Deflation is reduction in the level of national income and output, usually accompanied by a fall in the general price level.

Deflation is opposite of inflation.A decrease in the personal investment and spending of the government can also lead to deflation. As a result of deflation, the economy can witness increased unemployment as the demand for goods and services in the economy falls.

Causes of Deflation

• Decrease in Money supply
• Increase in goods supply
• Fall in Demand

Nature of Deflation: Deflation is viewed as a continuous process of decrease in some of the normally-followed collective indicator of price movements, like the GDP deflator or the Consumer Price Index (CPI). In general cases, a one-time reduction in the price levels does not necessarily hints at the initiation of Deflation. In fact, for Deflation to affect an economy, there must be a persistent fall in the prices for more than a year's time.

Effects of Deflation: Under Deflation, when the price fall persists, it normally creates a spiral of negative attributes comprising accelerative defaults on loan, reduction in incomes and increase in unemployments, downturn of profits and closing down of factories and manufacturing units.