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Measuring the Rate of Deflation and its Impact

Question

Explain how the rate of deflation is measured and the impact of a period of deflation on an economy.

Category:

Macroeconomic Factors and Policies

Preview Answer


Step ➊ : Define ‘deflation’ in the introduction.


Deflation refers to a sustained fall in the price level. Deflation involves a negative inflation rate, for example, –3%. In this essay, we will explain how the rate of deflation is measured and the impact of a period of deflation on an economy.


Step ➋ : Explain how deflation can be measured.


Deflation can be measured using the consumer price index. Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

Changes in the CPI are used to assess price changes associated with the cost of living; the CPI is one of the most frequently used statistics for identifying periods of inflation or deflation, if the CPI figure is negative, this implies a deflation.


Step ➌ : Explain the impact of a period of deflation on the economy.

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