Macroeconomics The Normal Price of the Goods & Services

Question: Describe an economic scenario, where the normal price of the goods services use to get decrease constantly over a certain period of time. Answer: Definition of Deflation:- According to the economists, deflation can be described as an economic scenario, where the normal price of the goods services use to get decrease constantly over a certain period of time. It is the opposite economic condition of inflation. During deflation, the real value of the money or the currency value of the country goes higher, which allow the people to purchase more products or services with a certain amount of money in comparison to the previous periods (Selgin, 2015). Deflation in Australia:- Reasons for Deflation in Australia:- The economists and researchers have analyzed various market scenarios very carefully to detect the actual reason for the deflation. As per the economists, the major factors, which use to control the value of money or currency are, Aggregate Demand Supply of Labor, Products Services, and Circulation of Money in the Market It has been observed that when the aggregate supply suddenly take a hike and the aggregate demand became lesser, the value of the money use to get down (Thirlwall, 2015). The following graph is presented to describe the situation:- Further, the aggregate demand supply and the circulation of money depend on various aspects of market. The aspects, which are responsible for the higher supply and lower demand in the Australian market and directly related to the deflation, are discussed in detail below:- Weak Demand:- Weak demand of the products and services are, mainly, developed due to decrease in the purchasing capability of the consumers, caused by the constant increase in the market price level. It may be also caused if the customers use to focus more on savings than consumption, due to various government policies. On the long run, such changes in the consumption pattern leads to the fall in aggregate demand of the products and services (Egle, 2015). Excessive Supply:- It is a very common trend of the market that whenever the supply of any product increases drastically, the producer uses decrease its price to increase the sales volume according to supply. If the producers producer use advanced technology greatly for additional production, then the income of labors, who are, directly or indirectly also the consumers of the products, do not change too much. In some cases, it may decrease also. In such condition, due of lack of extra income, the consumers cannot consume the excess supply and the producer have to cut the prices so that the consumers can buy it more with their unchanged income (Ball et al., 2015). Lower energy price:- Apart from the material and labor, the producers use to bear a huge amount for energy. Due to lower energy prices, the producers can consume more energy with the same amount of money, which they use to incur earlier for consuming lesser energy. Therefore, they can produce more units, which will ultimately lead to excessive supply. Flat wages:- Flat wages can create two types of consequences. If the market price level increase and the rate of wages remain constant, the labors cannot maintain the same consumption level as earlier. As discussed above, it causes lesser demand and excessive supply. It should be noted that all the reasons described above, are the consequences of subdued inflation. Therefore, it can be stated that the deflation, aroused in Australia, is the nothing but the aftermath of worldwide inflation and the control strategies applied for dealing with the inflation (Panic, 2015). Problems for Deflation:- The major economical problems, which Australia has to face due to deflation, are discussed below:- Reduction in Production:- As the supply of products and services rises at an abnormal rate, the volume of unsold products also increases drastically. It leads to decrease in the rate of profit. Due to lesser profits, the producers began to reduce the amount of production. Increase in Unemployment Rate:- When the volume of production declines, producers use to curtail in the labor quantity. It begins to increase the unemployment rate of the country. Fall in the Income Level:- If the total production level begins to decline, then the consumption level of raw material, energy and labors also follow the trend and the total income, generated from these items begins to fall down drastically over the period. Inequality in the Wealth Distribution:- Like the inflation, deflation also causes unequal distribution of wealth. As the value of currency use increase constantly, the creditors or moneylenders use to get more advantages and the debtors use to suffer losses. In the period of deflation, the earning groups, who use to earn at fixed income rates are the gainers and whose amount of income use varies from period to period use suffer the most (Korinek Mendoza,2013). Gross Domestic Product or GDP of a country is the total monetary amount of total products or services, produced in that country within a fiscal year. The aggregate supply and aggregate demand of products and services are one of the major factors, which use to control the amount of the GDP of a country. The production of any product or service use to change in the same proportion with the aggregate demand, where as it use change in a reverse ratio with the aggregate supply. During the deflation, due to the fall in price levels, the consumers use to consume more quantity of products but the amount of money, spend for the products, remains unchanged. Hence, the additional consumption cannot generate excess earnings. It implies that the aggregate demand of products only increases in terms of quantity not in terms of money. Moreover, when the profit margins of the producers begin to reduce due to excessive supply and lower price levels, they become unable to invest in productions more. Ins such scenario, though the quantity of consumption increases, the GDP do not increases accordingly, as because the GDP is ascertained on the value of the products. On the other hand, when the production decreases for the shortage of investments, the total production also goes down and cause drastic downfall in the GDP level (Fleckenstein et al.,2013). Health, education, insurance and other financial products belongs to the service sector. Unlike primary sector and secondary sector, the service sector use to affect the economy of a country indirectly. This sector provides support for developing proper infrastructure for the primary and secondary sectors. Therefore, initially, the service sectors do not get effected by any changes in the economy too much. But, it should be also noted that the products and services, required for the business operations in the service sectors use to be produced by the primary and secondary sectors. Therefore, if these two sectors get affected by the deflation, it would ultimately affect the service sector too. Moreover, when the currency price use to fall down nationally, various industries from service sectors also use to earn lesser profits. But, as some of the services, like health, education etc., are very essential for the consumers, the profit margins of these industries do not reduce at a very high rate. The service sectors use to acquire the smallest share in the total GDP. Therefore, the increase rate of this sector cannot save the GDP from the clutches of deflation. It can just slower down the falling rate of GDP. Moreover, if the deflation continues in the long run, the service sector will get affected by it and will begin to suffer from lower profit rates. Then it will amplify the reduction rate of GDP (Lavoie, 2014). Reference List:- Ball, R., Gerakos, J., Linnainmaa, J. T., Nikolaev, V. V. (2015). Deflating profitability.Journal of Financial Economics,117(2), 225-248. Egle, W. P. (2015).Economic Stabilization: Objective, Rules, and Mechanisms. Princeton University Press Fleckenstein, M., Longstaff, F. A., Lustig, H. (2013).Deflation risk(No. w19238). National Bureau of Economic Research Korinek, A., Mendoza, E. G. (2013).From sudden stops to fisherian deflation: Quantitative theory and policy implications(No. w19362). National Bureau of Economic Research Lavoie, M. (2014).Post-Keynesian Economics: New Foundations. Edward Elgar Publishing Panic, M. (2015).National Management of International Economy. Springer. Selgin, G. (2015). Synthetic commodity money.Journal of Financial Stability,17, 92-99 Thirlwall, A. P. (2015). Keynes, economic development and the developing countries. InEssays on Keynesian and Kaldorian Economics(pp. 149-177). Palgrave Macmillan UK.