Theory of Economic Deflation Essay Example | Topics and Well Written Essays - 500 words

Theory of Economic Deflation - Essay Example This process is deflation. The two pair of key elements that are involved in deflation theory is 1) goods and money and 2) demand and supply. The sum of amount of goods and money; and the demand and supply of both goods and money influence the economy of a nation or it can be called as economic decider. The demand and supply of goods results in deflation: if there is decrease in demand of goods or increase of supply of goods. The decrease in demand of goods is due to decreases in money supply or unavailability of money. If the supply of goods increases the price or the demand of the product get reduced. If this happens for all products at a point of time then it is called as secular deflation. The reduction in the transaction due to less money availability is also comes under deflation. "Overall the causes for deflation are: 1.Decreasing Money Supply, 2. Increasing Supply of Goods, 3. Decreasing Demand for Goods and 4. Increasing Demand for Money" (What is Deflation, n.d) Deflation has positive as well as negative effects. Stephen Davis (2003) points that people have got idea of deflation as reduce in rate of goods and its actual reduction in price. The deflation plays very good role for people who have large or considerable revenue in his/her hand. In terms of share market during deflation the market shares goes down and hence it's simply the golden period for investor.