a) Explain what is meant by inflation and deflation, clearly distinguish

between them.

Introduction

Inflation is commonly understood as a situation of substantial and rapid general increase in the level of prices and consequent deterioration in the value of money over a period of time. Different economists have defined inflation differently. We may, thus, enlist a few important definitions as under which would give us a comprehensive idea about this intricate problem. Harry Johnson defines inflation as a sustained rise in prices. Crowther, similarly, defines inflation as “a state in which the value of money is falling, i.e., prices are rising”.

Deflation is just the opposite of inflation. It is essentially a matter of falling prices. Deflation, according to Prof. Paul Einzig, “is a state of disequilibrium in which a contraction of purchasing power tends to cause, or is the effect of, a declining of the price level”. Deflation is the sate of falling prices when the output of work by productive agents increases relatively to money income. Deflation arises when the total expenditure of the community is not equal to the value of output at existing prices. Consequently, the value of money goes up, and prices fall. In short, deflation is a condition of falling prices, accompanied by a decreasing level of employment, output and income.

Inflation versus Deflation

Both Inflation and Deflation are socially bad, but inflation may be considered to be the lesser of the two evils. Inflation is unjust in its effects on the following counts:

1. Inflation redistributes income in the favour of the rich and the profiteer class at the cost of the poor masses – the wage-earners and consumers.

2. Through its redistributive effects, inflation increases the inequality of income in the community by widening the gulf between higher income groups and lower income groups. The rich become richer and the poor become poorer during inflation.

3. Inflation is regressive in effect in the sense that it hits hard those who are already weak and cannot protect themselves. It is specially the middle class which suffers most due to inflation.

4. Inflation is unjust because it affects different classes of people in society in different ways and different degrees .if inflation were to affect everyone in the society in exactly the same manner and to the same degree, it would not alter the economic and social relationships in the community. But inflation takes away wealth from some people and transfers to others arbitrarily without taking into consideration the sound maxim of social equity.

5. Inflation is also unjust because it breaks public morale. From the point of view of social ethics, inflation is always demoralizing; it introduces the spirit of gambling. It promotes speculation, hoarding, and diverts business skill and efficiency from productive purposes to speculative purposes.