Inflation Deflation Comparison Assignment Help | Inflation Deflation Comparison Homework Help


It seems as if inflation and deflation are exact opposite and symmetrical. In fact, it is not so. Inflation is rise in prices not accompanied by increase in employment, while deflation is fall in prices accompanied by rising unemployment.

Inflation deprives the consumers of their purchasing power due to fall in the value of money. Even if their wages and salaries move up, the real income goes down. Further, inflation distorts the distribution of income between different economic groups in such an unjust manner that the rich gains at the expense of the poor. As inflation continues, rich become richer and poor become poorer. Thus, inflation creates, perpetuates and sustains in-equalities through its redistributive effect. It penalizes those who save money out of their hard earned income and rewards those who spend, since the real worth of savings goes down, whereas the value of goods rises. The business men, producers, farmers, debtors, etc., prosper at the cost of consumers, fixed income earners and creditors. Consequently, the rich roll in wealth and indulge in conspicuous consumption, the poor become impoverished living in abject misery and poverty. By widening the gulf between the rich and the poor, inflation creates discontentment among the masses. Pressed by the rising cost of living, workers resort to strikes leading to loss in production. Lured by profit, businessmen resort to hoarding, speculation, black marketing, adulteration, producing substandard goods, etc. Corruption spreads in every walk of life reducing the efficiency of the economy. Agitations and protest by the political parties and social organizations may be the result of this socially harmful inflationary situation.

Deflation may give immediate benefits to the consumers, fixed income earners and creditors, but ultimately it reduces national income through contraction of output and employment. This is simple to understand. Consequent upon the fall in price level, the producers start curtailing their investment expenditure due to reduced profit margins. The production activities come to near stand still. Employers resort to lay off and retrenchment of workers. Unemployment of workers results in misery, grief and hunger all round. Of all the evils in a capitalist society, unemployment leading to poverty is the worst. What could be worse that goods lie unsold, but, consumers go without them due to  inadequate purchasing power.

Inflation, particularly the hyper inflation of the German type, endangers the very foundation of the existing social and economic system. It may cause frustration, distrust, discontent and injustice that may force people to revolt against the government. It becomes demoralizing by inducing the spirit of gambling. It is, thus, economically unsound, politically dangerous and morally unjust.  Deflation, on the other hand inflicts the hard punishment of general unemployment. Millions of families are literally thrown into the streets to make their living through begging, robbery, murders, etc. The whole system remains idle in spite of the existence of the factories and workers ready to work. Further, deflation is inexpedient in the sense that once it starts, gets momentum day by day and the economy plunges into a depression. This downward movement of the economy is much faster than the upward movement.

There is nothing to choose between inflation and deflation. Both create instabilities of the worst kind. however, if the choice is limited to these two phenomena, inflation is to be preferred. It is a lesser evil. While inflation takes away half the bread of the poor, deflation impoverishes them by taking away the whole of it. Keynes was right in saying “ Inflation is unjust and deflation is in-expedient, of the two deflation is worse.

Inflation creates income, which may not be equally distributed among different sections of the society. But, the total real income of the community generally remains the same. Deflation  leads to an almost equal distribution of poverty, in which all the economic groups suffer ultimately. Further, inflation can be controlled to a great extent through monetary and fiscal measures. Only occasionally, it gets out of control and that too on account of unscrupulous currency expansion by the poor government. The government is in a better position to improve the conditions of the masses under inflation than under deflation due to its larger spending capacity. However, deflation once started, injects so much pessimism in the economy that it becomes almost impossible to control. Thus, the objective should aim at economic stabilization at the full  employment level.

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