Deflation

Deflation is defined as a persistent fall in the general price level of goods and services in the economy - in other words, the inflation rate is negative, for example, –3%.

It results in a rise in the value of money, with each currency unit having greater purchasing power.

Good deflation occurs as a result of an increase in aggregate supply and will have a positive impact on the economy.

Good deflation occurs when workers and companies become more productive and learn to make things at a lower cost.

Advances in technology, for instance, may create new methods of production and lower costs of production.

This drives down the general price level of goods and services while increasing national income.

As well as output increasing, employment may rise and the international competitiveness of the country’s products may increase.

The aggregate supply curve shifts from AS to AS1 pushing down from P to P1. Real GDP increases from Y to Y1.