The paper "The Harmful Effects of Inflation " is an outstanding example of a micro and macroeconomic assignment. “ GDP is the abbreviation of gross domestic product. In other words, it is acknowledged as the sum of all the final goods and services produced in a country within a fiscal time of that country usually one year” (Brezina, 2011). However, for the GDP, only the goods and services manufactured in a country are included. Its formula is: GDP=GNP-NFP The GDP can be measured using the following three ways (Macdonald, 1999): Expenditure method Production method Income method Expenditure method This includes the GDP as total spending on final goods and services produced in a nation.
This includes consumption, investment, government purchases and net exports (Macdonald, 1999). Production method This method computes GDP by summing up the value-added of all products. It adds up prices on which they are kept in the consumption area, of all the goods and services produced excluding the production of goods at intermediate stages (Macdonald, 1999). Income method It calculates GDP by including the income attained by the workers and producers including profit and taxes paid to the government. The concept of national income is included in this approach (Macdonald, 1999). Explain the harmful effects of inflation and contrast them with the potential effects of deflation Inflation feeds on itself.
It is difficult to control at a very low rate. The following are its harmful effects (Barter, et al. , 2000; Brezina, 2011): Increase in the cost of living: Wages do not rise at the rate prices are raising. Those sectors of the economy that have fixed income get issues in attaining basic needs. The decrease in savings: As a big part of income is spent on consumption there is a low rate of saving. Fewer exports more imports: The balance of payment is badly affected due to inflation as the cost of local goods increases these prices are costly for foreigners. Production investment falls: When prices rise hoarding is encouraged.
People not selling goods for a few days make a huge amount of profit so the businessman becomes rich. Such a condition is only fruitful for some but a major part of the economy suffers.
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