Deflation refers to an economic condition in which various goods and services prices keep going down. This situation arises because there are more products in the market than the actual demand of the people.
Deflation also takes place when the purchasing power of the familiar people reduces. Which in turn affects the domestic economy adversely? This phenomenon is known as the effect of deflation (ผล กระทบ ของ ภาวะ เงินฝืด, which is the term in Thai). Let us look at the other factors that contribute to the effect of deflation in an economy.
In some circumstances, it has been found that due to a lack of appropriate monetary policies, that state or the country has landed severe economic crises. Sometimes the government increases the interest rate without considering its economic impact.
The growth in the population and the downfall of the economic scenario are more likely to go up. In simple words, if people become jobless daily, it is more likely that entrepreneurs will be able to sell fewer products or services because the purchasing power of the people will decrease if the unemployment rate keeps increasing.
Less Number Of Entrepreneurs
As mentioned earlier, due to the hike in unemployment, entrepreneurs are more likely to suffer losses. To survive, new start-up entrepreneurs will have to reduce the cost of the products or services. They will have to reduce their production costs to reduce the price of the products.
In House Economic Policy
Well formulated monetary policies can help a domestic economic system come out of deflation. As mentioned earlier, a country or a state suffers from an economic crisis. As a result, the economy becomes stagnant.
Sometimes the rapid technological advancement may lead to increased production of goods and services, which ultimately leads to excessive supply. Hence technologically advanced companies are more likely to produce more goods than the actual demand in the market. Thus the prices are also likely to go down, ultimately leading to losses.
Lower Production Costs
To cope with the downfall of demand in the market and keep up with the big competitors, small businesses tend to cut down on their production costs to sustain themselves in the market. Which ultimately leads them to incur heavy losses and less gross profit?
This is a condition where a decrease in the prices of goods and services leads to a chain of reactions that ultimately lead to a business establishment’s downfall. This phenomenon also leads to mass layoffs, decreased demand, lower profit margins, and lower production rates. Hence the deflection spiral is a dangerous situation that accelerates the downfall of an economy.