Rate of Inflation

The Rate of Inflation is the rate at which prices are rising within the economy in general within a one year period. It is regarded as one of the most important economic indicators. Of course, it is not practical to measure changes in price for all goods which are sold within an economy so governments measure inflation by taking a basket of typical goods, products which would regularly be bought by ordinary households within the country, and monitoring prices for the products within it.

Low rates of inflation are today considered normal in the developed world. In modern times, it is almost unheard of for a country to experience deflation, that is a fall in prices. Low inflation is not considered damaging, however. When the rate of inflation becomes high, however, such as into double digits, it is considered to have a very negative effect on the economy. It disrupts existing contract arrangements because prices set in the contracts are no longer worth as much as they seemed to be at the time the contracts were signed. This can worsen industrial relations, provoking demands for pay increases and strike action, for example. High inflation also creates problems for people on fixed incomes, whose real purchasing power is diminished.

What is Consumer Spending

Consumer spending is a measure of the amount of money used by ordinary people to make purchases in an economy in a period of time. It is one of the most important drivers of a modern economy. Consumer spending is affected by a number of factors. In part, it is seasonal in nature. In Western economies, for example, consumer spending is far higher around Christmas time than at other times of the year. In part, it is affected by the levels of disposable income. Anything which changes the average level of disposable income will ultimately affect consumer spending. For example, if a government raises or lowers taxes, this will result in the ordinary person have more or less disposable income than before. This will shortly feed through to consumer spending levels in the economy. Similarly, a raising or lowering of the prevailing level of interest rates in the economy will affect disposable income through the level of monthly payments which will be required on debt products such as mortgages.

Most importantly, consumer spending is affected by the level of confidence which people have in the economy and in their own personal financial circumstances. In particular, the purchase of large ticket items, such as houses, cars, some white goods, will be swayed by current consumer confidence levels.

Gross Domestic Product

Gross Domestic Product (GDP) is a measure of the total economic value of everything produced in a certain area (usually a country) in one year. The wealth of a country is usually measured as GDP per capita. This figure is arrived at by taking the total gross domestic product and dividing it by the number of people in the economy.

There are different ways of measuring gross domestic product. One way is to count up all the money spent by individuals, companies and governments on different things in one year and add it together. Another is to count up all the income received by individuals, companies and governments in one year and add that together. Yet another approach is to measure the value of the output of everything produced by individuals, governments and corporations within the area within one year and add that up. In theory, all three of these approaches, which are known as the expenditure approach, the income approach and the output approach, all ought to yield the same value for gross domestic product. In practice, there are usually slight differences between the value yielded by each.

In modern economies, the rate of growth (or of contraction in cases of recession) of GDP is usually estimated on a quarterly basis.

What is Economy

The term economy is usually used to describe the sum total of transactions – the buying or selling of goods or services - within a defined geographic area, usually a country, over a period of time. Economists have devised a number of concepts for measuring the size of an economy. Among these are the Gross Domestic Product and the Gross National Product.

It is generally considered desirable that the size of an economy should expand over time since this means that the people within the country become wealthier. Some ecologically-minded people dissent from this view, however, arguing that the high levels of personal consumption prevalent in the Western world are unsustainable because they represent too much of a drain on the earth’s resources.

In modern times, in the developed world, economies have experienced an almost constant expansion, though growth rates among them have differed. Exceptions to this, when economies in fact contracted, have generally been brief and are known as recessions or, in extreme cases, depressions.

Outside of the developed Western world, the picture has been more varied and exhibits more extremes. Cases exist, on the one hand, of economies shrinking over time and, on the other, of experiencing rapid expansion, enjoying much higher rates of economic growth than are common in the West.