What is meaning the Budget deficit ? What is difference between Inflation & Recession in the Economic concept?

A budget deficit is an indicator of financial health in which expenditures exceed revenue. The term budget deficit is most commonly used to refer to government spending rather than business or individual spending, but can be applied to all of these entities.

Difference between Inflation & Recession:

Inflation is a gradual continuous increase in the price of goods and services compared to some benchmark. Inflation can mean either an increase in the money supply or an increase in price. But if the money supply has been increased, prices will increase - it is simply a matter of time.

According to the International Monetary Fund, inflation is an important economic statistic because it affects the value of money and indicates the overall stability of a country's economy.

1. When the economy has unused labor or resources, inflation theoretically helps increase production. More dollars translates to more spending, which equates to more aggregated demand. More demand, in turn, triggers more production to meet that demand.
2. "Paradox of Thrift."- If consumer prices are allowed to fall consistently consumers hold off their purchases to wait for a better deal. THe businessman and farmers stop production. The net effect of this is less production, layoffs and a faltering economy. Phillips curve even mentions that that rising unemployment could be fought with increased inflation to an extent.
3. IT is good for lenders and debtors, who repay their loans with money that is less valuable than the money they borrowed. This encourages borrowing and lending, which again increases spending on all levels.

Recession is a time when trade, production and economic activities show a decline or stop. It is registered as drop in GDP. It can happen, due to reasons like

1. War
2. Govt policies- regulation, wage or price control, government instability leading to business putting investments on hold and people reducing spend
3. Scandals (stock market scandals, housing bubble, saving and loan crisis, )
4. Pull out from investments from one country to another
5. Major cause is inflation. Due to inflation, input costs increase- businesses stop investment and production. This leads to lower salaries, layoffs further reducing spend.

Recession is a cause of worry. Governments will introduce of stimulus measures to stop recessions from turning into deep depressions, but try not of preventing recessions altogether. Recessions aren’t left as unmitigated disaster, but leveraged for benefits

1. A recession helps to work off an imbalance between too much investment and too little saving.
2. According to Joseph Schumpeter recessions make necessary adjustment to change. These are“winds of creative destruction” so capital could be released from dying firms to new sectors of the economy, thereby boosting future productivity.
3. During boom, when credit is easy and thus easy to fund risky things like research and innovations that may boost future productivity growth. Booms also encourage mergers and acquisitions.

Causes of inflation

Inflation is caused by various economic factors.

1 - inflation arising from costs: This type of inflation arises because of the high operating costs in industrial or non-industrial companies, as the contribution of corporate departments in raising the salaries and wages of employees of employees, especially those working in productive sites, which comes because of the workers' demands to raise wages (age, : 40).

2. Inflation arising from demand: This type of inflation arises from an increase in the volume of monetary demand accompanied by a constant supply of goods and services, as the rise in aggregate demand is not offset by an increase in production. Leading to higher prices.

3. Inflation is the result of total changes in the composition of aggregate demand in the economy or changes in monetary demand, even if this demand is excessive or there is no economic concentration as prices are high and can not fall despite the decline in demand.

4 - inflation arising from the exercise of the economic embargo against other countries, exercised by external forces, as happened to Iraq and Cuba by America and as a result of the absence of import and export in the case of total blockade, leading to high inflation rates and thus the devaluation of the national currency and prices rise at unreasonable rates (Bazai, 1997: 91).

5 - Increasing monetary benefits: Some researchers have recently suggested that the increase in the value of monetary benefits for the value of production or the real one of the biggest causes of inflation, as illustrated by Johann Philip Putman in his book the disaster benefits. This is not surprising. Keynes expressed this in his book The Wealth of Nations: "The economic prosperity of the state increases as the value of interest approaches zero."

The relationship between inflation and recession:

The global economy has witnessed several fluctuations and waves of inflation and recession, mainly due to the inability of interest-rate instruments to manage economic activity. To my people, the remedy of this imbalance is the key to God's saying in the Qur'aan: "Everything has a difference." As the banks are the most important tools to implement economic policies aimed at achieving economic and social development, when the world experienced a great depression and severe unemployment, the result was more famine and misery, then the economic world (Keynes) to study this phenomenon and to define the phenomenon that the recession or Recession means the sudden decline in the marginal effectiveness of capital resulting in a lack of investment and effective demand.

All this leads to an imbalance between saving and investment, so that investment is low and labor is low, the level of national income is low, people tend to accumulate, stocks accumulate among employers, and so on. The definitions of contemporary economists of this phenomenon, the most important definition of which is: (The appearance of economic stagnation is reflected in the increasing commodity inventory among traders on the one hand and defaults on trade papers and checks among traders on the other hand).

Measures to reduce inflation

Inflation can be reduced, especially in developed countries, by implementing monetary and monetary policy measures:

Financial Policy:

First: The Ministry of Finance sets the fiscal policy of the state, under which the sources of revenues and their uses are determined, and the surplus in the budget reduces the amount of available liquidity. Thus reducing inflation.

Second: the Ministry of Finance to sell the public debt to the public and thus withdraw the cash available in the market and this leads to the reduction of money supply.

Third: Increase taxes on luxury goods traded by a small number of high-income residents.

Fourth: Reduction of government spending: Government expenditure is one of the reasons for the increase in the exchange of cash in the market, so reducing and reducing this spending will reduce the cash circulation in the markets (Bazai, 1997: 188).

Monetary policy:

Central banks in different countries develop and implement monetary policies by adopting a set of quantitative and qualitative instruments:

First: Quantity tools:

1. Reduced discount rate: The normal activities of commercial banks: discount commercial paper for individuals and in other cases re-deduction with the Central Bank in this case the central bank to raise the price of re-discount in order to affect the development capacity of banks in order to reduce the volume of liquidity And is one of the measures to combat inflation.

2. The entry of banks (central banks) to the markets a seller of securities in order to withdraw the penalty of liquidity in circulation in the market. Or so-called entry into the open market.

3. Increase the legal reserve ratio. Commercial banks maintain a portion of deposits with central banks, and the higher the percentage, the lower the development capacity of banks.

Second: Specific tools:

The qualitative tools are the way in which the managers of commercial banks and their bankers are convinced of the state policy to reduce liquidity in the markets. This policy is more effective in the developing country than in other countries.

Third: Interest Rates Interest rates are often associated with borrowing sources of finance whether short, medium or long-term. Capital is allocated in the framework of financial theory through interest rates. These rates vary according to varying borrowing times. Interest on short-term loans While interest rates on long-term loans are high while interest rates on medium-term loans are between the two rates and interest rates increase as demand for capital from economic growth increases.

Investment opportunities may be available to encourage investors to take advantage of these investment opportunities. The expectations of investors have a clear impact on the increase in capital demand. Their expectations are that the economic situation is improving and that an economic boom will lead to investment opportunities available to investors. Therefore, demand for capital and short-term loans increases, leading to short-term interest rates In excess of interest rates on long-term loans, unlike the rule that interest rates on long-term loans are more than short-term loans.

Interest rates are affected by several factors. The effects of these factors may require the lender to pay premiums in addition to real interest rates. The most prominent of these factors (Al-Bazai, 1997: 221): Inflation:

Inflation rates affect the cost of industrial production of enterprises in general and therefore the demand for capital to meet these costs increases. As noted earlier, the decline in the purchasing power of cash has increased the need for funding. On the assumption that the estimates of one of the business establishments indicated that the cost of a proposed production line in its annual plan for the coming year amounted to JD10 million. When the production line is returned, it is found that this amount is insufficient to cover the cost of constructing this production line. Million dinars (Bassam, 1999: 92).