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Measuring Economic Growth - Coggle Diagram
Measuring Economic Growth
While measuring the performance of an economy, one of the criteria is to consider how much is being produced by a country.
The more a country can produce, the better the economic performance will be.
When measuring how much a country can produce there is a standard from United Nations that is used by countries around the world. The measure is called Gross Domestic Product or GDP. GDP is the total amount of goods and services produced by a country in a year.
GDP Formula
GDP = C + I + G + NX
Sectors Of Economy
Primary (Natural Resources)
Secondary (Manufacturing)
Tertiary (Service)
GDP Per Capita
GDP Per Capita is the total amount of goods and services produced by a country in a year divided by the number of populations.
GDP Per Capita = GDP / Population
Recession & Depression
Recession means an economy has experienced negative economic growth over at least two consecutive quarters. (6 months in a row)
Recession :
Lasts for months
Causes only some unemployment
Negative GDP
Typically contained to a single country
Depression:
Lasts for years
Widespread unemployment
GDP plummets
Can affect foreign countries and their economies; a stall in Global trade
Inflation
Inflation is the increase in average prices in an economy. Inflation rates shows how much prices have changed, compared last year. Negative inflation rate means prices have fallen over the year.
Why Do We Measure Inflation?
The government monitors the prices of a specific market basket that included the same goods and services.
Inflation rate is the percentage change in prices (%) over a specific time period.
Measuring Inflation
Government usually measures and monitor the rate of inflation monthly using the consumer price index (CPI). CPI records the price of about 600 goods and services purchased by over 7000 families.
Demand Pull Inflation
Inflation caused by too much demand in the economy
Cost Push Inflation
Inflation caused by rising business costs.
Deflation
The opposite of inflation is deflat ion, or falling prices. Deflation is defined as a continuous decrease in prices across an economy, which describes a slowdown in the economy(when aggregate demand is falling).
Stagflation
Stagflation is when inflation is rising very high, while the economy is stagnant (not growing).
Reflation
Reflation is when there is a rise in GDP after a recession.
Hyperinflation
Hyper inflation is a situation in where inflation level are very high. Inflation rate of 50% per year would be classified as hyperinflation.
Disinflation
Disinflation is defined as a decrease in the rate of inflation. Example: If the rate of inflation falls from 4% to 2%, there is disinflation.
Impact Of Inflation
Prices
The main problem of inflation is that prices are rising. The rise in prices reduces the purchasing power of money. This means that people cannot buy as much with that income.
Wages/Salary
When prices are rising, workers need to increase their wages (Demand to increase the wage to the company) to compensate for the loss in purchasing power. When the wagesare increasing, the company will respond by increasing the price of their goods or services/.
Exports
When inflation is higher at hone than in other countries, firms/businesses will have difficulty in doing export, because the cost of export is high.
Unemployment
Falling exports can also result in unemployment especially for people working in a company which doing export.
Menu Cost
When prices is increasing fast, company will have to update their prices frequently, new brochures will have to be printed, websites updated, and sales staff informed.
Shoe Leather Cost
When prices is increasing fast, consumers will have to spend more time looking for the lowest prices or the best value for money.
Uncertainty
When prices is increasing fast, firms will have difficulty in making long term planning. Therefore, most company will postpone or cancel their investment.
Business and Consumer Confidence
Inflation will cause consumer and business are more likely to save their money. This will reduce demand which will lower the economic growth rates.
Unemployment
Unemployment is a waste of resources. Unemployment will cause a country’s GDP to decrease, and lower the standard of living. Why? The relationship between GDP and unemployment is when unemployment rate is high, then the the total amount of goods / service that are produced are low therefore the GDP will decrease too.
If people are unemployed, the country’s GDP will decrease, national income will drop, and living standards will be lower. But if the unemployment is a result of a new technology being introduced, the GDP might not fall, or can even be higher.
Impact Of Unemployment
GDP
Use Of Scarce Resources
Poverty
Government Spending
Government Tax Revenue
Consumer and Business Confidence
Society