Define Deflation and Discuss its Causes

Deflation and its Causes




It refers a situation in which quantity of money becoming fall as per demand, and value of money rises due to shortage of money, also fall in price of goods. Wh n d flation occurs then people don’t have money to buy goods and services. There is over production in the economy. New investments are not made.



By Prof. Crowther


“Def ation is that state of the economy where

the value of money is rising or prices are falling.”


By James Phi ips:


“Deflation is a period during which level of prices declines nd the value of money rises.”


By William J. Baumol:

“Deflation refers to a sustained decrease in the general price level.


Causes of Deflation


1. Fall in Quantity of money


The main cause of deflation is shortage in QM in market. Banks are not able to a position to fulfilling the demand of money for the economy. Due to it value of money increase.



2. Over Production


When production of goods and service becoming over rise as per demand of the economy, then it create the low price level of the goods and services, and meanwhile deflation occurred.


3. High Taxes


A high rate of income taxes means the low purchasing power of general public. The decrease in income due to taxes forces the people to buy than before high force the people to lower their demand rate.


4. Fall in investment

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During deflation banks charges high interest due to lesser quantity of money. Then people hesitate to getting loan from the bank, as well as hesitate to investing the money on business due to low profit ratio of earning.


5. Less Demand of goods & services


The decrease in demand is cause of d flation. On the other hand demand decrease in incom , wages. The excess supply and lesser demand bring the all in price level and after it deflation will be occurred.


6. Poor storage facility


The businessmen may have poor storage faculties. The perishable goods can not be kept for long period of time. The sellers have no choice but to sells goods at any rate. The result is that the price level comes down.


7. Lower profit


Due to decrease price level of goods the businessmen cut do n their profit to retain in the market. After it deflation occurred due to over production of goods in the market.



8. High reserve ratio


The central bank has power to regulate the resave ratio when riser ratio raised

The banks are bound to keep cash with them. The lending capacity is lowered in order to lower the money supply in the market.



9. High cost of goods


Cost of production increased due to increased the cost of factors of production. At the result producer raised the price level of goods and consumer fails to buy the costly goods

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10. Decrease in population


The decrease in population can lower the demand for goods and services. All marketing activates are useless when there is no demand. The population is a source of demand for purchase of goods.


11. Heavy imports


Imports in large quantity increase supply of goods in country. The excess supply puts the pressure on businessmen the rate of profit comes down. Thus excess imports are the reason for lowering the business work.



Remedies of Deflation


1. Rise in supply of money


To control the deflation their must be rise in quantity of money with the help of central bank. And central bank increases the currency notes for the development of the country.


2. Increase in credit


With the policies of Central bank, commercial bank r ised the limit of credit for businessmen and industrialist, after it business activates increased and production supplied according to demand of peoples.


3. Low rate of bank


Deflation may be controlled by lowering the bank rate. The central bank lowers the bank rate to provide more funds to commercial banks. The lower bank rate means that there is less money supply in the economy.


4. Fall in tax rates


Deflation can be controlled with the low rate of Tax, because it will bring the lesser cost of goods, as well as lesser price of goods, then after it deflation will be automatically controlled.

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5. Public works


The Govt. can start public works programmed to climate deflation. The amount is transferred from govt. to general public. The demand for goods increases and there is increase in production.


6. New investment


The investment can be made to set up new factories and mills. The production and employment increases due to new investment.



7. Production control


The control over production can help to control deflation. The producers can fix produ tion quota for each producer. The control over supply is necessary to maintain price level.


8. Increase in exports


The exporters can play their part for selling extra out put in the overseas market. The businessmen can reduce the worries of deflation.



9. Increase in wages


The wages of workers can be increased to control the deflation. The govt fixes the minimum wage rate the increased wages raise the income level of worker they go to market for purchase of goods and services.

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