What is economic growth and what does inflation have to do with it?

What is economic growth?

Obviously, the solution is the development of the economy. What else could it be? However, how do they assess whether or not there is an increase in this indication and how do they quantify it?

For example, when determining whether or not a person is wealthy, we look at their income first. A large house, a prestigious automobile, vacations in a luxurious resort, private schools for his children, medical care at the best clinics, and other perks of civilization that are accessible for a fee are all within his reach as his income rises and his expenses decrease.

It's the same with a country's economy: the bigger the total income of the country, the more its citizens can purchase in terms of goods and services. Another point to mention is that measuring the income of an entire nation is more difficult than measuring the income of a single individual; for this reason, the term "GDP" (gross domestic product) is used. If the country's gross domestic product (GDP) is increasing, the country is enjoying economic growth.

What is Gross Domestic Product (GDP) and how is it measured?

The entire value of products and services produced in a nation in a certain period of time, such as a year, is referred to as the gross domestic product (GDP) of that country. It is difficult to compute GDP since it requires summarizing all of the products and services generated in a nation, including both goods and services. The maize cultivated in the fields and the performance of a punk band both contribute to the country's gross domestic product. 

If each of these different things is transformed into money - into its market worth - the volume of GDP may be calculated by adding together all of the different items and calculating the total volume of GDP. The amount of money that people are prepared to pay for each of the items, whether it's a vegetable or a ticket to a punk concert, is reflected in the price of the goods. It turns out that the greater the country's gross domestic product, the better the quality of life for the people who reside there.

Not only is the overall amount of GDP significant, but so is the magnitude of GDP per capita as well. You may also use the example of a family: if a family of two individuals makes, say, 100,000 rubles per month, they can afford to spend a lot of money. And what happens if the family's total income is $100,000 and they have six children in addition to three aunts and two grandfathers who are reliant on them? Of course, their level of living will be lower than that of a family of two earning the same amount of money as they do.

A country's GDP per capita reflects the average income of a citizen - the so-called average temperature in a hospital: Vasya makes 300,000 dollars, whereas Petya is unemployed (GDP per capita). They each earn an average of 150,000 every year.

What is economic growth like?

Extensive expansion is achieved by increasing the number of resources available. Consider the following scenario: the state possesses a large number of minerals, and it subsists only on their proceeds: it extracts and exports; as a result, the economy flourishes. Nobody is developing products and making investments in technology at the same time; the country is just using its natural resources until they are exhausted.

Intensive economic growth happens as a result of the state's efforts to enhance technologies, master scientific and technological advances, and invest in new and creative businesses. Generally speaking, robots are replacing the hoe and the plow, resulting in increased output, increased GDP, and increased living standards.

Economic growth is dependent on a variety of factors, including the number of able-bodied people in the country, the number of qualified specialists, the number of natural resources available, how technologically advanced the production is, whether the socio-political situation is stable, whether investments are growing, and so on.

Why maintaining low inflation is critical for economic growth?

What actions do ordinary people, entrepreneurs, and businesses take in the face of high and unexpected inflation rates? They spend what they earn as rapidly as possible, refuse to save and make long-term investments, and instead of investing in development, they invest in precious commodities, real estate, and foreign money. It becomes hard to plan anything for a long period of time in advance, which is the most fundamental prerequisite for the expansion of investments and the expansion of the economy as a whole.

Without long-term planning and investment, it is difficult to advance science, technology, and new industries, all of which are necessary for the development of the contemporary economy, which would be unfathomable otherwise. Economic growth with high inflation is conceivable if external circumstances such as high prices for exported natural resources, for example, make it easier to achieve the growth. However, the influence of such causes may eventually fade away, and with it, the economic expansion would unavoidably come to an end.

Today, nearly two-thirds of global GDP—that is, all the goods and services that the entire world has produced overtime—accounts for countries where central banks control inflation in one form or another. After all, the lower the pace of price increase, the easier it is to prepare ahead of time - this is true for businesses, financial institutions, and even regular individuals. Prices that remain stable serve as the foundation for economic progress.


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