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Thread: How does a country deal with deflation?

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    Default How does a country deal with deflation?

    Definition of Deflation

    Deflation is a condition in which the prices of goods and services tend to decline, at a glance, the decline in prices for goods and services is beneficial because with the same money we can get more goods, but actually this is not a good thing, even though the prices of goods and services have decreased. if we do not have money, we cannot enjoy the decline in prices for these goods and services, instead we find it difficult to get these goods and services, not because these goods and services are not available but because we do not have the money to buy them, the same thing is experienced by producers, producers find it difficult to sell the goods and services they produce even though their prices have decreased, during this period of deflation many businesses were hit and went bankrupt.some of the producers try to survive by taking very thin profits, sometimes they even sell below the production price for the continuity of their business.

    Causes of Deflation


    The factors that cause inflation are usually complex, and this deflation is not due to mistakes that have just been made but because of mistakes that have been made for a long time and are protracted, if deflation is due to mistakes that have just been done it is easier to overcome them, but if these mistakes are in the way regulating the economy, and overcoming it is very difficult for a long time, here are some factors that cause deflation
    1. Too much of the same production, with many producers producing the same goods causing the price of these goods to decline, the deflation caused by this is usually not widespread, it only concerns certain goods, but to overcome it is quite difficult because there are so many businesses / producers. involved, it is not easy to shift the production of one manufacturer to another product
    2. Government regulations or central bank policies, the government is the party that initiates various economic policies, wrong government policies can result in a deficit in the circulation of money, this bad money circulation results in the flow of money being blocked so that only a small amount of money reaches the public, this results in the ability society in buying goods has decreased, and the impact is a decrease in the price of goods due to reduced demand.
    3. The decline in people's purchasing power, the ability of people to buy goods and services is called purchasing power, high purchasing power of society is good for the economy because it makes the economy live, producers can produce at full scale because the goods and services they produce are absorbed by society, but if The purchasing power of the people decreases, so not all the production of goods and services is absorbed by the market, people are unable or their ability to buy goods and services is reduced, so that the goods are sold, the producers reduce the selling price, so that deflation occurs.

    Ways to Overcome Deflation

    Deflation occurs due to reduced circulation of money in society, this reduced money results in reduced ability of people to buy goods and services, so to overcome this the amount of money circulating in society needs to be increased, as for ways to overcome deflation include:
    • Reducing the interest rate, the purpose of lowering the interest rate is so that the amount of money in circulation increases, with a lower interest rate more people are interested in borrowing money, and those who keep money in the bank withdraw their money, so that more money circulating in society, this money is used to buy goods and services so that the production of goods and services can be absorbed, and part of it is invested so that the economy can grow again.
    • Implementing monetary policy, this step was taken by the central bank, the central bank issued a number of policies aimed at increasing the amount of money in circulation, increasing the money in circulation helping to activate the economy, buying and selling transactions of goods and services resumed, and the decline in prices for goods and services stopped, so that the deflationary period can be ended.
    • Implementing fiscal policy, this fiscal policy that does it is the government, fiscal policy is related to government revenues and expenditures, so that the amount of money in circulation increases, the government increases its expenditure, the money issued by this government will later reach the community so that the economy will return to life and move, another step In order for the amount of money in circulation to increase, it is necessary to reduce government revenue, usually from the tax sector, by lowering the tax rate, which means that the money in public hands does not decrease so that the money supply can be maintained.
    • Implementing a non-monetary policy, the goal of this policy is the same as the other policies above, namely to increase the amount of money in circulation, this step is carried out, among others, by increasing the minimum wage, with the increasing wages, more money reaches the community and the people's purchasing power increases. This increase in purchasing power makes the absorption of goods and services better, this non-monetary policy can also be in the form of reducing the level of production, with decreased production in the value of money can be increased.

    Criticizing BLT Policy in Overcoming Current Deflation

    In overcoming deflation that was occurring when the government seemed to be incessantly disbursing BLT, but was this step right? We see that this BLT step does not help much to reduce deflation, this step drains a lot of state money, unfortunately this money comes partly from debt, and this large debt burden is part of our economic problems that cause deflationary conditions, besides this deflationary condition is at basically caused by decreased economic activity due to the corona virus outbreak,
    Instead of giving BLT which is very incessant like today with money that comes from debt, it is better for the government to give money in exchange for work, for example creating a river cleaning program, paying people who work to clean the river, or building bridges with local community workers, so the economy can live.

    The main problem of deflation at this time is due to reduced economic activity, so the best and main step taken by the government is to do everything possible to overcome the problem of this corona outbreak, many people have been dismissed not because the company they work for is problematic, but because the company's activities are limited and even partially stop. production, if the covid outbreak is resolved immediately then economic recovery can be carried out, it is useless to pour thousands of trillions of funds if economic activity is minimal due to the unresolved corona outbreak.

    Tackling Deflation with Fiscal Policy


    Fiscal policy is also often used in overcoming deflation, this policy is taken by the government of a region or country. Usually they will provide tax breaks, restructuring and relaxation of credit, provide cash assistance and others. Again, we get an example because of this pandemic, we can see how countries carry out their fiscal policies.

    An example is the United States which provides assistance to the community, especially workers affected by layoffs with quite large direct cash assistance, even the total agreed by the government and parliament reached 3 trillion dollars, a very fantastic figure and the greatest assistance in US history.

    Fiscal policy can also be carried out by increasing government spending, indeed for this one the government has a large financial power and is one of the consumptions that can help turn the wheels of the economy in society. With some of the fiscal policies that have been mentioned above, it will be able to help increase the circulation of money which will ultimately turn the wheels of the economy and increase people's purchasing power.
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    In view of our country, PAKISTAN in several regions experienced deflation which caused the price of goods to be very cheap, if this continued then the effect could spread to all regions in PAKISTAN.

    Then how does the government handle this deflationary phenomenon?

    1. Implementing non-monetary policy

    From here the government and the Central Bank have a full share in carrying out these non-monetary policy measures. Such as reducing the loan interest rate, reducing the tax burden and the government is required to increase the minimum wage for workers every year.

    2. New Product Innovation

    This is generally carried out by several production companies, where every few periods they have to create new and different variations of production goods from the previous ones, so that they can become the competitiveness of goods against other goods in order to have a more futuristic value.

    3. Set a Minimum Reserve ( Reserve Requirement Policy ).

    This role is carried out specifically by the Central Bank in PAKISTAN itself, namely BI. This measure was implemented in order to increase the amount of money circulating in the community, so that the people's interest in purchasing power would increase and in the end it could reduce deflation.

    4. Increase Government expenditures

    The government can provide facility services to the community, such as providing and building irrigation channels in every rice field. That way, the rate of harvest for agricultural products will be faster and more constant so that it can prosper the community and reduce deflation.

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    What is Deflation
    Deflation can be regarded as a economic factor which is the general decline in the price of goods and services over a period of time. When there is high rate of deflation in a economy in a specific period of time, this is signalling to economic recession. Deflation makes consumers wait for persistent decrease in price of goods and services which would definitely lead to a decline in the demand for goods and services which usually have negative effect on the economic growth of the country at that particular period of time. People often think that deflation is better than inflation because the price of goods and services will be cheap and affordable, money will have increase in purchasing power. But in most cases, deflation usually have negative effect on the economic growth and development more than inflation. The major way deflation can be measured is by the decline in the Consumer Price Index (CPI).

    Advantages of Deflation
    These are some of the advantages of deflation in the economy.
    1. The price of goods and services declines which makes it easier for consumers to purchase more goods and services and still have money to save.
    2. The interest rate will be very low during deflation in order to combat deflation. When there is a decline in the interest rate, it will encourage loans.
    3. Redistribution of real income where it reduces the gap between the rich and the poor.
    4. Increase in the value of real income.
    5. It benefits the creditors against the borrowers because the real value would have increased.

    Disadvantage of Deflation
    These are some of the disadvantages of deflation in an economy.
    1. A decline in Aggregate demand which would lead to unemployment, lower profits to the business organizations, decrease in production etc.
    2. Decrease in wages and salaries.
    3. Decrease in the production of goods and services.
    4. Increase in the national debt.
    5. Closure of some business organization because they are running on loss.

    Causes of Deflation
    These are some of the causes of deflation in an economy.
    1. Low circulation of money in an economy.
    2. Supply of goods and services exceeding the demand for goods and services.
    3. Decline in aggregate demand.
    4. Increase in aggregate supply.
    5. Technological decline.

    How does country deals with inflation
    These are several ways used by countries to deal with Inflation in an economy.
    1. Monetary Policy: Monetary Policy can described as a tool used by the government or central bank in order to regulate the economic growth of her country, and to protect the economy from declining The major monetary policy tools used by the government in order to deal with deflation is the interest rate.
    2. Quantitative Easing: Quantitative Easing is a process where private securities are purchased in an open market which helps in pumping money into the economy and also help to prevent deflation in the economy in a particular period of time.
    3. Open Market Operation: Thw central bank purchase the treasury securities in the open market by issuing new created money to the seller in return for the treasury securities purchased from the seller. The increase in money supply will encourage people to spend money.

    Though trading on financial markets involves high risk, it can still generate extra income in case you apply the right approach. By choosing a reliable broker such as InstaForex you get access to the international financial markets and open your way towards financial independence. You can sign up here.


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    What is Deflation

    Deflation is the opposite of inflation, if inflation occurs due to a large amount of money circulating in society, deflation occurs due to a lack of money in circulation. Deflation that occurs in a country will have more impact on business owners. This will have an impact on all business owners, both those who provide goods and services of the Company, which are continuously disadvantaged by these buying and selling activities. As a result, entrepreneurs must work around this by reducing production costs. Also, laying off employees is the most sensible option. This is because many business owners do not want to reduce their production costs in other sectors, such as using cheaper raw materials. This will risk changing consumer tastes.

    Then, how do you deal with deflation? Before that, let us first know the types of deflation and its causes.



    Types of Deflation

    Based on the process of occurrence, deflation is divided into two types, namely:

    • Circulation Deflation - This deflation occurs at a time of transition from economic success to an economic downturn. Due to the result of the imbalance between the power of production and consumption, therefore there is a decrease in the market price in an economic recession, due to the lack of need for excess economic goods.

    • Strategic Deflation - This strategic deflation occurs due to the implementation of a chatter policy against symptoms of over consumption to counter rising market prices.



    Causes of Deflation

    Deflation can occur due to the following reasons, including:
    • A little amount of money in circulation - In this case, many people keep their money in the bank and This can happen because many people are tempted by large yields or high interest in the bank. They take advantage of this opportunity by saving their money into the bank.

    • An increase in the number of goods in the market but the demand for goods decreases - Automatically the price of goods will decrease because of the large number of goods while the demand decreases. This can create losses for entrepreneurs because the goods in circulation do not sell in the market at normal prices while the stock is large, so the producers will reduce the selling price of these goods.



    Impact of Deflation

    The impact of deflation has positive and negative effects, including:

    Positive impact
    • The price of goods is cheap
    • People choose to save their money.

    Negative impact
    • Many have lost their jobs and job opportunities will be reduced.
    • State income or deviation will be reduced because tax collection is not optimal.
    • Economic activity will experience a decline
    • Sluggish investment in the real sector or on the stock exchange will add to the weight of the economy because there are no running business activities


    How to Deal with Deflation by the central bank and government

    When deflation occurs in a country, the central bank and government will introduce policies to overcome it, including:

    Monetary policy

    Monetary policy is an activity in which the central bank asks all banks to reduce bank interest rates. The smaller the interest rate provided by the bank, the more customers choose to withdraw their money. Because they think even saving will not give them significant benefits. This will encourage people to put their money in real business or investment rather than just leaving it in the bank with low interest.


    Non-Monetary Policy

    This non-monetary policy is a policy that is considered the most effective in dealing with deflation. In this policy, close cooperation between the government and the central bank is needed.

    Some of the things that are commonly done are:
    • Reducing corporate loan interest rates - Business owners can breathe a little easier because they are not burdened with too much expenditure.

    • Reducing the value of taxes imposed - With the hope that the money used to pay taxes can be rolled back by the company. So that it can strengthen existing buying and selling activities.

    • Establishing Fiscal Policy - In this policy, the government will act fully to manage the country's economy. So, the country's economy can return to stability
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    WHAT IS DEFLATION?

    Deflation refers to the event where there is a general decrease in price level for goods and services. Deflation is the opposite of inflation and every known economy have at to go through a period of deflation at one point or the other.


    During a period of deflation, prices of goods and services continues to experience drop in value which might be rapid or slow but eventually reduces the entire value of the economy. In the event that inflation is now below zero percent, one can agree that deflation is what is imminent.


    Deflation could be good and it could be tagged as bad depending on the period of time during which it occurs. It could happen naturally within an economy and sometimes government and other institutions might encourage deflation in other to correct periods of massive inflation. With deflation in view, a nation's currency would be able to buy more than it would do on a normal day, and if this continues in the same manner such a currency might enjoy too much value than expected as things would become ridiculously inexpensive.


    A progressive period of deflation will eventually cause recession to take form within the economy. This also increases the value of the debt which has been incurred by that economy since price value has experienced reduction.


    In the event that production output increases within an economy, the currency of such economy might become able to buy more with less since price will reduce thereby, leading to the event of a deflation. Sometimes, changes in the supply of money could be the reason for deflation. Whatever the case, a fully formed deflation would be as a result of multiple contributing factors. Deflation could also be experienced within an economy in a rapid wave in that it does not provide much warning before it takes form.


    Deflation is a concept which is considered to be mostly beneficial to consumers since they have increased purchasing power. However, this might not be the case for every other part of that economy. Deflation also discourages growth within an economy making it to either remain stagnant or keep dropping in it overall economic value.

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    HOW THE GOVERNMENT DEALS WITH DEFLATION

    When deflation cannot be controlled, it lead to series of unfavourable events such as companies filing bankruptcy, inability to continue with the level of production which then leads to loss of jobs and it goes on an on in that negative manner.


    Deflation happens for different reasons and no matter the soundness of an economy, there is always a possibility of the occurence of deflation. Depending on what led to the deflation, it is important to properly manage it so as not to result into outcomes that could have been avoided.


    That being said, the government and the central banks are the most important parties when it comes to curbing and generally dealing with deflation. When the government and central bank work together, they are able to introduce a number of policies that could help to sustain a balanced economy and eliminate deflation.


    Inflation is the opposite of deflation, and by introducing inflation into the economy, the period of deflation could come to an end. In respect to this, central banks are able to introduce monetary measures and policies that would force inflation into an economy. In the event that a deflation occured due to reduced cash flow or supply or money, the central bank can be authorized by the government to actively participate in the production of more money so that enough can circulate within the economy.


    Central bank would also have to engage in cutting down the interest attached to debts and various types of loan. By doing this, they hope to make debt payment become more flexible without requiring the debtor to go into taking more debts. Once people are able to pay very little interest, they can direct their energy towards other productive measures without having to bother about their debts. New borrowers can also find it much more easier to borrow money.


    It is also possible that the central bank is being able to buy as much as available financial securities and treasury bills from those holding it. This way, the parties that sell these financial securities to the central bank gets paid and cash flow is made possible within that economy.


    Since the government is the main body saddled with the responsibility of controlling deflation, it is not left out in it duties and would have to encourage a number of fiscal policies. It is important that government econurages increased spending so that money is able to circulate within the economy. When this is made possible and cash flow is still being maintained, it is only a matter of time before a country gets over deflation.


    Another way for government to deal with deflation is by constantly making efforts to reduce the rate of taxes being levied on people. When government reduces how much in tax people pay, these tax payers would have more funds available for them which they can put into other spending that can help increase the value of that nation's economy. While the event of reduction of tax levy might work, it will lead to the event that the government's revenue generated on tax would experience reduction as well.


    Whatever the case, the government would have to actively participate in introducing and promoting measures that would get it economy out of deflation and spur economic development which is the goal of every government. To avoid deflation, government must always maintain a considerable amount of inflation just enough to keep the economy balanced.

    Though trading on financial markets involves high risk, it can still generate extra income in case you apply the right approach. By choosing a reliable broker such as InstaForex you get access to the international financial markets and open your way towards financial independence. You can sign up here.


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    Default How does a country deal with deflation?

    How does a country deal with deflation?

    Deflation may be a decrease within the general price index of products and services. place differently, deflation is negative inflation. once it happens, the worth of currency grows over time. Thus, additional product and services will be purchased for constant quantity of cash.



    Deflation is wide considered associate economic “problem” that may intensify a recession or result in a deflationary spiral.

    cause of deflation.
    Economists verify the 2 major causes of deflation in associate economy as (1) fall in combination demand and (2) increase in combination offer.

    The fall in combination demand triggers a decline within the costs of products and services. Some factors resulting in a decline in combination demand are:



    Fall within the monetary resource
    A financial organisation might use a tighter financial policy by increasing interest rates. Thus, people, rather than defrayment their cash now, {prefer to|like better to|value additional highly to|favor to|opt to|choose to} save more of it. additionally, increasing interest rates result in higher borrowing prices, that additionally discourages defrayment within the economy.


    Decline in confidence
    Negative events within the economy, like recession, may additionally cause a fall in combination demand. for instance, throughout a recession, folks will become additional demoralized concerning the long run of the economy. after, they like to extend their savings and scale back current defrayment.



    An increase in combination offer is another trigger for deflation. after, producers can face fiercer competition and be forced to lower costs. the expansion in combination offer will be caused by the subsequent factors:

    Lower production prices
    A decline in value for key production inputs (e.g., oil) can lower production prices. Producers are able to increase production output, which is able to result in associate oversupply within the economy. If demand remains unchanged, producers can have to be compelled to lower their costs on product to stay folks shopping for them.

    Technological advances
    Advances in technology or speedy application of latest technologies in production will cause a rise in combination offer. Technological advances can permit producers to lower prices. Thus, the costs of product can seemingly go down.

    Though trading on financial markets involves high risk, it can still generate extra income in case you apply the right approach. By choosing a reliable broker such as InstaForex you get access to the international financial markets and open your way towards financial independence. You can sign up here.


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