WITH THE AID OF DIAGRAMS, ILLUSTRATE THE CAUSES OF INFLATION AND DEFLATION, AND BY COMPARING THEIR ECONOMIC EFFECTS CONSIDER HOW BOTH CAN AFFECT THE CORPORATE SECTOR.
The essay will describe causes of inflation and deflation and explain how they can affect the corporate sector.
1. INTRODUCTION
DEFINITION OF INFLATION AND DEFLATION
Inflation is a process in which the price level is rising and money is losing value. (Parkin, Powell, Matthews p654)
Inflation tends to rise when at the current price level, demand for goods and services in the economy are greater than economy's ability to produce goods and services.
The graph below shows continuously growing inflation, occurred by a rising price level.
If the price level is rising, the inflation rate is positive. If the price level rises at a faster rate, the inflation rate increases.
Inflation is measured with a price index.
The two main measures of inflation are: the Retail Price Index (RPI) and Consumer Price Index (CPI).They measure an average of the prices paid by costumer for a fixed basked of goods and services included such items as food, heating, housing goods, bus fares and petrol.
One of the several variations on inflation is hyperinflation. When it occurs, the value of money becomes worthless. Although it is extremely rare it may lead to the breakdown of a nation's monetary system. One of the most famous happened in Germany between 1921 and 1923 and Turkey in 1999 when inflation reached 70%.
Deflation is very unusual although some countries such as Japan and China have experienced price deflation in their economies in recent years.
Falling prices can arise from too much supply or too little demand. There are four causes for deflation. ...