Term Paper on Deflation | Money | Economics

Here is a term paper on ‘Deflation’ for class 9, 10, 11 and 12. Find paragraphs, long and short term papers on ‘Deflation’ especially written for school and college students.

Term Paper # 1. Meaning of Deflation:

Deflation is a situation which is opposite to inflation. Like inflation, it is also an economic sickness. According to Crowther, “Deflation becomes a state in which the value of money is rising, i.e., prices are falling.”

Crowther’s definition is certainly an easy definition but it is a major fault of this definition that in it every fall in the prices relates to deflation which is not in reality. Fall in prices after the inflation cannot be called deflation but disinflation. Some economists have the opinion that when the supply of money on a particular time in a country is less than its demand, it is called deflation.

However, the best definition has been given by Prof. Pigou. According to him, “Deflation is that situation of fall in prices which arise when the production of goods and services increases rapidly as compared to monetary income.

So, it is clear from Prof. Pigou’s definition that every decline in the price level is not deflation but it arises when the production in the country increases more rapidly as compared to the monetary income of the people.

On this basis, it can be said that following declines in the price level are symbol of deflation:

(i) If the monetary income increases, but the amount of production is stable.

(ii) If the monetary income decreases, but there is an increase in the amount of production.

(iii) If the monetary income is stable and the amount of production is increasing.

(iv) If there is a decline in both monetary income and production, but the decline in monetary income is less than that in production.

(v) If there is rise in both monetary income and the amount of production but the production is increasing rapidly as compared to monetary income.

Term Paper # 2. Causes of Deflation:

Following are the causes of deflation:

(i) Reduction in the Quality of Money:

When the government reduces the amount of currency in the country, the situation of deflation arises. Even if the amount of money is stable and the amount of goods and services increase, the situation of deflation will rise.

(ii) Increase in Bank Rate:

If the central bank increases the bank rate, the commercial banks also increase their rates of interest. Consequently, the amount of credit available in the country decreases and the prices began to fall and the situation of deflation emerges.

(iii) Open Market Operations:

When the central bank of the country starts selling the government securities to the common people, it is called open market operations. When these securities are sold, the amount of money in circulation reduces and at the same time there is a decline in deposits with banks. Its cause is that people withdraw their deposits from the banks to invest in securities. This weakness the economic strength of banks and there is contraction of credit money.

(iv) Taxation and Public Debts:

When government charges higher taxation on people or people take the optional or compulsory loans, the amount of money in circulation in the country reduces and the amount of production stays stable. This brings fall in prices; the value of money increases and the deflation come into effect.

(v) Increase in Production:

When there is an increase in the production of goods and services in the country and there is no increase in the amount of money and credit deflation arises.

(vi) Other Policies of Credit Control:

When the Central Bank of the country adopts other dominant steps like rationing of credit, direct action, change in CRR etc. for the bank rate and open market operation for the credit control, there is deflation of credit money.

Term Paper # 3. Effects of Deflation:

The whole economy is affected by deflation.

The effects of deflation on different classes are as follows:

(1) Common People:

The general price level of goods and services fall during deflation. Consequently, commodities become cheap and common people Eire benefited.

(2) Producers and Traders:

Producers and traders face loss during deflation. Its cause is that the cost of production for the producers is high while the selling prices become low. The cause of high cost of production is that raw materials are previously purchased and there is also stock of produced goods having high cost of production. But they have to sell goods at low prices due to deflation. Similarly the traders also have to sell those goods at low prices which they have purchased at high prices.

(3) Investors:

Those investors who have invested their money in securities like bonds and debentures having stable income are benefited. Its cause is that the purchasing power of their stable income increases. On the other hand, those investors who have invested in the equity shares of joint stock companies face loss because the profit of companies falls during deflation and so the amount of dividend decreases.

(4) Consumers:

Generally, there are two classes of consumers—those with stable income and those with unstable income. Consumers with stable income have profit during the deflation because the purchasing power of their income increases but the consumers with changeable income have loss due to deflation because their income declines more that the decline in the prices of goods.

(5) Labourer Class:

The labourers get profit in the initial phase of deflation because there is a fall in prices of goods without any fall in their wages. But gradually the wages are reduced by the producers and there is also reduction in the employment if the industries face bad situations. Thus the labourers face the problem of unemployment. So deflation brings loss for the labourer in the long run.

(6) Banking Sectors:

There is a decline in the demand of loans due to recession in the field of trade and industries during deflation. At the same time, there is not proper recovery of previous loans. This hampers the banking activities and there is a bigger possibility of failure of banks with poor economic condition.

(7) Other Effects:

Some other effects of deflations are as follows:

(i) The industrial calmness is disrupted during deflation because due to reducing wages and increasing unemployment there is a class between the producers and labourers.

(ii) The export gets encouragement due to the fall in price levels as there is a decline in import.

(iii) Deflation increases the value of money which raises the load of public loans and government and there is a bad effect on the economy.

(iv) The incidence of tax for the tax payers is monetarily less during inflation but they have to pay more tax in the form of purchasing power due to high value of money. Thus, the tax payers face loss.

Term Paper # 4. Measures to Restrain Deflation:

Deflation is an economic evil. So there is a dire need of checking it.

The main measures of checking the deflation are as follows:

(A) Monetary Measures:

Following steps come under it:

(i) Issue of Money:

If there is an increase in production in the country due to deflation, the central bank should check it by issuing more currencies.

(ii) Increase in Credit Money:

The Central Bank should bring an increase in credit money by reducing the bank rate and purchasing securities in the open market.

(B) Fiscal Measures:

The government should take following fiscal measures during deflation:

(i) Reduction in Taxes:

To encourage the profit of the producers there is a need of reducing the burden of taxes. This gives encouragement in the production and the labourers get chances of employment.

(ii) Increase in Public Expenditure:

The government should try to provide the opportunities of economic development and construction by making the possible increase in the public expenditure with the view of increasing the employment opportunities and the purchasing power of people.

(iii) Subsidies:

The industrialist should be encouraged by giving subsidies to re-establish the industries which were closed down due to deflation.

(iv) Redemption of Debts:

There should be payments of public debts by the government during deflation. This increases the amount of money in circulation.

(C) Other Measures:

Besides the above mentioned measures, the inflation can be controlled through other steps also which are as follows:

(i) Promotion of Exports and Control of Import:

There should be encouragement to the export of goods produced in the country so that the stock should not be useless. At the same time there should be complete ban on the import of such goods. This would give encourage­ment to the producers.

(ii) Elimination of Excess Production:

If there is no possibility of sale of available produced goods in the country and the government would also not be in the condition of purchasing these, the surplus production should be eliminated. This brings an instant loss for the producers but in the long run there is an increase in the prices of goods due to their shortage and the producers get profit.