4. Associated Terms

Stagflation: Stagflation refers to a situation in an economy when inflation and unemployment both are at high levels i.e. a combination of high inflation and low growth. Such a situation occurs when the inflation may have gone on for a long period and resultantly affected the input prices as well as the demand for goods and services in the economy.

Deflation: This is nothing but the completely opposite of inflation as there is a fall in the general price levels in the economy over a period of time. Deflation occurs when the inflation rate falls below 0% (where inflation is in negative territory). This should not be confused with disinflation, which implies slow-down in the inflation rate only (where inflation is in declining

trajectory but remains positive). Following the Asian financial crisis in late 1997, Hong Kong experienced a long period of deflation which did not end until the end of 2004.

Recession: It is a situation which is characterized by negative growth rate of GDP in two successive quarters. Some of the indicators of a recession include slowdown in the economy, fall in investments, fall in the output of the economy etc.

Depression: It is an extreme form of recession and characterizes a situation in which the recession may have gone on for too long resulting in depression in the economy. A common rule of thumb for recession is two quarters of negative GDP growth. The corresponding rule of thumb for a depression is a 10 percent decline in gross domestic product (GDP). Some of the indicators of a depression are huge fall in demand and consumption of goods and services, shattering of business confidence, a sharp decline in the output of the economy and investments. One of the examples of depression is the great depression of 1930s.

Inflation Spiral: An inflationary situation in an economy, which results out of a process of wage and price interaction ‘when wages press prices up and prices pull wages up’, is known as the inflationary spiral. It is also known as the wage-price spiral. This wage-price interaction was seen as a plausible cause of inflation in the year 1935 in the US economy, for the first time.

Reflation: Reflation is a situation often deliberately brought by the government to reduce unemployment and increase demand by going for higher levels of economic growth. Governments go for higher public expenditures, tax cuts, interest rate cuts, etc. Fiscal deficit rises, extra money is generally printed at higher level of growth, wages increase and there is almost no improvement in unemployment. Reflation can also be understood from a different angle—when the economy is crossing a cycle of recession (low inflation, high unemployment, low demand, etc.) and government takes some economic policy decisions to revive the economy from recession, certain goods see sudden and temporary increase in their prices, such price rise is also known as reflation.