Define deflation and also explain causes of deflation?

G.thomas says that, “deflation us a reduction in the general price level due to decrease in the economic activity of a nation”

According to Philips, “deflation is a period during which level of price decline and the value of money raises”.

Causes of deflation:

1.                 Access production:

The production of goods and services in excess of its demand is a cause of deflation. The price level comes down and the producers may not able to continue their output at present level may make wrong calculation about future demand.

2.                 Security sales:

The sale of security is cause of deflation. The shares and debentures are sold in the markeet. The people like to invest their idle money in shares. The purchasing power is checked to the extent of investment in shares and debentures. They can buy loss goods due to low expending capacity. The demand for goods is laver. The supply increases the demand limits. The excess supply bring deflation in country.

3.                 Low profit:

The low rate of profit is caused deflation. There may be competition in economy. The investment in any sector may be more than the demand. The tight competition lower the rate of profit. The seller try to clear their stick of goods. But excess supply becomes a problem, the business persons cut their profit to retain.

4.                 Less demand:

The decrease in demand is cause of deflation the demand may decrease due to decrease in income, wage. The excess supply and less demand to a sat back to the economic activity.

Thus decreasing rate of demand is brings deflation in the economic system.

5.                 High bank ratio:

The high bank ratio is a cause of deflation the bank rate is an official rate of central bank for discounting bill of commercial bank. When bank rate is raise the banks cannot issue loans, the money supply decreases. The business working is effected due to less funds. This high bank rate can work for deflation.