An article in Business Week warned of the dangers of deflation as the collapse o

Question

An article in Business Week warned of the dangers of deflation as the collapse of numerous Asian economies was creating worries that Asia might try to "export its way out of trouble" by oversupplying everything from automobiles to semiconductors. Evidence that deflation had become a genuine concern for managers was provided by a statement in the article by John Smith, chairman and CEO of General Motors Corporation: "Fundamentally, something has changed in the economy. In today's age, you cannot get price increases." The article offers advice to managers: "Productivity growth lets companies boost profits even as prices fall." Using short-run production and cost theory comment on this advice.

Explanation / Answer

Answer:

The dangers of deflation create worries as deflation would mean shrinking of consumption; unemployment .It is a dangerous practice which leads to the tightening of the credit markets, which hurdles economic growth. Evidence suggests that deflation had become a genuine concern for the managers. Since the article offers the advice to the managers

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