Understanding Key Economic Indicators and Finance Terms

Core Economic Concepts

Microeconomics: Households and Firms

Microeconomics is the study of the economic system from the perspective of households and business firms.

Macroeconomics: System Performance

Macroeconomics is the study of the overall performance of the economic system.

Economic Growth (EGR)

Economic growth means that the economy is moving towards its full potential output. This is beneficial for the economy because it signifies that people are working and goods are being sold, which in turn stimulates the economy further by creating more jobs. Economic growth is typically presented as the percentage increase in Real GDP.

Gross Domestic Product (GDP) Definition and Measurement

GDP is the total market value of all the final goods and services produced during a given time period within a nation's domestic borders.

Two Primary Ways of Measuring GDP:

• Total income of the nation's households.
• Total expenditures within the nation.

Income Approach to GDP Calculation

The Income Approach measures all the income earned by all the households in a nation. The factors of production are charged for a corresponding source of income.

Expenditure Approach to GDP Calculation

The Expenditure Approach measures the total amount of spending on goods and services in a nation.

The GDP calculation formula is:

GDP = Consumption + Government Spending + Investment + (Exports - Imports)

Note: (Exports - Imports) represents Net Exports.

Real GDP vs. Nominal GDP

Real GDP

Real GDP is the total market value of goods and services produced, measured using constant dollars (adjusted for inflation).

Nominal GDP

Nominal GDP is the total market value of goods and services produced, measured using current dollars (not adjusted for inflation).

Understanding Inflation and Its Effects

Inflation is a sustained increase in the average level of prices in the economy.

Types of Inflation:

• Cost-Push Inflation: Occurs when there is an increase in the cost of raw materials needed to produce goods.
• Demand-Pull Inflation: Occurs when aggregate demand exceeds aggregate supply.

Key Effects of Inflation

Inflation causes the value of money to decrease. Since prices are higher, consumers need to spend more money to buy the same quantity of goods they previously purchased.

A critical effect is that income may not increase proportionally. A general price increase does not guarantee that individual income will rise to accommodate the difference, leading to a reduction in purchasing power.

Macroeconomic Objectives

The primary objectives of macroeconomic policy include:

• High level of GDP
• Full employment
• Price stability
• Balance of payments
• Sustained economic growth

Essential Accounting and Finance Terms

Assets and Liabilities

• Assets: Things owned by the company.
• Liabilities: Debts or financial obligations.

Key Financial Components

• Stock (Inventory): Goods held for sale.
• Debtor (Accounts Receivable): Money owed to the company.
• Contributed Capital (CS): The amount of money that a company owner personally invested in the company.
• Retained Earnings: Accounting reserves obtained from profits that have been earned and not distributed to owners/shareholders.

Fiscal Year Results

The Fiscal Year Result reflects the company's financial performance:

• If the result shows profits (benefits), the quantity will be positive.
• If the result shows losses, the quantity will be negative.