Effects of deflation
The price effects of deflation become
visible in the economic effects of deflation and commodities.
When the volume of money and credit rises
relative to the volume of goods available – which
is the definition
of inflation – the relative value of each unit
of money falls. This makes prices for goods generally
rise. When the volume of money and credit falls relative
to the volume of goods available – which is also the
deflation definition – the relative
value of each unit of money rises, making prices of
goods generally fall. Though many people find this
concept difficult, the proper way to understand these
changes is that it's the value of units of money,
which rise and fall, not the value of goods.
The most common misunderstanding about inflation
vs. deflation – echoed even by some renowned economists
– is that inflation is rising prices and deflation
is falling prices. In truth, general price changes
are simply the effects of deflation and inflation.
The price effects of inflation can occur in goods,
which most people recognize as subject to inflation,
or in investment assets, which people do not generally
recognize as subject to inflation.
The price effects of deflation are simpler. They
tend to occur across the board, in goods and investment
assets simultaneously.
For more on deflation, Download Robert Prechter's FREE 60-page eBook, The Guide to Understanding Deflation.
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