How to become a successful entrepreneur in 5 steps

 The difference between inflation and depression

In fact, there is a clear interdependence and similarity between both inflation and depression, as the difference between inflation and depression is similar, as economic inflation causes a state of decline in the purchasing power and capabilities of consumers, and the matter turns from a lack of supply and an increase in demand to a severe shortage. The supply and lack of demand, lead to the occurrence of the so-called economic depression, knowing that the recession also causes the occurrence of economic inflation, and in this article, we will discuss both concepts in detail.

inflation

Inflation refers to a state of long-term continuous rise in the general level of prices, as measured by the consumer price index, and this term was included to express abnormal increase in prices, and about early modern European history, the best term for it was explained in the indexes of the “basket of consumables”, invented by the Spanish Earl Hamilton, knowing that there is a set of real (demographic) factors that are related to population, as well as monetary factors related to inflation, and in the exchange equation in the literature of early modern economic history. Extremely misleading for this inflation was population growth.

Certainly, population growth, which operates on a fixed (inelastic) land in union with other natural resources, results in diminishing returns and high marginal costs, and this may explain the high relative prices of some specific commodities, such as grain and timber, but demographic factors alone A rise in the price level cannot be explained by inflation, which is basically although not uniquely monetary in origin, and the rate at which the general level of prices of goods and services rises, and consequently the purchasing power of a currency decreases. Inflation is classified into three types: demand inflation, cost inflation, and built-in inflation (1).

Inflation Indicators

Regarding the most commonly used inflation indicators, they are Consumer Price Index (CPI), as well as Wholesale Price Index (WPI). Inflation can be viewed in positive or negative terms, depending on the individual point of view, and owners of tangible assets, such as property, stored goods, etc., knowing that there is a view that inflation increases the value of assets, and may not like people who keep cash, because it dilutes the value of their cash holdings, and better still, an optimum level of inflation is required to boost spending to some extent instead of saving and thus nurturing economic growth (2).

As prices rise, one unit of currency loses value, as it is less able to purchase fewer goods and services, and this loss in purchasing power affects the general cost of living for the general public, ultimately leading to slower economic growth, given the consensus view among Economists state that persistent inflation occurs when the growth of money supply in a country exceeds economic growth (2).

The consequences of inflation

Price inflation has many consequences for the stability of societies, the security of countries, and their level of well-being. Inflation redistributes income from wage earners, people with fixed incomes, especially land owners, or renters within a system of long-term contracts, as well as to traders and industrialists. Given the vital importance of capital in economics, Most merchants and industrialists benefited from lower real interest costs, and more importantly, nominal and real interest rates fell during this entire period throughout Western Europe, and a large number of peasants or small landowners rose, their rents remaining constant, while The prices of the products that they sell in the market have continued to rise, and on the other hand, there is no doubt that some suffer the consequences of population growth, at least in partial inheritance areas, which means a large division of property, it will be difficult to build a balance sheet for the winners and losers of inflation for the era of price revolution (2).

depression

To know the difference between inflation and stagnation, you must define stagnation. Depression) a state of a severe and prolonged contraction or decline in economic activity in a country, and is economically defined as a very severe recession lasting three years or more, or leading to a decrease in real GDP, by at least 10%, Thus, it is a natural part of the business cycle that occurs in general, in the case of a contraction of the gross domestic product for a good period, and on the other hand, depression is the case of a significant decline in economic activity that lasts for several years, knowing that recessions and depressions differ in terms of duration and severity Economic downturn, and economists differ about the duration of the depression, as some believe that the recession includes only the period during which the noticeable decline in economic activity suffers, and experts and specialists have a clear debate on this issue, at a time when economists and other specialists see that the recession is a continuous condition. Until most economic activity returns to normal economic activity back to normal(3).

depression model

The Great Depression lasted nearly a decade and is widely considered to be the worst economic recession in the history of the industrialized world, and it began very shortly after the collapse of the US stock market, in the period from October 24, 1929, which is known as Black Thursday After years of reckless investment and speculation, as the stock market bomb exploded, then the massive sell-off began, as up to 12.9 million shares were traded, and the Great Depression was repeated. New laws and regulations have been implemented to prevent a recurrence and central banks have been forced to rethink how best to tackle economic stagnation (3).

Knowing that the economic depression is such a catastrophic situation that it requires perfect solutions, many experts assert that contractionary monetary policy exacerbated the depression, and the Federal Reserve rightly sought to slow the stock market bubble in the late twenties, but once the stock market collapsed, and in The Fed kept raising interest rates by mistake to defend the gold standard, so instead of pumping money into the economy and increasing the money supply, the Fed allowed the money supply to reduce by as much as 30 percent (4).