If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:3:10
AP.MACRO:
MEA‑1 (EU)
,
MEA‑1.F (LO)
,
MEA‑1.F.1 (EK)
,
MEA‑1.F.2 (EK)
,
MEA‑1.F.3 (EK)
,
MEA‑1.F.4 (EK)

Video transcript

deflation is literally just a lowering of prices or a general decrease in the level of price for goods and services or another way to think about it since inflation is an increase in the level of prices you can just view it as negative negative inflation and so let's say you wear the wear the folks at the Bureau of Labor Statistics and we're trying to compute the CPI index and in one period let's call this period 1 over here we have our CPI index for urban consumers and that's the one that's quoted most often and we have this basket of goods and it'll have housing in it it'll have housing let me write housing like that let me write that a little bit neater it'll have housing in it it'll have transportation in it it'll have fuel in it it might have some proxy for entertainment or whatever else inside of it and that basket of goods let's say in period 1 and this is a simplification runs that urban consumer on average 100 dollars and then we go to period 2 and we look at that same basket of goods maybe we're adjusting certain things maybe some products have become obsolete we have to replace or there has to be some adjustments for technology and that's all under debate what how you should adjust them but given that assuming everything else is equal that same basket of goods is now running at 98 dollars and so the total cost of goods and services for this kind of average consumer has gone down by has gone down by two dollars or we could say that we've experienced negative two percent inflation which is really just another way of saying that we have another way of saying that we have experienced deflation now deflation is not the norm especially for growing economies the way that our current economic systems run although it does happen and a pan in particular is probably the most recent most famous case of deflation and the main reason why economists really don't like deflation or I should say in particular while sent why central bankers really don't like deflation is that it makes it much harder to control the economy or the fueled economy with interest rates alone or be just with printing money alone and I'll go into a little bit more depth with that in future videos one thing I do want to make clear is although deflation isn't what we normally see in the broader economy as a whole it does happen very frequently in specific sectors and the most common one is in the technology sector in specific specifically hardware we've all experienced buying a laptop one at one period so this is right now you buy the laptop for maybe $1,000 and then six months later six months later you see that exact same laptop for five hundred dollars and that's just because the rate of technological innovation is good at going so fast that they can produce the same amount of memory and processing power for a lot cheaper now or for the same amount of money you can get much more memory and processing power and all of the rest and you see this with laptops and with with with big-screen TVs and and and phones and all the rest
AP® is a registered trademark of the College Board, which has not reviewed this resource.