Economics 101

We all find economic terms like GDP or growth rate confusing, horrific, and boring. At the Finance Box, we will break it down and make it less tedious for you. GDP refers to the goods and services produced in the economy. The higher the GDP, the better the economic condition of the country. The past year has been challenging for the global economy. Due to a nationwide lockdown, several companies ran out of business; hence our GDP decreased.

Economic growth means the growth of GDP we expect in the future a.k.a “Potential GDP”. If we expect that the businesses will grow, people will get jobs, we are expecting economic growth. In reality, GDP might differ from the potential GDP but on average, it will be the same as the potential GDP.

Let us take a simple analogy, if a student scores below what was expected of him, the teacher will support the student by making the concept easy and help him by providing extra notes. In the same way, our government, like a good teacher, will lower interest rates, increase spending and encourage the people to invest in the economy. This support will eventually make the economy (student) match up to the expectations.

What if the student scores way above the expectation? It’s only natural for the student to slack off. The teacher in this case will try to provide extra incentives for the student to keep performing but will also be strict. The government will increase interest rates, decrease spending to keep the economy in check.

In the above analogy, the former condition is called “Deflationary environment”, where the GDP is lower than expected (Potential GDP), in such a situation, prices of goods and services go down, which is great for shopping but people lose out on jobs. And if not corrected, it will eventually lead to a recession. On the other hand, the latter condition is called “Inflationary environment”, the prices of goods rise up, and people spend more money rather than saving it. The government has to keep both deflation and inflation in check to help the economy grow.

As the business activities have started to come back to normal level, the state of economy is rather cloudy. Guess we need to wait to find out if the student will match the expectations this time or not?

Concept: Shivangi Bhatia
Editor: Minakshi Agrawal Todi