Difference Between Deflation and Recession

Deflation vs Recession
 

Deflation and recession are both terms that are used to describe scenarios in which an economy experiences lower demand, low productivity, low output, low investment, higher unemployment and lower household income. A country’s central bank reduces interest rates as a measure to counteract deflation and recession. Despite their similarities, there are a number of differences between these two concepts. The following article offers a clear explanation of the terms and shows the similarities and differences between deflation and recession.

What is Deflation?

Deflation occurs with a fall in the price level of goods and services. A deflation results in the prices of goods and services becoming cheaper to consumers. In terms of supply, during deflation, businesses and employers reduce investments, hire less people, and reduce production levels thereby reducing supply to match the current low demand. These can be detrimental to the economy as unemployment will increase, output will fall, incomes will reduce, and more people will face financial distress. A deflation, generally, occurs when companies experience high productivity levels (increasing levels of output) and low levels of money supply in the economy, which results in not sufficient funds to pay for the increased supply of goods. In order to counter deflation, the central bank increases the money supply in the economy by reducing the interest rates, and thereby encouraging firms to borrow and invest more.

What is a Recession?

Recession is when there is a significant decline in economic activity. A country is said to be in recession when they experience two quarters of economic decline or negative economic growth as a measure of the country’s GDP. A recession causes an overall negative effect on the country’s economic activity thereby affecting the country’s economic and financial wellbeing. A recession results in higher levels of unemployment, lower investment by firms, low income, and results in an overall reduction in the country’s levels of output and GDP. During a recession, the central bank reduces interest rates thereby encouraging individuals and corporations to borrow, invest and increase levels of output.

Recession vs Deflation

Deflation and recession are similar to one another in that they both result in a period of economic downturn. The outcomes of both deflation and recession are quite similar in that they both cause high levels of unemployment, reduction in investment, lower product output and thereby cause negative economic growth. In both situations, the central bank reduces interest rates to stimulate economic activity by increasing investment, spending and output. Despite these similarities, there are a number of differences between the two.

Deflation occurs when an economy experiences low price levels. It occurs as a result of low money supply in the economy where there are insufficient funds to create demand for goods and services to match the supply level. A recession occurs when an economy experiences continuously low economic growth as a measure of the country’s GDP. Recession can be caused by both inflation and deflation and can result in negative growth in economic activity.

What is the difference between Recession and Deflation?

• Deflation and recession are both terms that are used to describe scenarios in which an economy experiences lower demand, low productivity, low investment, low output, higher unemployment, and lower household income.

• Deflation occurs with a fall in the price level of goods and services.

• A country is said to be in recession when they experience two quarters of economic decline or negative economic growth as a measure of the country’s GDP.

• In both situations, the central bank reduces interest rates to stimulate economic activity by increasing investment, spending and output.

  • Neo Salivahana

    Totally clarified my confusion. Thank you author.