Register now or log in to join your professional community.
Simply speaking higher GDP means higher tension on wage increase and this could be translated into higher inflation. See also IS-LM model presenting the relationship between interest rates and real output in the goods and services market and the money market.
GDP growth means output within country, when it raise people income raise , they demand more and more and in that way inflation raise
Reported gross domestic product is adjusted for inflation. The growth of unadjusted GDP means that an economy has experienced one of five scenarios:
1. Produced more at the same prices.2. Produced the same amount at higher prices.3. Produced more at higher prices.4. Produced much more at lower prices.5. Produced less at much higher prices.
Each of the other three scenarios has been witnessed and either immediately or eventually causes higher prices or inflation.
Scenario 1 implies that production is being increased to meet increased demand. Increased production leads to a lower unemployment rate, further increasing demand. Increased wages lead to higher demand as consumers spend more freely. This leads to higher GDP combined with inflation.
Scenario 2 implies that there is no increased demand from consumers, but that prices are higher. Through the early 2000s many producers were faced with increased costs due to the rapidly rising price of oil. Both GDP and inflation increase in this scenario. These increases are due to decreased supply of key commodities and consumer expectations, rather than increased demand.
Scenario 3 implies that there is both increased demand and shortage of supply. Businesses must hire more employees, further increasing demand by increasing wages. Increased demand in the face of decreased supply quickly forces prices up. In this scenario, GDP and inflation both increase at a rate that is unsustainable and is difficult for policymakers to influence or control.
Scenario 4 is unheard of in modern democratic economies for any sustained period and would be an example of a deflationary growth environment.
Scenario 5 is very similar to what the United States experienced in the 1970s and is often referred to as stagflation. GDP rises slowly, below the desired level, yet inflation persists and unemployment remains high due to low production.
Three of these five scenarios include inflation. Scenario 1 eventually leads to inflation, and scenario 4 is unsustainable. From this, it's clear that inflation and GDP growth go hand-in-hand.
When the amount of spending and income grow faster than the production of goods, prices rise, when prices rise, we call this inflation."You might want to have a look at this excellent 30min You Tube video of the biggest hedge fund manager at present day "How the economic machine works". It explains the economic cycle quite well.
"As economic activity increases, we see an expansion, the first phase of the short term debt cycle. Spending continues to increase and prices start to rise, this happens because the increase in spending is fueled by credit, which can be created instantly out of thin air. When the amount of spending and income grow faster than the production of goods, prices rise, when prices rise, we call this inflation."
