What is inflation and deflation? When inflation takes place?

Question

Please elaborate . Thanks !

Answer 1

We often use something like the consumer price index, or some adjusted version. It is a list of common items a normal person would likely buy (bread, milk, etc.). When the prices of those items rises, that is one indication of inflation. During the Great Depression (essentially the 1930's) there were two examples that were easily seen--the US and Germany. In the US there was deflation, prices substantially falling, while Germany had a bout of hyperinflation. As my grandfather used to say when we complained of prices rising, "I remember when bread was a nickel [five cents] a loaf--but who had a nickel?". Earnings were down, unemployment up, way up, there just weren't an awful lot of dollars running around looking for merchandise to be exchanged for, which in turn meant that there wasn't an awful lot of merchandise being sold, which meant that there were a lot of people unemployed, with no dollars to spend to buy what they need, etc. It is a cycle, and you might want to look up an economic expression called velocity of money that will help explain the situation. Meanwhile, Germany was having different problems, dealing with it in different ways. You may have heard of people talking about government 'printing more money' when they run short, well that is an exaggeration today, but exactly what Germany did. Their war reparations bills (for damages to the Allies during WWI) were coming due, so they just printed more money to satisfy them. With all that extra currency and too little national production to represent that value, the mark (their 'dollar') became worth less and less. There was a common observation that a bushel of marks wouldn't buy a loaf of bread. That is called hyper inflation.

Every economy goes through cycles and there are different causes or types of inflation. The inflation that Nixon faced was not quite the one that Carter faced and the other stuff in between had different features to it. But the center to the issue is, will the dollar (or whatever currency) buy as much now as sometime in the past. Relative to that, the dollar is worth more or less. Paradoxically, if the dollar is worth more than it used to, prices tend to go lower than they used to be, so a more valuable dollar MAY spur deflation. Similarly, if the dollar is worth less than it used to be, prices will go higher to reflect that loss of worth, so a less valuable dollar MAY represent inflation. It gets a little more involved, but I gave you my two-points worth.

Answer 2

Both terms referrers to the relative value of money, or the purchasing power of money. Inflation takes place when money are losing their purchasing power. Or when prices goes up measured in money. Deflation is the opposite. One way you might understand it is, and this is not intended as blasphemy, if Jesus came back to Jerusalem right now, he could purchase a home there for almost exactly the same amount of gold as when he was there last. Gold, in other words, has kept it's relative purchasing power, but due to inflation, the same is not true for money.

Hope that helps?

Answer 3

Inflation is general increase in prices. It is measured by tracking prices for a basket of goods and services. The basket is made of most everyday items that we buy, like milk, eggs, chicken, etc. The basket should ideally be representative of all goods and services in the economy, thus the basket of goods studied by the economists usually contain a wide variety of goods and services. When the prices of these items generally increase, the inflation is present. Deflation is the opposite of inflation, obviously.

Answer 4

Inflation is when a car used to cost $1,000.00 USD back in the 70s and today it costs $10,000.00 USD.

Deflation is when a car used to cost $19,999.00 USD back in 2006 and it will cost $4,999.00 USD in 2009