Positive Impacts, Benefits Or Advantages Of Deflation
The main advantages of deflation can be expressed as follows:
1. Increase In Purchasing Power
Negative inflation or deflation increases the value of money. So, purchasing power increases and price of goods and services decreases.
2. Lower Monthly Budget
As we know that deflation causes fall in the price of commodities, so people can satisfy their needs by spending less amount of money. So, it reduces the monthly budget which benefits middle and lower level consumers.
3. Increase In Saving
Due to fall in price of goods and less spending of money, people's saving will be increased at the period of deflation.
4. Higher Living Standard
Deflation helps to maintain better living standard because of lower expenditure and increase in saving.
5. Beneficial For Creditors
Deflation increases the real value of existing debt. So, creditors are benefited in this situation.
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6. Lower Business Costs
Deflation lowers the cost of business because of decrease in the price of raw materials, machinery, technology and fixed assets. So, this period is appropriate for long-term investment.
4. Possibility Of Unemployment
Negative Impacts, Drawbacks Or Disadvantages Of Deflation
The major disadvantages of deflation can be described as follows:
1. Lower Consumer Spending
People may stop spending on luxurious and expensive products with the expectation of more decrease in price in the future. So deflation may encourage lower consumer spending which is not good for the economy.
2. Loss For Investors
At the time of deflation, investors and producers who hold large quantity of inventory suffer because of the decrease in the value of stock.
3. Increase Value Of Debt
As we know that deflation increases the value of debt, it makes difficult for the existing debtors to repay their loan.
Business profit decreases because of decrease in the price which force the producers to stop production or reduce their production capacity. It may create unemployment problem.
5. Lower Economic Growth
Limited production, less consumer spending, increased value of debt and unemployment lead to lower economic growth and instability in the country.
Pros And Cons Of Deflation In Short
Pros:
- It lowers the monthly budget of because of decrease in the price of goods and services
- It helps to improve living standard of because of improved purchasing power
- It is beneficial for creditors because banks reduce the interest rate
- Suitable period for investment
Cons:
- It may lead to lower consumer spending
- It may create unemployment problem
- It negatively affect economic growth of the country
- It increases the real value of debt
