adminDeflation: 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.
Description: 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/inflation. 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.
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Depreciation: The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.
Description: Depreciation, i.e. a decrease in an asset’s value, may be caused by a number of other factors as well such as unfavourable market conditions, etc. Machinery, equipment, currency are some examples of assets that are likely to depreciate over a specific period of time. Opposite of depreciation is appreciation which is increase in the value of an asset over a period of time.
Accounting estimates the decrease in value using the information regarding the useful life of the asset. This is useful for estimation of property value for taxation purposes like property tax etc. For such assets like real estate, market and economic conditions are likely to be crucial such as in cases of economic downturn.
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Depression: Depression is defined as a severe and prolonged recession. A recession is a situation of declining economic activity. Declining economic activity is characterised by falling output and employment levels. Generally, when an economy continues to suffer recession for two or more quarters, it is called depression.
Description: The level of productivity in an economy falls significantly during a depression. Both the GDP (gross domestic product) and GNP (gross national product) show a negative growth along with greater business failures and unemployment.
When a recession continues to take its toll on any economy, the built in process triggers further cuts in investment as well as consumption spending due to loss of confidence among investors and consumers. Also, the financial crisis may lead to decreased availability for credit.
Excessive fluctuations happen in relative value of currency. Overall trade and commerce get reduced. The Great Depression of 1929 is considered to be the most classic example of a depression in economic history.
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