Tuesday, December 22, 2009

Evils of Inflation and deflation

Let me explain the concept of Inflation and deflation in a simple manner. Inflation and deflation are the terms used to describe the state of a Economy.
Inflation is the word used during price rise of essential commodities. Inflation is nothing but, too much of money chasing too little goods. To put it simply, if there is too much of paper money and less quantity of goods are produced, then too much of paper money would chase too little goods which would automatically increase the price of the commodity.
Inflation occurs when there is more paper money and less end products. There is imbalance between the money printed and the goods produced during inflation. Inflation can be controlled by controlling the printed paper money or producing more of the goods.
The term deflation is used opposite to Inflation. Deflation is a period when too little money chases too many goods. Because of this, the price of the commodities starts falling which will put the producers to get a price lower than their production cost. This is also evil to the economy.

So continous fall or rise of prices would be seen as evil for the economy. Inflation and deflation can be controlled by the Government by increasing or decreasing the Interest rates or by controlling the printing of Currencies.