Unit 3: Hyperinflation & Real GDP Flashcards
What is hyperinflation?
When a country experiences a monthly inflation rate of over 50% or around 13,000% annual inflation.
Identify and explain the three problems that hyperinflation causes for a country and its people?
Hyperinflation erodes wealth.
Extreme inflation causes people to spend as quickly as possible rather than save. So there’s no money available to fund new businesses.
And all of that uncertainty limits foreign investment/trade.
What causes hyperinflation? Provide a detailed explanation.
When the government pays bills by printing more money. Increase in money supply can have two effects, it can increase output or prices, or a combination of both. Inflation starts when output is pushed to capacity and can’t rise further, but policy makers continue to increase money supply. Buying behaviours change and people started to make more purchases quickly. And basically have a chance to buy it before the price changes again. Dollars begin to circulate faster when purchases increase. This causes the velocity of money (the number of times a dollar is spent per year) to increase even faster, pushing inflation up faster.
Often, what do countries have to resort to in order to effectively respond to hyper inflation?
Switch to a new currency replacing their old one, or adopt another country multiple countries’ currencies. Example; Like Germany and Zimbabwe
Explain why it is important to adjust GDP for inflation.
It’s important to adjust GDP for inflation because if we’re measuring output value in prices and the total output increases, how much of the increase is because the economy is growing and how much is because prices have increased. There’s a difference between a real increase in GDP, or if the increase was just due to an increase in the level of prices.
What is the difference between nominal GDP and real GDP?
Nominal GDP: Also known as current-dollar GDP or money GDP is the total value of the output of an economy before the effect of price increases is removed.
Real GDP: Total value of all goods and services produced in Canada in a given year, adjusted for price changes; also called constant-dollars GDP
GDP deflator is applied to remove the effect
of inflation and create real GDP (constant dollar GDP)
What is the equation/formula used to calculate real GDP?
Real GDP: Nominal GDP/GDP Deflator x 100%
What is the difference between the GDP deflator and the chain fisher volume index? Which of these more effectively accounts for the effects of inflation?
GDP deflator uses a base year. The rapid expansion of information and communication technologies has produced biased results that overstated economic growth in Canada during the 1990s. The base year of 1992 set the weighting categories based on prices in 1992, the prices of technology drastically declined. GDP deflator no longer effectively accounted for inflation effects.
The chain fisher volume index eliminates the use of a base year and uses a formula to “rebase” the GDP each quarter that it’s measured.
The chain fisher volume index more accurately measures growth. It’s a more complicated calculation than the GDP deflator, it’s said to be a more accurate measure of the changes in GDP and its components. It’s used to remove the effects of changes in price levels on the GDP.
