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With the aid of diagrams, illustrate the causes if inflation and deflation, and by comparing their economic effects consider how both can effect the corporate sector

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Introduction

With the aid of diagrams, illustrate the causes if inflation and deflation, and by comparing their economic effects consider how both can effect the corporate sector This essay will aim to cover the causes of inflation and deflation and see how their economic effects influence the corporate sector. By first defining any key terms, then looking at the causes of inflation and deflation, looking at their different effects on the economy and in turn analysing how those effects shape the corporate sector. Before this can be done the terms 'inflation', 'deflation' and 'corporate sector' must first be defined. 'Inflation is a rise in the average price of goods over time'. (Begg, D., Fischer, S. and Dorndusch, R., 2000, p462) and 'The most usual measure is that of retail prices' (Sloman, J. and Sutcliffe, M., 2001, P533) (this information being gathered from the retail price index [RPI]) and 'A rise in inflation means a faster increase in prices...fall in inflation means a lower rise in prices' (Sloman, J. and Sutcliffe, M., 2001, p533). To illustrate the importance of inflation 'The COS (Central Statistical Office) says it gets more queries from the public about the RPI than any other statistic, a refection of the influence inflation has on every ones life.' (Vaitilingam, R., 1994, p132). Now deflation must be defined. ...read more.

Middle

Firstly high inflation 'redistributes wealth to those with assets (e.g. property) ... and away from those with savings that pay rates of interest below the rate of inflation and hence who's value is eroded by inflation' (Sloman, J. and Sutcliffe, M., 2001, p534). This may include people on fixed pensions. Atkinson, B. and Miller, R., (1998 p384) show redistribution also effects 'creditors , those who are owed money, will also suffer, since when they are paid back, the value of money will be worth less, while debtors, those who owe money, will benefit.' So 'Firms can also borrow more for investment as real value of debt decreases' (Atkinson, B. and Miller, R., 1998, p386). This will be a benefit to firms to wishing to borrow money but bad for those who offer long term credit options on their products. Secondly 'inflation tends to cause uncertainty and firms may be reluctant to plan ahead and take long term decisions regarding investment as they are unable to predict future costs and revenues.' (Atkinson, B. and Miller, R., 1998, p384) 'This will reduce the rate of economic growth.' (Sloman, J. and Sutcliffe, M., 2001, p534). So the corporate sector will suffer from poor planning and low investment. Furthermore 'inflation is likely to worsen the balance of payments...its exports will become relatively less competitive in the world markets. ...read more.

Conclusion

So in conclusion low inflation can be beneficial to the corporate sector but higher inflation can have many negative affects but 'It is generally better to have mild inflation than deflation. Deflation...can create a potentially dangerous situation, as occurred during the depression of the 1930's.' (Atkinson, B. and Miller, R., 1998, p386). Biblography Anon, 1998, Collins Gem - English dictionary (Nineteenth Edition), HarperCollins Publishing, Glasgow Atkinson, B. and Miller, R., 1998, Business economics, Pearson Education Limited, Essex Begg, D., Fischer, S. and Dorndusch, R., 2000, Economics (Sixth Edition), McGraw-Hill Publishing Company, Berkshire. Begg, D. and Ward, D., 2004, Economics for business, McGraw-Hill Education, Berkshire Brooks, D. H. and Quisingp P., F., 2002, Dangers of Deflation, [online], Available from: http://adb.org/Documents/EDRC/Policy_Briefs/PB012.pdf [access 8th March 2006] Griffiths, A. and Wall, S., 2004, Applied economics (Tenth Edition), Pearson Education, London Kai, V., W., 2004, The Causes and Effects of Deflation in Macao, [online], Available from: http://www.amcm.gov.mo/publication/quarterly/Jul2004/causes_en.pdf [access 8th March 2006] McAleese, D., 2004, Economics for business - competition, macro-stability and globalisation, (3rd Edition), Prentice Hall Europe, London Oxford University Press, 2006, Corporate, [online], Available from: http://www.askoxford.com/concise_oed/corporate?view=uk [Accessed 8th March 2006] Parkin, Powell and Matthews, 2005, Economics (Sixth Edition), Pearson Education Limited, Essex Sloman, J. and Sutcliffe, M., 2001, Economics for business (Second Edition), Prentice Hall, London Vaitilingam, R., 1994, The financial times guide to using economics and economic indicators, Pitman Publishing, London Wikipedia contributors, 2006, Deflation (economics), [online]. Available from: http://en.wikipedia.org/w/index.php?title=Deflation_(economics)&oldid=42742256 [accessed 8th March, 2006] Wikipedia contributors, 2006, Inflation [online] Available from: http://en.wikipedia.org/wiki/Inflation [Accessed 22nd February 2006] ...read more.

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