[HurricaneDominic]

There isn't much in the AQA A Level textbook on Deflation, neither is there online, or at least there's not just 1 page that tells the topic to you straight.
I know the basic pros and cons of deflation but would not feel comfortable with a question, especially a 25 mark question, in the exam next week.

Any help is greatly appreciated! Good luck to anyone taking the exam!

Cheers

[HurricaneDominic]

I've already found this on tutor2u:

Possible Economic Costs of Deflation:

1.Holding back on spending: Consumers may opt to postpone consumption if they expect prices to fall further in the future

2.Debts increase: The real value of household, corporate and government debt rises when the price level is falling – another factor that might cause people to cut back on their spending

3.The real cost of borrowing increases: Real interest rates will rise if nominal rates of interest do not fall in line with prices – another factor driving spending lower

4.Lower profit margins: Company profit margins come under pressure unless costs fall further than final prices to consumers – this can lead to higher unemployment as firms seek to reduce their costs. Weaker profit margins can also have a negative effect on stock markets because of a fall in expected profits and dividends to shareholders

5.Confidence and saving: Falling asset prices such as price deflation in the housing market hit personal sector financial wealth and confidence – leading to further declines in AD and a rise in precautionary savings (the average and marginal propensity to save will tend to rise)


What about the advantages though?

[sweetascandy]

(Original post by HurricaneDominic)
I've already found this on tutor2u:

What about the advantages though?

Low prices for all
This means that low income earners will be able to afford essential items, so they'll be escaping the poverty bracket.
Also, because prices are low, workers may behave rationally and accept wage cuts, decreasing the costs of production for UK firms.
Thats all I can think of from the top of my head.

[HurricaneDominic]

(Original post by sweetascandy)
Low prices for all
This means that low income earners will be able to afford essential items, so they'll be escaping the poverty bracket.
Also, because prices are low, workers may behave rationally and accept wage cuts, decreasing the costs of production for UK firms.
Thats all I can think of from the top of my head.

Thanks.
So that means lower prices will make the UK more competitive internationally and we should see an improvement in the UK's Balance of Payments on Current Account?

[sweetascandy]

(Original post by HurricaneDominic)
Thanks.
So that means lower prices will make the UK more competitive internationally and we should see an improvement in the UK's Balance of Payments on Current Account?

Exactly
Although it can generate uncertainty when it comes to foreign direct investment, but hey, thats another drawback!

[HurricaneDominic]

(Original post by sweetascandy)
Exactly
Although it can generate uncertainty when it comes to foreign direct investment, but hey, thats another drawback!

Cheers

Any more information from anyone would be helpful!

[theonefrombrum]

(Original post by HurricaneDominic)
I've already found this on tutor2u:

Possible Economic Costs of Deflation:

1.Holding back on spending: Consumers may opt to postpone consumption if they expect prices to fall further in the future

2.Debts increase: The real value of household, corporate and government debt rises when the price level is falling – another factor that might cause people to cut back on their spending

3.The real cost of borrowing increases: Real interest rates will rise if nominal rates of interest do not fall in line with prices – another factor driving spending lower

4.Lower profit margins: Company profit margins come under pressure unless costs fall further than final prices to consumers – this can lead to higher unemployment as firms seek to reduce their costs. Weaker profit margins can also have a negative effect on stock markets because of a fall in expected profits and dividends to shareholders

5.Confidence and saving: Falling asset prices such as price deflation in the housing market hit personal sector financial wealth and confidence – leading to further declines in AD and a rise in precautionary savings (the average and marginal propensity to save will tend to rise)


What about the advantages though?

Number one sounds like one of the most ridiculous things that i've ever heard. Who honestly looks at something that is cheaper that it once was and takes a chance and says 'you never know Bob, it might get even cheaper so i wont buy it'

If something's cheaper, consumers tend to snap it up as soon as possible, fearing a return to inflation, they don't put it off because it could get even cheaper still.

[sweetascandy]

(Original post by theonefrombrum)
Number one sounds like one of the most ridiculous things that i've ever heard. Who honestly looks at something that is cheaper that it once was and takes a chance and says 'you never know Bob, it might get even cheaper so i wont buy it'

If something's cheaper, consumers tend to snap it up as soon as possible, fearing a return to inflation, they don't put it off because it could get even cheaper still.

Not really, if they see prices falling, speculation tells them that the prices will continue to fall; hence they hold back their purchases. This is like one of the very few things in economics that makes sense

[theonefrombrum]

(Original post by sweetascandy)
Not really, if they see prices falling, speculation tells them that the prices will continue to fall; hence they hold back their purchases. This is like one of the very few things in economics that makes sense

Lo maybe but speaking from personal experience about myself and people that i know, if we see that something is cheaper than it once was and we like it, we snap it up.

It would just be funnily ironic if someone saw that the TV he's after had reduced in price, he said 'i'll come back in a week, it's bound to be even cheaper!' and he goes back to find that the economy was playing a joke on those who rely on it and his prized TV is more expensive than it ever was.