Week 2 - GDP & Inflation Flashcards
What is regarded as economic growth
A real increase in GDP, not in proportion to the population increase.
What is GDP
Gross domestic product.
Total goods and services produced in a country during a period of time (usually a year). Gross because no account is taken of depreciation of the country’s capital stock.
What is GNP
Gross National product.
Total value of goods and services produced by residence of a country.
What is GDP per capita
GDP / total population.
This is an important economic indicator
What are the limitation of GDP?
It is not a perfect measure of welfare, as it doesn’t include : unpaid work, Pollution, Work-life balance, leisure activities, Safety.
It does not include goods and services purchased on the black market (the underground economy).
What are the components of GDP - expenditure method
Y = C + I + G + NX
Growth could come from any of these components.
C = consumption (Purchase of consumer goods by the household sector) I = Investment (Business investment by product or activity (Capital goods - plants, equipment, Inventory, buildings by the business sector) G = Government spending - purchases of goods and services (e.g. wages, infrastructure). NX = Net exports ( purchases of domestic goods by foreigners LESS purchases of imports).
What is inflation
It is an ongoing rise in the general price level.
What happens is GDP goes down
We move into a recession.
What is CPI
Consumer price index - it is a weighted sum of the price of a basket of goods and services purchased by a typical consumer.
It attempts to measure changes in price levels over time.
It is the most widely used measure/indicator of inflation.
What is meant by Nominal price
price is stated in the dollars of the day (current price)
How do we get the real price
We adjust the nominal price and take inflation (CPI) into account.
Nominal price / CPI x 100
What is meant by the term Fiscal drag or Bracket creep
If wages go up with inflation, individuals will find themselves in a higher tax bracket and need to pay more tax.
Inflation can act as “tax by stealth”
What is disinflation
It is a decrease in the RATE of inflation
Sometime if inflation is too high the the reserve bank can increase interest rates which reduces spending. But this can lead to a recession.
What is Hyperinflation
Extremely rapid increases in the general level of price
What is Deflation
Negative inflation rates (falling prices)
