What is Deflationary Gap in economy ? What are the reasons for Deflationary Gap ? What causes Deflationary Gap ?
Deflationary Gap is the situation where the national income level is behind the level of full employment in an economy. If a part of the labor factor in a country is not involved in production, its economy reaches a balance below the level of full employment, which is the potential product.
Due to the low level of employment in the country and the lack of full capacity, the maximum production and income level cannot be reached. For this reason, deflationary deficit occurs and is called short spending shortly. In economies where this situation prevails, unemployment starts to occur and creates negative effects on the economy due to the low level of capacity utilization.
Prices do not increase at the general level due to the lack of spending. In other words, an effect that will fuel inflation cannot be created. This is the positive side of the deflationary deficit. However, the fact that such an economy has stabilized in the real area indicates the level of underemployment equilibrium. This situation indicates that the economy is stagnating and has entered a period of contraction. While classical economists argue that such an economy will find its own balance, state intervention is required in Keynesian theory.