Hello,
The term inflation and deflation is used a lot in economics and both have equal importance in determining purchasing power of people.
Inflation is the increase in price level of goods and decrease in value of money. For example, a dollar last year could by 2 lemons while this year it can only buy 1. The value of dollar is decreased in terms of how many lemons can we buy.
The federal reserve bank of America targets the inflation rate of 2% each year.
Deflation is the decrease in price level and increase in value of money. For example, if you could buy 2 lemons with a dollar last year this year you can buy 3. Sounds good? Deflation comes with other cost like lack of employment, waste of natural resources and capital which at the end destroys economy more than inflation. Deflation can bring more negative effect than positive if it stays for long time. Ireland, Hong Kong and Japan are the countries who have suffered seriously from deflation.
Thus, a small rate of inflation is better than deflation for a developing economy.
The term inflation and deflation is used a lot in economics and both have equal importance in determining purchasing power of people.
Inflation is the increase in price level of goods and decrease in value of money. For example, a dollar last year could by 2 lemons while this year it can only buy 1. The value of dollar is decreased in terms of how many lemons can we buy.
The federal reserve bank of America targets the inflation rate of 2% each year.
Deflation is the decrease in price level and increase in value of money. For example, if you could buy 2 lemons with a dollar last year this year you can buy 3. Sounds good? Deflation comes with other cost like lack of employment, waste of natural resources and capital which at the end destroys economy more than inflation. Deflation can bring more negative effect than positive if it stays for long time. Ireland, Hong Kong and Japan are the countries who have suffered seriously from deflation.
Thus, a small rate of inflation is better than deflation for a developing economy.
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