Developing Countries and Deflation Essay Example | Topics and Well Written Essays - 2500 words

Developing Countries and Deflation - Essay ExampleA year after Roachs arguable report, Goldman and Sachs published a Global Economics paper entitled Dreaming with BRICs The Path to 2050. In this report, the authors surmised that minded(p) the right growth conditions and a lot of luck, four of the biggest developing countries namely Brazil, Russia, India and China (thus forming the BRIC acronym) could become the largest economic soak up in the world in 50 years possibly even surpassing the G6 economies (US, Japan, UK, France, Italy and Germany). Like China, the economies of Brazil, Russia and India ingest influenced the decline of consumer prices in the world. If there is any empirical basis on the notion of Chinas alleged scatter of deflation, would it not be reasonable to suggest that the rest of the BRICs could have the same effect on the worlds parsimoniousness This paper aims to examine if such generalization regarding deflation shifting could indeed be applied to all of th e BRICs as the worlds largest developing countries. ... ntinuously as determined by aggregate measures such as the Consumer Price Index (CPI) or the Gross Domestic Product (GDP) deflator (Kumar et al, 2003). In such a case, economic activity and consumer spending atomic number 18 significantly reduced, which in turn cause a decline in prices, profits, trade, employment and productivity in general (Guardian Unlimited, 2006). The decline in price levels could either be due to a demand jarful (a significant fall in the demand of goods and services) or a supply shock (significant increase in emergeputs while demands remain constant). In case of the former, a vicious cycle of declining asset prices, rigid pecuniary policies and reduced nominal interest rates are likely to result. The situation could become more than bad if the expectation for even set down prices prompt consumers to postpone their spending. An extreme effect of this would be companies going out of business or exa ctingly cutting down on labor and production due severe inability to sell their goods or services, realize revenues and/or pay off outstanding loans. This perpetuates an even lower demand for goods and further decline in prices. Supply shocks, on the other hand, can result from more positive events such as technological advancements, trade liberalization gains, productivity growth and strengthened confidence in the long-term effects of perceived political and economic stability. Under such circumstances, deflation could not be as costly as that in the demand shock effect since the price decline could only be a manifestation of temporary adjustment to a new equilibrium brought about by external, productivity-enhancing changes, e.g., IT mutation and deregulation, (Kumar et al, 2003). Deflation in historyThere are two periods in history when deflation occurred in