Inflation Impact, Financial Tools, Eurozone Policy, Economic Growth
Effects of Inflation
Loss of Buying Power: When inflation occurs, the prices paid by economic agents increase. Consequently, the purchasing power of money decreases.
Uncertainty: Prices contain valuable information for economic agents to make decisions. Inflation alters prices, destroying their informative capacity and provoking uncertainty.
Loss of Competitiveness of Domestic Production Overseas: Inflation will decrease the volume of exports of goods and services.
Unemployment: Two effects of inflation cause a break in the level of employment:
- If money loses purchasing power, consumption and investment fall. As global demand decreases, so do production and employment.
- If economic agents are making decisions under conditions of uncertainty, consumption, investment, and employment will also fall.
Financial Instruments Used by Operators
Companies
Funding sources commonly used are:
- Contributions made by partners at the time of the company’s formation and subsequent enlargement of capital through the purchase of securities representing the company’s production.
- A portion of the profits generated by the company that remain in the form of reserves to finance future investments. (These two are from the company itself.)
- Bank loans: Money offered by the bank and available to the company. The company can take what it needs but then returns the borrowed money.
- Leasing system.
Families
Families use their savings from their disposable income.
The State
The state draws primarily from taxes and the emission of public debt.
Monetary Policy in the Euro Area
Eurosystem: This comprises the ECB and national central banks of member countries.
Functions:
- Define and implement monetary policy in the area with the goal of price stability.
- Conduct foreign exchange operations.
- Promote the smooth operation of payment systems.
- Issue banknotes.
Monetary Policy Objective: To achieve price stability.
Economic Growth and Development
Economic Growth: A continued increase in the real output of a country. The main variables used are real GDP and real GDP per capita.
Development: This occurs when, in addition to economic growth, there are a series of structural changes that improve the political, economic, and social structures of a country and increase the quality of life of its inhabitants.
Indicators that reflect development:
- Social: Life expectancy, educational level.
- Economic: Level of qualification, GDP, income distribution, sector weight, percentage of GDP devoted to research and development.
- Political: Degree of democracy, regulation of economic activity by the public sector.
Human Development Index (HDI): Life expectancy, GDP per capita, adult literacy rate, enrollment in primary, secondary, and tertiary education.
Factors Contributing to Development
Improvements in the Level of Productivity
Productivity refers to the amount of goods and services that each unit of a productive factor can produce. Productivity will grow as the production of a country increases. It depends on productive capital, human capital, natural resources, and technological expertise.
Saving and Investment
Governments can encourage saving so that a larger portion of income becomes investment, whether aimed at increasing productive capital or achieving a higher level of technological knowledge (research and development), to accelerate economic growth and raise living standards.
Education and Training
A country’s investment in human capital produces positive synergies that are transmitted to all fields of knowledge. Human capital is considered by most analysts as a decisive factor in enhancing productivity and economic growth.
Political Stability
As a prerequisite to running a country’s economic system, there must be a system of government that provides stability to its political life.
Free Trade
The disappearance of barriers to international trade, in general, improves the possibility of economic growth in all countries, since it expands the accessibility of markets and products.
Control of the Population
Sharing the highest income growth generated by a smaller number of citizens increases individual welfare.