Chapter 13.2, Problem 1R

To determine

To discuss: The importance of the terms given.

Explanation of Solution

The significance of the various terms is as explained below:

1. Inflation: Increase in the general price level of products and services for a long period of time in an economy is termed as inflation. In situation of inflation, people spend more money considering it less valuable in future and hence it increases GDP in a shorter time period.

2. Purchasing power: The real value of products and services that can be brought with the money is termed as its purchasing power. Purchasing power helps in determining economic statistics more accurately and comparison between the market conditions of different countries can be determined.

3. Deflation:Decrease in the general price level of products and services for a long period of time in an economy is termed as deflation. Deflation affects GDP as it is one of the reasons for unemployment.

4. Consumer price index: The measure of change in the prices that are spent by an average household in buying the required products and services is termed as consumer price index. CPI measures inflation and how the change in price level affect the customers. It helps in forming various policies like fiscal policy and price policy.

5. Market base year: The starting point or a series of beginning years that is used to calculate an index number is termed as base year. The base year is used for comparing the business or economic activities of different years.

6. Producer price index: The measure of change in prices that is charged by the producers for their goods and services. This is also used to measure inflation. This index increases usually before the consumer price index.

7.GDP price deflator: The price index that eliminates the effect of inflation from GDP for better comparison of GDP of one year from another year is termed as GDP price deflator. This is used by government economists to determine the value of inflation in an economy.

8. Real GDP: That value of GDP from which the effect of inflation is eliminated. This effect is eliminated by using GDP price deflator. The real GDP provides more accurate value of products and services in an economy.

Economics Concept Introduction

Introduction:

Economic performance- The performance of a nation’s economy can be measured by national income accounting. The major statistics used is GDP; however, GDP can be misleading sometimes as it does not measure the value of depreciation. There are other factors too that influence the current dollar value of GDP and those are purchasing power, inflation and deflation.