In short, deflation is a continuous decline in prices. In the United States, is determined primarily by two economic indicators, consumer prices (CPI) and the GDP deflator. The CPI reports on trends in average prices paid by consumers of goods over a period of time.

The GDP deflator measures changes in prices of goods produced in one country by comparing the GDP of a country (GDP) at some point of GDP to a previous state. When the fall in prices persist for more than a year, said the global economy is deflationary.

The most common trigger of deflation are reduced credit availability and lower costs. These cases are different, but similar. For example, the availability of credit can lead to a reduction in expenditure has decreased. This was during the credit crisis of 2008. Businesses and individuals have not been able to borrow money, thereby reducing costs and, by extension, the lower the global economy.

Deflation has different signs. An early sign of an economy may suffer a deflation reduces demand for goods and services. When companies begin to have the highest amount of stock can not sell, economic growth could be slower. A second sign of deflation is an increase in unemployment. As companies begin to lose money, often have reduced its workforce to reduce costs.

A marked increase in debt is a third sign of deflation. As unemployment rises, consumers are forced to borrow money to survive. Due to financial difficulties, which are often unable to pay its debts on time, making the amount of debt and the amount of time that the debt continues to rise. Low return on investment may also indicate a period of deflation. As companies report lower earnings, lower stock prices and investors see less return on their farms.

Deflation can have a dramatic effect on the economy of a nation. For most consumers, the sound, the lowest price, as good. However, the danger comes from the effects of long-term lower prices for the overall health of an economy. Lower prices mean less profit for companies less profitable businesses mean more unemployment and rising unemployment means less income for individuals and families. Deflation, if not controlled, can lead to a recession and, in extreme cases, depression.

In this scenario takes place during the Great Depression of 1929. As prices fall, firms produce less and consumers spent less. Because deflation is not limited, a vicious circle begins. Company stopped taking because there was no hope of selling the products. Mass unemployment prevented consumers from being able to move, which further reduces the demand for products. The economies of the United States and in many other countries in a stalemate.

To avoid such a result, governments often seek to increase spending to reduce interest rates and initiatives. But if conditions continue to be more stringent, consumers tend to save rather than spend, because the economic recovery of a long and difficult process.

For more information on the basics of investment, see the articles on “the conditions for investment: Exchange-Traded Funds” and “terms of investment Agreement 2: Arbitration.”

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