Every country witnesses boom and depression periodically.

Depression is
characterized by falling production, falling prices and rise in unemployment. On
the other hand, boom is characterized by rising production, rising prices and high
employment percentage.

These changes of boom and depression are cyclical in form. Hence, these are
called Trade or Business Cycles.

The phenomenon of trade cycle was first observed by the English economist Sir
William Petty. Petty's observations were later developed by Malthus, Mill, Karl
Marx, Ragnar Frisch, etc.

Inflation and deflation are two opposite situations and both of these are
necessary evils of the present day economic order. We have seen that they affect
different classes of society, differently.
 Concept:

The economic progress that the world has made has not been a steady and
continuous process. The world economy had upswings and downswings. The
periods of business prosperity alternated with periods of adversity. Such ups and
downs in the economic activities are popularly known as business cycles or trade
cycles.

Meaning:
Business or Trade cycle refers to the existence of fluctuations in economic activity
in an economy over a variable time span. These fluctuations occur around a long-
term growth trend, and typically involve shifts over time between periods of
relatively rapid economic growth (expansion or boom), and periods of relative
stagnation or decline (contraction or recession).
Definitions:

1) Lord J.M.Keynes :
"A trade cycle is characterized by alternating expansionary and
Contractionary wavy movements in the aggregate business activity and
there is some regularity in respect of the duration and time sequence of
the upward and downward movements of a trade cycle.“

2) Prof. Schumpeter :
"A business cycle represents wave-like deviations in business activity from
the equilibrium or trend line of the economy caused by outside impulses
operating upon the economy."

3) Hicks :
"Cyclical fluctuations are movements of the system above and below the

rising trend or growth line."

 Natures:

The occurring of different type of

change in the economic is known as
trade cycle. Such regular and
continuous changes in the economy
are the feature of the trade cycle.
So main nature of trade cycle can be
expressed as follows:
Natures:
1) Cyclical Nature:
After the creation of trade cycle the ups and downs fluctuations will be of
recurrent and repetitive pattern. As a result, in the economy depression occurs
after the state of prosperity after the state of depression continuously and
cyclically.
2) Regularity:
Some of the economists have given the views that there is regularity or
periodicity in the fluctuations of the trade cycle or the state of prosperity and
the state of depression occurs and completes in a fixed period.
3) Wave-like Movement:
Movement of the trade cycle is just like the sea-waves. In capitalistic economy
depression after prosperity and prosperity after depression occur in wave-like
movement.
4) Movement in Economic Activity:
A trade cycle is a wave-like movement in economic activity showing an upward
trend and a downward trend in the economy.
Natures:
5) International:
Trade cycle starts at one section of the economy and expands throughout the
country, then through the means of international trade it expands from one
country to the other. Thus, in this, one directs the others.
6) Cumulative Nature:
The state of prosperity and the state of depression that occur in the trade cycle
are of the cumulative nature. all states will cumulates such state which will direct

this towards the opposite direction. Thought the states of prosperity and
depression are not definite, both the states can continue being indefinite.
7) Dynamic:
Business cycles cause changes in all sectors of the economy. Fluctuations occur
not only in production and income but also in other variables like employment,
investment, consumption, rate of interest, price level, etc. employment,
investment, consumption, rate of interest, price level, etc.
Characteristic:

1) Uncertain Period:
The period of trade cycle is
not certain. It varies from one
year to one hundred years.
2) Discontinuity :
Business cycle occurs after
certain period. Though there is
no continuity in trade cycles,
different trade cycles may have
similarity in certain economic
activities.
Characteristics:
3) Affecting all Sectors:
Business cycle relates to ups and downs in all the economic activities and not
only to ups and downs in a particular industry or firm. It means that the
variations are universal and affecting all the sectors of the economy.
4) Simultaneous Effect:
The variations in economic activities in all the aspects such as production,
employment, investment, consumption, rates of interest, price level at the same

time. Thus, trade cycle is a synchronous simultaneous effect.

5) Unpredictable Changes:
Due to trade cycle, there is uncertainty about future and the businessmen
cannot predict the changes in future.
6) Phases for Every Type:
Though the period of different trade cycles differs, the order of the phases is the
same in all types of trade cycles as prosperity, recession, depression and
recovery.
Characteristics:
7) Related with Economic Crisis:
Business cycle occurs with the economic crisis. The decline in production,
employment, price level etc. is experienced on large scale during depression.
8) Periodical :
Trade cycles occur periodically but they do not show the same regularity.
9) Different Types :
There are minor and major trade cycles. Minor trade cycles operate for 3-4
years, while major trade cycles operate for 4-8 years or more. Though
trade cycles differ in timing, they have a common pattern of sequential phases.
10)Duration :
The duration of trade cycles may vary from a minimum of 2 years to a maximum
of 12 years.
Causes:

1) Interest Rates:
Changes in the interest rate affect
consumer spending and economic
growth for example, if the interest
rate is cut; this reduces borrowing
costs and therefore increases
disposable income for consumers.
This leads to higher spending and
economic growth.
Causes:

2) Changes in House Prices:

A rise in house price creates a wealth effect and leads to higher consumer
spending. A fall in house prices causes lower consumer spending and bank losses.

3) Consumer and Business Confidence:

People are easily influenced by external events. If there is a succession of bad
economic news, this tends to discourage people from spending and investing
making a small downturn into a bigger recession. But, when the economy
recovers this can cause a positive bandwagon effect.
4) Multiplier Effect:
The multiplier effect states that a fall in injections may cause a bigger final fall in
real GDP.
Causes:

5) Accelerator Effect:
This states that investment depends on the rate of change of economic growth.
If the growth rate falls, firms reduce investment because they don't expect
output to rise as quickly.
6) Inventory Cycle:
Some argue that there is a natural inventory cycle. For example, there are some

'luxury' goods we buy every five years or so. When the economy is doing well,
people buy these luxury items causing faster economic growth. But, in a
downturn, people delay buying luxury goods and so we get a bigger economic
downturn.
Types:

1) Major Cycles:
These are of the duration of 8 to 12 years. They were first explained by French
economist Juglar. Hence they are called Juglar cycles.
2) Minor Cycles:
Duration of these cycles is from 2 to 5 years. They were first mentioned by an
English economists Kitchen. Hence, they are called Kitchen Cycles. A major cycle
comprises of many minor cycles.
Types:
3) Very Long Cycles:
These are prolonged cycles with their duration ranging from 50 to 60 years.
There were first referred to by Russian economist Kondratieff. Hence they are
called Kondratieff Cycles. A very long cycle may contain in itself many major and
minor cycles.
4) Seasonal Fluctuations:
This refers to trade cycles, which take place due to seasonal changes in the
economy, for e.g. failure of monsoon can cause a downtrend in the economy,
which may be followed by, a good monsoon and up to trend.
5) Irregular or Random Fluctuations:
These trade cycles are unpredictable and occur during a period of strikes, war,
etc., causing a shock to the economic system.
6) Cyclic Fluctuation:
These fluctuations are wave-like changes in economic activity caused by
recurring phases of expansion and contraction.
The business cycle starts from a trough (lower point) and passes through a recovery
phase followed by a period of expansion (upper turning point) and prosperity. After
the peak point is reached there is a declining phase of recession followed by a
depression. Again the business cycle continues similarly with ups and downs. The
four phases of business cycles are shown in the following diagram :
Phases:
1) Prosperity Phase:
When there is an expansion of output, income, employment, prices and
profits, there is also a rise in the standard of living. This period is termed
as Prosperity phase. The features of prosperity are :
a) High level of output and trade. b) High level of effective demand.
c) High level of income and employment. d) Rising interest rates.
e) Inflation. f) Large expansion of bank credit.
g) Overall business optimism. h) A high level of MEC

2) Recession Phase:
The turning point from prosperity to depression is termed as Recession Phase.
During a recession period, the economic activities slow down. When demand
starts falling, the overproduction and future investment plans are also given up.
There is a steady decline in the output, income, employment, prices and profits.
Phases:
3) Depression Phase :
When there is a continuous decrease of output, income, employment, prices and
profits, there is a fall in the standard of living and depression sets in. The features

of depression are :

a) Fall in volume of output and trade. b) Fall in income and rise in unemployment.
c) Decline in consumption and demand. d) Fall in interest rate.
e) Deflation. f) Contraction of bank credit.
g) Overall business pessimism. h) Fall in MEC
2) Recovery Phase :
The turning point from depression to expansion is termed as Recovery or Revival

Phase. During the period of revival or recovery, there are expansions and rise in
economic activities. When demand starts rising, production increases and this
causes an increase in investment. There is a steady rise in output, income,
employment, prices and profits. The businessmen gain confidence and become
optimistic
Concept:
Inflation is an irreversible rising trend in prices. A continuous rise in the general
price level over a period of time has been the most common feature of both,
developed and developing countries.

Meaning:
Inflation is a continuous rise in the general price level.

It is a stage in which the value of money falls. Inflation is a stage in which too much
money is chasing for too few goods. Inflation is a Monetary Phenomenon.

Inflation is a sustained or continuous rise in the general price level or,

alternatively, as a sustained or continuous fall in the value of money. Several
things should be noted about this definition.
Definitions:
1) Crowther :
"Inflation is a state in which the value of money is falling i.e. prices are
rising.“

2) Pigou :
"Inflation exists when money income is expanding relatively to the output of

work done by the productive agents for which is the payment.“

3) Chamber's Dictionary :
"Inflation is an undue increase in quantity of money in proportion to buying
power, as on an excessive issue of fiduciary money.“

4) Colborn :
"Inflation is a state in which too much money is chasing too few goods."
Types: Based on speed of price

1) Creeping Inflation :
When prices are gently rising, it is referred as Creeping Inflation. It is the mildest
form of inflation and also known as a Mild Inflation or Low Inflation.
2) Chronic Inflation :
If creeping inflation persist for a longer period of time then it is often called as
Chronic or Secular Inflation. Chronic Creeping Inflation can be either Continuous
or Intermittent.
3) Walking Inflation :
When the rate of rising prices is more than the Creeping Inflation, it is known as
Walking Inflation. When prices rise by more than 3% but less than 10% per
annum, it is called as Walking Inflation.
Types: Based Inflation:
4) Moderate on speed of price
Prof. Samuelson clubbed together concept of Creeping and Walking inflation
into
Moderate Inflation. When prices rise by less than 10% per annum (single digit
inflation rate), it is known as Moderate Inflation.
5) Running Inflation:
A rapid acceleration in the rate of rising prices is referred as Running Inflation.
When prices rise by more than 10% per annum, running inflation occurs.
6) Galloping Inflation:
According to Prof. Samuelson, if prices rise by double or triple digit inflation
rates
like 30% or 400% or 999% per annum, then the situation can be termed as
Galloping Inflation.
7) Hyperinflation:
Hyperinflation refers to a situation where the prices rise at an alarming high
rate.
The prices rise so fast that it becomes very difficult to measure its magnitude.
However, in quantitative terms, when prices rise above 1000% per annum
(quadruple or four digit inflation rate), it is termed as Hyperinflation.
Types: Based on Causes

1) Credit Inflation :
If there is an excessive increase in credit beyond the legitimate requirements of
business, and prices are pushed up, it is known as 'credit inflation. Credit inflation
originates from there lease of more and more credit by the banks, which
increases
supply of money without any corresponding increase in production.
2) Currency Inflation :
If the price rise is caused by an increase in the volume of currency, it is known as
currency inflation'. It happens due to issue of more currency by the government
without any legitimate demand of currency to purchase goods and services.
Types: Based on Causes

3) Budgetary Inflation:
The budgetary inflation is due to budgetary deficit (i.e., public expenditure
exceeds public revenue) shown by the government in its annual budget. Thus,
the
gap between public expenditure and revenue is left uncovered.
4) Demand-pull Inflation:
When aggregate demand for output tends to be excessive in relation on to the
supply of output, there is demand-pull or excess demand inflation.
5) Cost-push Inflation:
Prices increase due to increased demand as well as due to increase in the cost of
production. To cover the increased cost, prices are raised. Such inflation is called
cost-push inflation'. It is many times 'wage-push' or 'profit push inflation'.
Types: Based on Coverage

1) Comprehensive Inflation :
When the prices of all commodities rise throughout the economy it is known as
Comprehensive Inflation. Another name for comprehensive inflation is
Economy Wide Inflation.
2) Sporadic Inflation :
When prices of only few commodities in few regions (areas) rise, it is known as
Sporadic Inflation. It is sectional in nature. For example, rise in food prices due
to bad monsoon (winds bringing seasonal rains in India).
Types: Based on Government Reaction

1) Open Inflation :
When government does not attempt to restrict inflation, it is known as Open
Inflation. In a free market economy, where prices are allowed to take its own
course, open inflation occurs.
2) Suppressed Inflation :
When government prevents price rise through price controls, rationing, etc., it is

known as Suppressed Inflation. It is also referred as Repressed Inflation.

However, when government controls are removed, Suppressed inflation
becomes Open Inflation. Suppressed Inflation leads to corruption, black
marketing, artificial scarcity, etc.
Types: Based on Employment

1) Semi-Inflation :
Semi-inflation occurs, when the rise in prices is partly due to increase in cost of
production and partly due to increase in supply of money before the point of full
employment. The semi-inflation is also referred to as 'Bottleneck inflation'.
2) Full Inflation :
The type of inflation occurs after achievement of` full employment level by the
economy. Any increase in money supply beyond the point of full employment
level, will result in the rise of prices, as there is no increase in cost of production
due to the fact that all the factors of production have already been employed
fully.
Types: Based on Expectation

1) Anticipated Inflation :
If the rate of inflation corresponds to what the majority of people are expecting or
predicting, then is called Anticipated Inflation. It is also referred as Expected
Inflation.
2) Unanticipated Inflation :
If the rate of inflation corresponds to what the majority of people are not expecting
or predicting, then is called Unanticipated Inflation. It is also referred as Unexpected
Inflation.
Causes:

1) Increase in Money Supply :

Supply of money may increase
due to cheap money policy,
credit
created by the commercial
banks. Increased money supply
creates more demand for goods
and services, as there is more
purchasing power in the hands of
the people.
Causes:
2) Increase in Disposable Income of the People :
If certain taxes are cancelled or tax rates are lowered then people are left with
more disposable income. They demand more goods and services than before.
3) Increase in Public Expenditure :
If the volume of Government's expenditure increases due to increased defense
expenditure or developmental expenditure, then more money is injected in the
economy.
4) Increase in Private Expenditure :
If people spend more for various reasons like increase in income, increase in
employment, preference to present consumption than to savings then demand
for goods and services increases.
5) Repayment of Public Debt :
If the Government repays internal loans then the lenders to the Government i.e.
investors in the Government securities get their money back along with interest.

Repayment of public debt increases money in circulation, creating demand for

goods and services.
Causes:

6) Deficit Financing :
If the Government finances the deficit by way of issuing additional currency
and if it is beyond the safe limit, then deficit financing is inflationary.
7) Increase in Exports :
If foreign demand for domestic goods increases then there is shortage of the
same in the economy leading to price rise. Price rise caused by increased
exports is called export boom inflation.
8) Limited Resources :
Scarcity of capital equipment, skilled labour, essential raw materials or lack of
dynamic entrepreneurs proves to be constraint on production. Increased
demand and limited supply results into inflation.
9) Natural Calamities :
Drought, excessive rains, earthquake etc. adversely affect output and supply.
Scarcity of goods leads to price rise.
Causes:
10) Industrial Disputes :
Industrial disputes adversely affect production and supply.
11) Speculative Hoarding :
Speculative hoarding by the producers and traders in anticipations of further
rise in prices adds to scarcity of goods and price rise.
12) Changes in Import and Export :
Increase in exports and decrease in imports also adversely affect supply.
Imports
may decline due to war, government policy-Exports may be encouraged to earn
more foreign exchange and to correct the adverse balance of payment position.
Exports reduce internal supplies and make prices to risk.
Effects:

The economic effects of

inflation are all pervasive. It
affects all those who demand
on the market for their
income and supplies. The
effects may be low or high
depending on the rate of
inflation and favorable or
unfavorable. Effects of
Inflation are economic, social
and political. The economic
effects are as follows :
Effects:
1) Effects on Distribution of Income :
Inflation brings about redistribution of national income among the different
sections. It favors one section at the cost of the other. It causes inequitable and
arbitrary redistribution of income and wealth in society.
2) Effects on Distribution of Wealth
The effect of inflation on the net worth depends on how inflation affects the
money value of the price variable assets. If prices of all price variable assets
increase at the rate of inflation, then there will be no change in asset portfolio
and no change in wealth distribution.
3) Effects on Production :
As the people prefer to consume more during inflation, demand for goods
increases. Profit margin in the production of luxuries or non-essential
commodities is more so the producers divert the resources from the production
of essential commodities to non - essential. As a result, the volume of production
of essential commodities declines and that of non-essential commodities
increases.
 4) Fall in the Value of Money :
Effects:
With a rising price level, each unit currency will buy less. The purchasing power of

money falls. Households may not experience as much damage if their disposable
income rises with inflation.
5) Menu Costs :
These are the costs of changing prices due to inflation. Firms, such as restaurants
have to change their menus to match the change in inflation which costs time
and
increases labour costs.
6) Shoe-Leather Costs:
These are costs in terms of the extra time and effort involved in reducing money
holdings. Essentially, this involves moving money from the bank or from their
own
wallets into banks that offer the best interest rate following the change in
inflation.
7) Random Redistribution of Income:
In the interest rate; inflation can mean borrowers gain more money while lenders
Effects:
8) Fiscal Drag:
This is people's incomes being dragged into higher tax bands as a result of tax
brackets not being adjusted in line with inflation.
9) Uncertainty:
Consumers may be reluctant to buy products due to the uncertainty of its
relative
value. It is also makes it difficult to determine where to save and how much of it
to save.
10)Inflation Causing Inflation:
If people expect prices to rise, then they will consume more to avoid higher
costs.
This increases consumption and therefore aggregate demand and more inflation
arises.
11) Loss of International Competitiveness:
If inflation is above that of foreign competitors, prices of domestic products
become fewer prices competitive. Fewer exports are sold and more imports are
purchased.
Measures to control Inflation:

the root cause of inflation is the excess of

aggregate demand in relation to the
aggregate supply, control of inflation
should involve monetary and fiscal steps
aiming at reducing the level of aggregate
demand so as to equate it with the output
in the economy. Measures have to be taken
on several fronts, monetary and non-
monetary. The anti-inflationary measures
can be classified as under:
 A) Monetary Measures :
Measures to control Inflation:
The monetarists argue that inflation is a monetary phenomenon so the measures

to control it should be monetary. Aggregate spending should be reduced.

Demand-pull inflation can be controlled by adopting suitable measures ranging
from demonetization to credit rationing.
1) Increasing Bank Rate :
Borrowing tendency of the public can be controlled by central bank by
increasing Bank Rate which leads to an increase in the interest rate charged
by
commercial banks.
2) Sale of Government Securities :
By selling government securities in the open market, the central bank reduces

the money supply. This will reduce the inflationary pressures in the economy.
3) Increase in Cash Reserve Ratio :
If the cash reserve ratio increases by the central bank, the amount available
to
be advanced by commercial banks will be reduced automatically.
Measures to control Infletion:
4) Increase in Liquidity Ratio :
An increase in the liquidity ratio by the central bank reduces the amount of
money available for lending to the public as advance. This leads to reduction
in
money supply.
5) Selective Credit Control:
The selective credit control measures can direct the flow of credit from
unproductive and inflation-prone sectors towards the productive and growth
oriented sectors. The main selective credit control measures to control
inflation are:
a) Consumer Credit Control:
This is a device which is generally adopted during inflation to curb excessive
spending by consumers. During inflation, loan facilities for installment
buying are reduced to minimum to check consumption spending.
b) Higher Margin Requirements:
Margin requirement is the difference between the market value of the security and
its maximum loan value.
Measures to control Inflation:
B) Fiscal Measures:
The fiscalists or the Keynesians are of the opinion that fiscal or budgetary
measures are a more powerful and effective weapon to control demand-pull
inflation, changing the volume of public expenditure, imposition of taxes and
public borrowing are the fiscal measures. The choice of fiscal measures for
controlling inflation depends on the causes of inflation.
1) Increase in Taxation :
Public income should be reduced by increasing the rates of taxes. With the
increase in taxation, lesser income will be available for expenditure which leads

to reduction in demand for goods and services.

2) Surplus Budget:
An important fiscal measure is to adopt anti-inflationary budgetary policy. For
this purpose, the government should give up deficit budget policy and it must
be replaced by surplus budget policy.
Measures to control Infletion:
3) Increase in Savings:
Another measure is to increase savings on the part of the people. This will
reduce the disposable income with the people which results in reduction in
personal consumption expenditure.
4) Reduction in Public Expenditure:
In order to establish prompt control over inflationary condition, the govt.
should adopt the policy of maximum reduction in government expenditures.
The government should reduce its unproductive expenditures to the
minimum compulsorily. This will reduce the deficit on the one side and on the

other side supply of money will fall.

5) Public Borrowing:
Public borrowing is another measure of controlling inflation. Through public
borrowing, the government can take away excess purchasing power from the
public. This will results in reduction of aggregate demand for goods and
services and hence the price level.
Measures to control Inflation:
C) Non-monetary Measures:
Monetary and fiscal measures work indirectly and often prove ineffective in
controlling inflation. Therefore the governments resort to direct measures to
control inflation. Direct measures consist mainly of price and wage controls.
1) Price Control:
Price control as a measure is adopted during the war time as well as peace
time
Price control may be partial or general. The primary objective is to prevent the
price rise of scarce goods and to ration the use of the commodity.
2) Wage Control:
Wage control is used to combat inflation when wages tend to rise much faster
than the productivity; Government imposes a ceiling on the wage incomes in
private and public sectors. A more strong method is 'wage-freeze' but it is a
politically sensitive issue. Wage control is a short term measure.
Measures to control Inflation:
D) Other Measures:
Besides monetary and fiscal measures, there are some other measures which can

be taken to control inflation:

1) Increase in Production:
The best method of controlling inflation is increasing the production of
essential consumer goods like food, clothing, kerosene, oil, sugar, vegetable
oils, etc. to the maximum. All possible efforts must be made to maximize both
the agricultural and industrial production, so that supply is increased and the
price level is reduced automatically.
2) Proper Ways Policy:
In order to control inflation, it is necessary to adopt proper ways and income
policy. Ceiling on ways and profits keep down disposable income and control
the cost-push inflation.
Measures to control Inflation:

3) Rationing:
Rationing aims at distributing scarce essential consumer goods such as
wheat, rice, sugar, kerosene oil, etc. to a large number of consumers.
4) Overvaluation:
Overvaluation of home currency in terms of foreign currencies also serves to
control inflation.
5) Population Control:
Population control measures to check the growth of population also produce
anti-inflationary effects.
Meaning:
Deflation is the reduction of prices of goods, and although deflation may seem like
a good thing when you're standing at the checkout counter, it's not. Rather,
deflation is an indication that economic conditions are deteriorating. Deflation is
usually associated with significant unemployment, which is only corrected after
wages drop considerably.
Concept:
The concept of deflation is opposite to inflation. It is also known as negative
inflation. During deflation the income level falls against the available supply of
goods and services. The stage of deflation arises when.
1) Prices are falling continuously
2) People prefer to hold money with them and do not keep goods.
3) The available supply of goods does not dispose off on the prevailing prices.
4) People expect more reduction in prices thus reduce their consumption to bring
prices down.
Causes:

There are many reasons why deflation

may take place, the following causes
seem to play the largest roles:
Causes:
1) Fall in Demand for Goods and Services :
When the aggregate demand is less than the available supply of goods, then
there is deflationary gap and so excessive supply causes fall in prices. When the
demand for goods is not fully elastic to supply then there is rise of deflation.
2) Over Production :
When there is far more production than the increase in money incomes of
factors of production, the demand for goods, goes an declining leading to fall in
prices, excessively. This leads to deflation.
3) Fall in General Level of Prices :
When prices fall steadily over a long period of several years, there is sustained
deflation which is associated with depression.
4) No Full Employment :
When the aggregate demand is insufficient to create full employment,
deflationary gap comes into existence. It leads to fall in output, prices and
employment.
Causes:
5) Low Level of Economic Activities :
When the demand for goods declines, prices fall. The business community is not
willing to undertake investment and production. All productive activities reach
low
level.
6) Pessimism in the Business World :
Fall in prices adversely affect the profits and profitability. The businessmen are
not optimistic about future. They try to increase the sale by lowering the prices,
even then there is no response from the market. Supply exceeds demand.
7) Contraction of Bank Credit :
Banks face problem in getting their loans back when there is economic
slowdown.
They ask for their loans back but the borrowers are not able to repay. This
adversely affects the lending activity. People prefer to hold cash than spending.
8) Decrease in Currency Supply:
As the currency supply decreases, prices will decrease so that people can afford
goods.
Causes:
9) Change in Structure of Capital Markets:
When many different companies are selling the same goods or services, they will
typically lower their prices as a means to compete. Often, the capital structure of
the economy will change and companies will have easier access to debt and
equity markets, which they can use to fund new businesses or improve
productivity.
10)Deflationary Spiral:
Once deflation has shown its ugly head, it can be very difficult to get the
economy
under control for a number of reasons. Firstly, when a consumer starts to cut
their spending, business profits decrease. Unfortunately, this means that
businesses have to reduce wages and cut their own purchases.
Effects of Deflation:

Deflation can be
compared to a terrible
winter: The damage
can be intense and be
experienced for many
seasons afterwards.
Unfortunately, some
nations never fully
recover from the
damage caused by
deflation. Deflation
may have any of the
following impacts on
an economy:
Effects of Deflation:
1) Effect on Production :
Deflation takes the economy to depression. Fall in prices bring about fall in
investment, production, employment and income. Cost of production does not
decline immediately with fall in prices. So the losses increase.
2) Effect on Distribution of National Income :
Deflation brings about changes in the distribution of national income. The share
of primary sectors in the national income declines. Fixed income earners gain as
their real income of money income increases with fall in prices.
3) Distortions in the Price Structure :
The price mechanism gets disturbed due to deflation. Correlation between
prices
of raw material and finished goods is distorted.
4) Increased Pessimism :
As the demand and profits decline, pessimism in the economy increases.
Liquidity preference of the people increases. Banks suffer losses as there is no
demand for loans. Factories get closed down.
Effects of Deflation:
5) Reduced Business Revenues:
Businesses must significantly reduce the prices of their products in order to stay
competitive. Obviously, as they reduce their prices, their revenues start to drop.
Business revenues frequently fall and recover, but deflationary cycles tend to
repeat themselves multiple times.
6) Wage Cutbacks and Layoffs:
When revenues start to drop, companies need to find ways to reduce their
expenses to meet their bottom line. They can make these cuts by reducing
wages
and cutting positions.
7) Changes in Customer Spending
When the economy undergoes a period of deflation, customers often take
advantage of the substantially lower prices. Initially, consumer spending may
increase greatly; however, once businesses start looking for ways to bolster their

bottom line,
Effects of Deflation:
8) Reduced Stake in Investments:
When the economy goes through a series of deflation, investors tend to view
cash as one of their best possible investments. Investors will watch their money
grow simply by holding onto it.
9) Reduced Credit:
When deflation rears its head, financial lenders quickly start to pull the plugs on
many of their lending operations for a variety of reasons. First of all, as assets
such as houses decline in value, customers cannot back their debt with the same

collateral. In the event a borrower is unable to make their debt obligations, the
lenders will be unable to recover their full investment through foreclosures or
property seizures.
Measures of Deflation:
The various measures taken by
government to increase consumption
and investment expenditures in the
economy are:

1) Reduction in Taxation:
The government should reduce
the number and burden of
various taxes levied on
commodities. This will increase
the purchasing power of the
people.
Measures of Deflation:
1) Redistribution of Income:
Marginal propensity to consume can be raised by a redistribution of income and
wealth from the rich to the poor. Since the marginal propensity to consume of
the poor is high and that of the rich is low, such a measure will help increasing
the aggregate demand in the economy.
2) Repayment of Public Debt:
During deflation period, the government can repay the old public debts. This will

increase the purchasing power of the people and push up effective demand.
3) Subsidies:
The government should give subsidies to induce the businessmen to increase
investment.
4) Repayment of Public Debt:
During deflation period, the government can repay the old public debts. This will

increase the purchasing power of the people and push up effective demand.
Measures of Deflation:
5) Public Works Programme:
The government should also directly undertake public works programme and
thus increase expenditure in public sector. Care should, however, be taken that
the public works policy of the government does not adversely affect investment
in the private sector.
6) Deficit Financing:
In order to have significant expansionary effects, the government's public works
schemes should be financed by the method of deficit financing, i.e.,, by printing
new money. The government should adopt a budgetary deficit and cover this
deficit through deficit financing.
7) Reduction in Interest Rate:
By adopting a cheap money policy, the monetary authority of a country reduced
the interest rate, which stimulates investment and thereby expands economic
activity in the economy.
Measures of Deflation:
8) Credit Expansion:
The central bank and the commercial banks should adopt a policy of credit
expansion to promote business and industry in the country. Bank credit should
be made easily available to the entrepreneurs for productive purposes.
9) Foreign Trade Policy:
To control deflation, the government should adopt such a foreign trade policy
that, on the one hand, increases exports, and, on the other hand, reduces
imports. This kind of policy will go a long way in solving the problem of
overproduction, and help overcoming deflation.
10) Regulation of Production:
Production in the economy should be regulated in such a way that the problem
of over-production does not arise. Attempts should be made to adjust
production with the existing demand to avoid over-production.