Understanding GDP, Inflation, and Economic Indicators

Posted on Jan 29, 2025 in Economy

GDP (Market Price)
GDP mp = Household consumption + Investment + Public spending + (Exports – Imports)

GDP (Cost of Factors)
GDP cf = Wages + Interest income + Benefits + Business profits + Official grants

Nominal vs. Real GDP

  • Nominal GDP: Calculated by multiplying the quantity of final goods and services by their current prices.
  • Real GDP: Calculated using the quantities of goods and services in a given year, multiplied by the prices of a base year.

Deflator: Eliminates the effect of inflation on the size or value of GDP.

GDP per capita: Total GDP divided by the number of inhabitants.

Inflation

Causes of Inflation:

  • Businesses: Improved business expectations can increase demand for goods.
  • Public sector: Improvements in the country’s infrastructure.
  • Families: Reduced savings and increased spending.

Consequences of Inflation:

Harmful Effects:
  • Pensioners: Pensions often increase at a lower rate than the cost of living.
  • Employees: Those with salaries that do not increase at the same rate as inflation.
  • Savers: Lenders see the value of their returns decrease.
  • Companies exporting national products: Reduced competitiveness of national products.
Beneficial Effects:
  • Debtors: The value of debt decreases as the value of money decreases.
  • Government: Promises to pay over a period of time become less burdensome.
  • Companies importing goods: Increased favor for importing foreign goods with the same functions.

External Benefits or Positive Externalities:
The entire society benefits from discoveries and innovations.

External Benefits

External benefits are benefits people receive from an economic activity other than those directly involved. Externalities are the economic consequences of an activity that affects people not directly involved, and may not be reflected in the prices of goods and services produced.

Competitive Advantage

  • Promotion of innovation and technological progress through more efficient production methods.
  • Greater access to goods and services for the general public due to lower prices.
  • Increased real wages for workers due to lower prices of goods and services.
  • New market opportunities for companies, creating employment.

The Unequal Distribution of Income

Income levels determine the ability to pay for goods and services. People with lower purchasing power may struggle to maintain a decent standard of living.

Consumer Price Index (CPI)

The CPI indicates the evolution of prices and, therefore, the presence or absence of inflation.

If Inflation is Controlled

  • Pensions maintain their purchasing power.
  • Families can more easily make ends meet.
  • Unemployment rates decrease.
  • Family incomes grow.
  • Increased consumption and demand, leading to more hiring by companies.
  • The government collects more taxes and has more funds.
  • Families have more money to spend.

Economic Indicators

Market price (PM), household consumption (C), business investment (I), public spending (D), exports (X), imports (M).