Question

Hi my name is Elena. I’m a general contractor. I took over the family business when my Dad retired. This inflation has made my job a lot harder. The price of materials keeps going up and up. My employees and sub-contractors keep costing me more and more. I have to overbid on contracts so that I do not lose money. I win some contracts but lose out on others. On the other side with inflation being so high people are building now instead of investing their money, so my company has several big contracts that we are working on.    

How is your individual affected by deflation?

Answer 1

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Abstract

As we can see in this case Elena is working as General Contractor to run her Family Business and due to inflation rate which is very high she is unable to save the cost on building Materials by securing the perfect contracts.

She finally obtained some big contracts and started to working on it.

In following ways the individual will be affected by Deflation :

When the overall price level decreases so that inflation rate becomes negative, it is called deflation. It is the opposite of the often-encountered inflation.

A reduction in money supply or credit availability is the reason for deflation in most cases. Reduced investment spending by government or individuals may also lead to this situation. Deflation leads to a problem of increased unemployment due to slack in demand.

Central banks aim to keep the overall price level stable by avoiding situations of severe deflation.

They may infuse a higher money supply into the economy to counter- balance the deflationary impact. In most cases, a depression occurs when the supply of goods is more than that of money.

Deflation is different from disinflation as the latter implies decrease in the level of inflation whereas on the other hand deflation implies negative inflation.

1) Deflation Creates Higher Rates of Unemployment

When incomes decline and confidence is lowered, consumers decrease their spending. This creates another situation where companies are pushed to cut their prices in order to sell their products.

At the beginning of a deflationary period, there is a temporary silent situation when consumers' income remains steady while prices decline.

Eventually, these falling prices begin to have an impact on the health of companies. In response to falling revenue, companies are forced to cut pay and layoff workers.

This results in increased unemployment, incomes declining and consumer confidence decreasing.

2) Debt Increases Relative to Household Budgets

Despite decreases in incomes, debt loads and interest payments remain constant during periods of deflation. However, on a relative basis, debt and interest payments increase because they eat up a larger portion of household budgets.

Individuals who become unemployed may have a hard time finding new employment and may spend their savings in order to survive.

Many consumers are forced into bankruptcy during periods of deflation.

3) Deflationary Periods Are Dangerous for the Economy

Consumers on fixed incomes, and individuals who do not lose employment or have their pay cut, may be spared financial difficulties during deflationary periods.

However, a deflationary period is dangerous for a country's economy and even individuals who are spared economic hardships themselves will be living in an environment where businesses are closing and people in their community are economically displaced.

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