Economic instability destroys the value of the currency. It's also caused by technology changes, such as more efficient computer chips. Why does Deflation matter? What can cause deflation? According to those with deflation-phobia, deflation is a disaster in part because it causes households to postpone their spending, leading to falling consumption and high unemployment. The Great Depression was regarded by some as a deflationary spiral. The inflation rate is typically measured on an Annual basis although it is reported monthly so you can also calculate monthly inflation. Deflation is the general fall in the price level. Deflation can also be caused by exchange rates. People revert back to a barter economy. For example, when Spain initiated austerity measures in 2010, preexisting deflation began to spiral out of control in that country. During the Great Depression, unemployment reached 25%, and although the output of high production industries such as mining and farming was high, workers were not compensated according to their labor. Still, examples of deflation accompanied by economic strength are rarer in modern industrialized economies. Deflation. In reality, the two are quite similar in both their concepts and how they are calculated. Fewer shoppers mean businesses have to lower prices, which can turn into a bidding war. For example, China keeps its currency's value low compared to the U.S. dollar. Deflation can be the result of decreased governmental, business, or consumer spending, which means government spending cuts can lead to periods of significant deflation. Prices are increasing, so the purchasing power of the currency is falling. An example of deflation is the Great Depression in the United States that followed the US stock market crash in 1929. Although many people laud lower across-the-board prices, prolonged periods of falling prices can wreak havoc on the economy by starting a downward economic spiral, resulting in fewer jobs, less income and a potential period of recession. However, in the short run, many factors can push the economy toward deflation. The World’s Most Famous Case of Deflation (Part 1 of 2) The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.. Let us take a look at the recent real-life examples. The same cannot be said, however, for its opposite, "deflation." A deflationary spiral is the modern macroeconomic version of the general glut controversy of the 19th century. Macroeconomists generally agree that, in the long run, inflation and deflation are monetary phenomena. Deflation is when prices are actually falling (Year over Year) so you would have a negative inflation rate. Another related idea is Irving Fisher's theory that excess debt can cause a continuing deflation. Continue reading Deflation Explained – Definition, Examples and Consequences → Many have heard of the economic term "inflation" and at least have a general understanding of its effect. The Great Depression was the most severe economic depression ever experienced by the Western world. Definition: Deflation is the contradictory of inflation which means that the prices or value of goods reduces. Which of the following is an example of deflation? Example. Another economic example of this situation in economics is the bank run. Japan is the only Western country that has experienced protracted deflation in recent decades. Someone owes more on a house than it is worth. 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