Economic Variables: GDP, CPI, and Growth Analysis

Economic Variables and Their Impact

Macroeconomic analysis often begins with the work of John Maynard Keynes, a prominent economist of the 20th century. Keynes identified three fundamental questions to minimize the negative impact of economic fluctuations:

• How to mitigate lower production and employment and reduce unemployment?
• What causes widespread price increases, and how can they be controlled?
• How can a country increase its rate of economic growth?

Economies experience alternating expansive and contractive phases, known as economic cycles. Economic policy aims to achieve long-term prosperity by focusing on production, pricing, and capacity.

Key indicators include:

• Gross Domestic Product (GDP): Measures production.
• Consumer Price Index (CPI): Indicates price evolution and inflation.
• Activity rates, unemployment, and employment levels.

Methods to Calculate GDP

In a market economy, firms adjust production based on economic agents' spending.

Expenditure Approach

GDP = C + I + G + (X - M)

Value Added Approach

GDP = VAA + VAB + VAC + ... + VAZ

Income Approach

GDP = Wages + Rent + Interest + Business Profits + Grants - Business Losses

Government grants do not require repayment from companies.

Real vs. Nominal GDP

Nominal GDP is calculated at market prices or cost factors, multiplying the quantity of final goods and services by the prices of the current year.

Real GDP uses the quantities of goods and services from a specific year but multiplies them by the prices of a base or reference year. Converting nominal GDP to real GDP is known as deflating.

National Accounting

National accounting comprises indicators that record and report on economic activities within a country over a specific period.

Inflation

Inflation is the continuous growth in the general price level of an economy.

Causes of Inflation

• Demand-Pull Inflation: Occurs when demand exceeds production capacity, leading to excess demand and price increases.
• Cost-Push Inflation: Arises from increased resource costs or wage-price spirals, where rising wages lead to higher prices, and vice versa.
• Inflation due to interest rates