Question

Given the topics of GDP, Supply and demand, CPI, Inflation rates, describe their importance and impact on national and global economy and businesses?

Answer 1

1.

• GDP measures economic performance and hence government formulates its policies accordingly, in case of low GDP government try to boost the performance and if GDP has increased government will maintain the growth and try to prevent inflation.
• In order to contract or expand business closely uses GDP as a tool. If there is a growth in the GDP business takes it as a positive sign and thus hires more employees, builds more factories and purchases more raw materials.
• Likewise when GDP grows as people are spending more and thus in order to prevent inflation central bank raises the prime interest rate and vice versa.

2.

• Being key to economic activity supply and demand influence each other thereby influence prices of goods and services.
• Demand and supply helps in the perfect allocation of resources thus used to decide product development and production.
• It is also used by the companies to study consumer behavior so as make an effort to comprehend current and future demand.

3.

• The CPI acts as one of the man indicators to assess the inflationary change, which is used to review price changes coupled with the cost of living.
• It is the most commonly statistical tool used to identifying periods of inflation or deflation, thus extensively employed economic indicator that helps to measure inflation and thereby used to check the efficiency of the economic policies.
• It is used as a guide to formulate informed decisions about the economy since it gives an idea about price changes.

4.

• Inflation is used to make better investment choices. Investment is discouraged due to high inflation and leads to lower long-term growth.
• High inflation incurs menu costs due to frequent price changes but can be mitigated by using technology.
• High inflation makes an economy susceptible to the recession and makes exports less competitive globally.
• High inflation also discourages inward investment.
• In order keep check on the inflation government makes use of contractionary monetary policies like increasing interest rates, reserve requirements or by reducing the money supply