Understanding GDP, Inflation, Fiscal Policy, and Aggregate Demand

Gross Domestic Product (GDP)

GDP represents the monetary value of all goods and services produced by a country in a given period of time.

Characteristics of GDP:

• Follows a monetary standard.
• Considers only declared activities.
• References the value of final goods.
• Measures the value of what occurred within the borders of a country.
• Refers to what occurred within a specific period of time.

GDP at Market Prices (GDPmp): C + I + G + (X-M)

GDP at Factor Cost (GDPfc): Value Added by Sector A (VAA) + Value Added by Sector B (VAB) + ...

Nominal GDP is obtained by multiplying the quantities of final goods and services by the prices they had during that year.

Real GDP is calculated like nominal GDP, but it is multiplied by the prices of the year used as a base or reference.

Inflation

Inflation is the widespread and continuous growth of prices in an economy.

Causes of Inflation

• Demand-pull inflation: Driven by businesses, the public sector, and families.
• Cost-push inflation: Driven by factors such as:
  • Higher cost of natural resources.
  • Wage-price spiral.
  • Wage-wage spiral.
  • Market power.
  • Interest rates.

Consequences of Inflation

• Loss of purchasing power: Disadvantaged groups include pensioners, workers, savers, and exporting companies.
• Beneficiary groups: Debtors, the state, and importing companies.

Business Investment

Business investment indirectly involves acquiring goods that satisfy human needs. It plays two important roles:

1. It pulls rising demand.
2. It increases productive capacity.

It comprises three broad categories:

1. Investment in plant and equipment.
2. Construction.
3. Inventory changes.

Factors Influencing Business Investment

• Revenue.
• Costs.
• Used production capacity.
• Future prospects.

Fiscal Policy

Fiscal policy is the intentional action of the public sector, through fundraising and the implementation of public expenditure, to achieve the objectives pursued by the state.

Types of Fiscal Instruments

• Discretionary Fiscal Policy: Public works programs, employment schemes, training programs, and modifying tax rates.
• Automatic Stabilizers: Proportional taxation, progressive taxation, social security, and unemployment benefits.

Aggregate Demand

Aggregate demand is the total expenditure, for a given average price level, made in an economy by families, businesses, the public sector, and foreign entities. Aggregate demand represents the value of goods and services that agents are willing to buy, while GDP is the value of what was actually purchased. The graphical representation of aggregate demand is represented by the aggregate demand curve. Aggregate demand increases as the prices of goods and services fall.

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

Aggregate Supply

Aggregate supply is the amount of output that companies would be willing to sell at a given average price level and with certain production costs. The conditioning factors are:

• The average price level.
• Production costs.
• Business expectations.

The curve that plots the aggregate supply is called the aggregate supply curve.

Consumption

The main components of this macroeconomic concept are private consumption and business investment. Private consumption refers to:

• Durable goods.
• Perishable goods.
• Services.

Factors Influencing Consumption

• Disposable income each year.
• Permanent income.
• Life-cycle hypothesis.
• The "wealth effect."

State Budget (PGE)

The State Budget (PGE) expresses expenditure and revenue plans. It is a detailed expression of what public finances will entail that year.

Revenue

• Social contributions.
• Taxes (taxes and fees).

Expenses

• Running costs (staff salaries and the purchase of goods and services).
• Investment expenditures.
• Transfers and subsidies.