises, and then its effects are felt by the population.
The causes of the process may be different, the main ones being highlighted.
The increasing demand for cash and non-cash money, which occurs when citizens increase their savings on a massive scale. And it can be deposits or just keeping banknotes at home. In this case, money goes out of circulation in the country’s economy, which increases its value, and the demand for products and services falls. The cost of goods is reduced in order to adjust to the purchasing power.
The second reason for deflation is the reduction in lending, which prevents the increase in cash turnover.
Overproduction also has an impact on this phenomenon. Enterprises continue to produce products, but they are not in demand – the population does not buy them because they prefer to keep money rather than spend it. As a result, there is no capital turnover, and if the picture is aggravated by a decline in lending, prices begin to fall sharply, and inflation is replaced by deflation.
Rigid public policy can stimulate such processes. This manifests itself in a sharp reduction or increase in the key rate.
It should be borne in mind that the causes of deflation can be observed together or separately, much depends on the characteristics of the economy, processes within the country.

Notion of deflation

The consequences of the increase in the value of money are considered to be the so-called “deflationary spiral”, which is observed in the segment of commodity circulation. With falling prices for products and services, when the population keeps the money, the demand does not increase. At the same time, companies’ profits are reduced, they are forced to lay off their staff and lower their salaries in order to avoid bankruptcy. But demand continues to fall, and deflation is getting stronger. The process is moving in a spiral, worsening with a new twist.
Banks also fail to cope with the situation and close down. The population, observing this trend, starts to express distrust towards financial institutions, take away deposits, preferring to keep money at home. The economy does not have enough money to overcome the crisis. The volume of lending is going down.
The manufacturing industry is not getting the right injections and cannot develop. Declining prices on the market with low demand lead to losses. Many enterprises refuse from various directions, and do not finance new developments. Downsizing increases unemployment in the country.
But deflation can also have positive consequences. If people’s purchasing power increases, it leads to higher demand. People can buy more goods, and the value of money remains unchanged.

Tags: Market terminology
0
Previous Post Introduction of import duties: how did the United States respond to the French digital tax? Next Post What does the OFZ market expect in the next quarter

You Might Also Like

price breakout in a trading strategy
Market terminology
How to use a price breakout in a trading strategy
06.07.2024
High-frequency trading has a number of disadvantages
Market terminology
High-frequency trading and its advantages for playing on the exchange
31.08.2022
equity
Market terminology
Equity and its importance for a trader
20.06.2024
How to fill in the investment declaration
Market terminology
How to fill in the investment declaration: detailed instructions
14.11.2020
third-tier stocks
Market terminology
Third tier stocks: risks and benefits of risky assets
07.06.2020
short and long position
Market terminology
Short and long position on the stock exchange and their application in trading activities
19.12.2021

Popular Posts

  • Field of activity of the American Monsanto Company Corporation
  • Spain’s economy performs best in the EU
  • Li Ka Shing: How can success be achieved without money and education?
  • Skolkovo analysts: the Russian energy market is suffering losses

Editor's Picks

Chaslau Koniukh
Analytics

American bankers from JPMorgan and Goldman Sachs advise to invest in gold: review by Chaslau Koniukh.

Spokesperson
17.08.2020
Expert Chaslau Koniukh
Analytics

Chaslau Koniukh on the analysts’ opinion on the key stake size change soon

Spokesperson
18.06.2020
expert Chaslau Koniukh
Analytics

Chaslau Koniukh: Internet trade market in Russia may reach 2.78 trillion rubles.

Spokesperson
30.05.2020
Will the U.S. oil shale industry be able to quickly recover from the crisis: A Review by Chaslau Koniukh
Analytics

Will the U.S. oil shale industry be able to quickly recover from the crisis: A Review by Chaslau Koniukh

Spokesperson
16.05.2020

Popular Posts

  • Field of activity of the American Monsanto Company Corporation
  • Spain’s economy performs best in the EU
  • Li Ka Shing: How can success be achieved without money and education?
  • Skolkovo analysts: the Russian energy market is suffering losses
  • Ingeborg Mootz: a woman who became a stock player at the age of 75
Expert Chaslau Koniukh
  • Facebook
  • Twitter
  • Instagram

© 2024 CHASLAU KONIUKH. ALL RIGHTS RESERVED. Expert in marketing and project management, international investments, financial analyst.

Menu

  • Biography
  • Companies and corporations
  • Global investment
  • Investors and Entrepreneurs
  • Economy
  • Market terminology
  • Stock Market
  • World exchanges
  • Tech and Marketing
  • Analytics