Understanding Inflation, GDP, and Economic Concepts

Inflation

Inflation is an increase in the average level of prices of goods and services.

Types of Inflation

• Demand-Pull Inflation: This occurs when various factors increase aggregate demand, leading to inflation.
• Cost-Push Inflation: This is a decrease in the supply of goods caused by an increase in the cost of production.

Causes of Inflation

• Increase in the cost of raw materials
• Increase in the cost of inputs (land, labor, capital)
• Increase in the cost of borrowing by producers
• Natural calamities, floods, earthquakes

Consequences of Inflation

• Price effect: Consumer consumption will go down.
• Income effect: Real income may decrease.
• Saving effect: Consumer saving declines.
• Wealth effect: The value of assets like land, cash, stocks, bonds, and bank deposits can be affected.
• Gold holders: The impact on gold prices can vary.
• Stockholders: Stock prices go through uncertainty.
• Bondholders: Bondholders would be worse off as bond prices would go down.
• Antiques: Prices normally increase; antique holders would be better off.

Gross Domestic Product (GDP)

GDP is the monetary value of all finished goods and services produced within a country's borders in a specific time period.

Gross National Product (GNP)

GNP is the market value of all final goods and services produced with the resources owned by a country, irrespective of the place of their deployment during a given period.

Disposable Income

Disposable Income is personal income after taxes.

Consumption

Consumption is the amount spent on goods and services.

Real GDP

Real GDP is the value of final output produced in a given period, adjusted for changing prices.

Nominal GDP

Nominal GDP is the value of final output produced in a given period, measured in the prices of that year (current prices).

Components of GDP

• Households
• Industry
• Government
• Foreign Sector

Expenditure Approach to Calculating GDP

1. Consumption of goods and services (households)
2. Investment in plants, equipment, and inventory (industry)
3. Government spending on goods and services (government)
4. Exports – Imports (E-IM)

GDP = C + I + G + (Ex - Im)

Income Approach to Calculating GDP

1. Wages and salaries (households)
2. Corporate profit (industry)
3. Proprietors' income (households)
4. Rent
5. Interest
6. Taxes on output and imports
7. Depreciation

Intermediate Goods

An intermediate good is a good or service that is used in the eventual production of a final good.

Final Good

A final good is any commodity that is produced and subsequently consumed by the consumer.

Net Exports

Net Exports = Exports – Imports

Dissaving

Dissaving is the amount of consumption that is more than disposable income.

Saving

Saving is the amount of disposable income that is not spent.

Equilibrium Level of Income

Equilibrium level of income occurs when income equals aggregate expenditure.