What is economic growth and what does inflation have to do with it

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What is economic growth?

The answer is obvious – it is the development of the economy. But how do they measure this indicator and determine whether there is growth or not?

For example, to assess whether a person is rich, we first look at their income. The more he earns, the more he can afford: a big house, a prestigious car, holidays in an expensive resort, private schools for children, treatment in the best clinics and other benefits of civilization that are available for money.

It is the same with the country’s economy: the greater the total income of the country, the more its inhabitants can afford. Another thing is that the income of an entire country is more difficult to measure than the income of one person, for this there is GDP – gross domestic product. If the GDP is growing, then the country is experiencing economic growth.

What is GDP and how to measure it?

Gross domestic product is the total value of goods and services that were produced in a country in a given period of time, such as a year.

It is not easy to calculate GDP, because you have to sum up everything that is produced in the country: both goods and services. The corn grown in the fields and the concert of a punk band also count towards GDP. All these various goods can be added up and the volume of GDP can be determined only if each of them is converted into money – into their market value. That is, in the amount of money that people are willing to pay for each of the goods, whether it be a vegetable or a ticket to a punk concert.

Valeria once a month had her hair cut at the beauty salon. For each haircut, she paid 1,000 rubles to the cashier, that is, she made her contribution to the country’s GDP. She was cut by a handsome master Valery, during the haircut they talked, then drank coffee together. The case ended with the fact that Valery and Valeria got married. Now Valeria does not need to go to the salon, her beloved husband cuts her hair for free. So the new unit of society reduced the GDP by 1,000 rubles a month.

It turns out that the higher the gross domestic product, the better the inhabitants of the country live?

Not only the level of GDP is important, but also the size of GDP per capita. Here you can also draw an analogy with a family: if a family of two people earns, say, 100,000 rubles a month, then they can afford a lot. And if 100,000 is the total income of a family with six children, besides, three aunts and two grandfathers are dependent? Of course, their standard of living will be lower than that of a family of two with the same income.

GDP per capita shows the income of an average resident of the country – the so-called average temperature in a hospital: Vasya earns 300,000, and Petya is unemployed. On average, they both receive 150,000.

By itself, GDP does not take into account such indicators as, for example, the environment or the level of personal happiness of each inhabitant. So it’s impossible to call it an ideal measure of well-being – after all, the quality of life is not always directly related to the amount of money in your wallet.

Thus, economic growth is an increase in the quantity of goods and services. Is it worth chasing consumption? After all, they say money doesn’t buy happiness. Yes, economic growth is not always synonymous with happiness and well-being, but still, GDP growth has a positive effect on living standards. The wealthier the society, the higher the life expectancy, the better medicine, the lower the crime rate. Caring for the environment is also characteristic of rich countries. Therefore, economic growth is one of the main objectives of the economic policy of any country.

What is economic growth like?

  • Extensive  is growth by increasing the amount of resources. Suppose the state has a lot of minerals, it lives only at their expense: it extracts and exports; due to this, the economy grows. At the same time, no one develops production, does not invest in technology – the country simply intensively uses the resource until it runs out.
  • Intensive economic growth occurs due to the fact that the state improves technologies, masters the achievements of science and technology, and invests in innovative business. Roughly speaking, robots are replacing the hoe and plow – production is improving, GDP and living standards are growing.

Economic growth depends on various factors: for example, how many able-bodied people are in the country, how many qualified specialists, how many natural resources, how technologically production is, whether the socio-political situation is stable, whether investments are developing, etc.

Why low inflation is important for economic growth

How do ordinary people, entrepreneurs, enterprises act in conditions of high and unpredictable inflation ? They spend what they earn as quickly as possible, refuse savings and long-term investments, invest not in development, but in valuable goods, real estate or foreign currency.

It becomes impossible to plan anything for a long time ahead, and this is the most important condition for the growth of investments and the economy as a whole.

Without long-term planning and investment, it is impossible to develop science, technology and innovative industries, without which the modern economy is unthinkable. Economic growth with high inflation is possible if this is facilitated by external factors, such as high prices for exported natural resources. But the effect of such factors may end, and along with this, economic growth will inevitably end.

Today, nearly two-thirds of global GDP—that is, all the goods and services that the entire world has produced over time—accounts for countries where central banks control inflation in one form or another. After all, the lower the price growth rate, the easier it is to plan in advance – this applies to businesses, banks, and ordinary people. Stable prices are the basis for economic development.

In 2014, the Bank of Russia launched an inflation targeting policy, that is, set itself the goal of constantly keeping price growth close to 4%. In 2015, inflation rose to double digits, but the regulator managed to bring it down.

In 2017-2020, price growth was at targets near 4%, and then accelerated strongly due to the pandemic. According to the forecast of the Bank of Russia, taking into account its  monetary policy , inflation will fall as early as 2022 and return to the target level again.

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