What are Inflation, Deflation?: Definitions and Impact | Economic Word

 

Inflation and Deflation: Meanings and Impacts

 

If you're someone who closely follows economic news, you've probably seen many reports about the serious problems caused by global inflation following the end of the COVID-19 pandemic. Inflation and deflation are concepts that complement each other, and today, we'll explore the meanings and impacts of inflation and deflation, which have significant effects on policies in modern economies.

 

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Inflation: Meaning and Impact - Diminished Value and Rising Prices

 

Inflation refers to the phenomenon where the value of currency decreases, and the overall price level of goods and services rises. In simpler terms, it means that it becomes more difficult to purchase goods and services with the same amount of money. This phenomenon can be attributed to various factors such as increased demand, excess money supply, among others.

• For example, let's consider a situation where the price of a notebook, which used to cost 1,000 won, increases to 1,100 or 1,200 won. In this scenario, the 1,000 won bill that used to represent the value of one notebook now holds less value compared to the price of the notebook. Inflation represents a situation where this phenomenon extends across various goods and services.

The rising prices caused by inflation directly affect consumers. Consumers may experience increased living expenses and decreased purchasing power due to higher prices. However, businesses may benefit from higher prices, which can have positive effects on the economy from a quantitative perspective. Additionally, economic growth often accompanies inflation. However, persistent and rapid inflation can have detrimental effects on the economy. Historical examples of severe inflation include the collapse of the German economy after World War I and the current situation in Venezuela. In extreme inflation scenarios, the value of money converges to that of pieces of paper.

 

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Deflation: Meaning and Impact - Increased Value and Falling Prices

 

Conversely, deflation refers to the phenomenon where the value of currency increases, and the overall price level of goods and services decreases. In other words, deflation signifies a situation where you can purchase more goods and services with the same amount of money. This can occur due to reasons such as excess production, lack of demand, or economic recession.

Opposite to inflation, deflation can lead to increased purchasing power for consumers due to falling prices. However, deflationary situations can have negative effects beyond just price decreases. The true cause of deflation usually lies in economic recessions.

• For example, the Great Depression, Japan's Lost Decade, and the Subprime Mortgage Crisis are often associated with significant deflation. In large-scale deflation, which is often rooted in bubble collapses, the value of tangible assets declines. Therefore, deflation can have a more significant impact than inflation across the economy and society.

 

 

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Policy Responses to Prevent Inflation and Deflation: Role of Central Banks

 

As seen above, rapid and extreme inflation and deflation can have significant impacts across society and the economy. Therefore, economic agents base their investment and consumption decisions on predictions of inflation and deflation.

Governments and central banks formulate appropriate policies to respond to these economic conditions. To control inflation, central banks employ various measures such as adjusting interest rates and controlling the money supply. In response to deflation, central banks may lower interest rates or implement policies to stimulate the economy to maintain economic stability.

Given the measures taken by governments and central banks worldwide following the pandemic, understanding their actions regarding interest rates and money supply adjustments becomes easier.

 

 

The Reason You Failed to Start in an International Sales

 

Deflation can originate from a widespread economic downturn, which can, in some aspects, be more dangerous than inflation.