Basic Economic Concepts - General Knowledge Notes

Definition: The total monetary value of all goods and services produced within a country over a specific period, usually a year.
Types of GDP:
- Nominal GDP: Measured at current market prices without adjusting for inflation.
- Real GDP: Adjusted for inflation, reflecting the actual value of goods and services.
- Per Capita GDP: GDP divided by the population, indicating average economic output per person.
Significance: GDP is a primary indicator of a country’s economic health and growth.

Definition: The rate at which the general price level of goods and services in an economy rises over time, reducing the purchasing power of money.
Types of Inflation:
- Demand-pull inflation: When demand for goods and services exceeds supply.
- Cost-push inflation: When production costs (e.g., wages, raw materials) rise, pushing prices higher.
- Hyperinflation: Extremely rapid and out-of-control inflation.
Measurement: Inflation is measured by indexes such as the Consumer Price Index (CPI) and the Producer Price Index (PPI).
Impact: Moderate inflation is normal, but high inflation can erode purchasing power and lead to economic instability.

Definition: A decline in the general price level of goods and services, leading to an increase in the real value of money.
Causes: Often caused by a reduction in the supply of money or credit, decreased consumer demand, or improved technology that lowers production costs.
Impact: Deflation can lead to reduced spending, lower profits for companies, and increased unemployment.

Definition: The situation when individuals who are capable and willing to work cannot find employment.
Types of Unemployment:
- Frictional: Temporary unemployment during job transitions.
- Structural: Caused by a mismatch between skills and job requirements.
- Cyclical: Linked to the economic cycle; rises during recessions and falls in periods of growth.
- Seasonal: Related to seasonal industries (e.g., agriculture, tourism).
Unemployment Rate: The percentage of the labour force that is unemployed but actively seeking work.

Supply: The quantity of a product or service that producers are willing and able to offer for sale at different price levels.
Demand: The quantity of a product or service that consumers are willing and able to purchase at different prices.
Law of Demand: As prices decrease, demand increases (and vice versa).
Law of Supply: As prices increase, supply increases (and vice versa).
Equilibrium Price: The price where supply equals demand, ensuring market stability.

Definition: The cost of borrowing money or the return on savings, expressed as a percentage of the amount loaned or saved.
Types of Interest Rates:
- Nominal Interest Rate: The rate before adjusting for inflation.
- Real Interest Rate: The nominal rate adjusted for inflation.
- Central Bank Interest Rates: Set by a country’s central bank (e.g., Federal Reserve, European Central Bank) to control monetary policy.
Impact: Lower interest rates encourage borrowing and investment, while higher rates can slow down the economy to curb inflation.

Definition: The total amount of money (cash, coins, and balances) circulating in an economy at a given time.
Measures: Often measured by monetary aggregates like M1 (physical money) and M2 (includes savings deposits, money market securities).
Control: Central banks regulate money supply through monetary policy (e.g., adjusting interest rates, open market operations).

Definition: Government decisions on taxation and public spending aimed at influencing the economy.
Types:
- Expansionary Fiscal Policy: Increases in government spending and tax cuts to stimulate economic growth.
- Contractionary Fiscal Policy: Reductions in government spending and tax increases to control inflation.
Impact: Fiscal policy directly affects aggregate demand, employment, and inflation.

Definition: Actions taken by a central bank to control the money supply and interest rates to influence economic activity.
Tools:
- Open Market Operations: Buying/selling government securities.
- Discount Rate: The interest rate charged to commercial banks for loans from the central bank.
- Reserve Requirements: The amount of funds banks must hold in reserve.
Goals: Maintain economic stability, control inflation, and stimulate growth.

Definition: The difference between the value of a country’s exports and imports.
Trade Surplus: When a country’s exports exceed its imports.
Trade Deficit: When a country’s imports exceed its exports.
Impact: A trade surplus can strengthen a country’s currency, while a deficit may weaken it.

Definition: The value of one currency compared to another.
Types:
- Fixed Exchange Rate: A currency’s value is pegged to another currency or a basket of currencies.
- Floating Exchange Rate: The value is determined by market forces of supply and demand.
Impact: Exchange rates affect international trade and investment flows.

Definition: A period of economic decline characterized by falling GDP, higher unemployment, and reduced consumer spending.
Causes: Decline in demand, external shocks (e.g., oil prices, global financial crises), or high interest rates.
Duration: Typically lasts for six months or more.

Definition: A prolonged and severe recession characterized by significant declines in economic activity across all sectors.
Example: The Great Depression of the 1930s, which saw drastic declines in GDP, high unemployment, and global economic hardship.

Definition: The cost of forgoing the next best alternative when making a decision.
Example: If a government invests in infrastructure, the opportunity cost may be reduced by spending on education.

Definition: Goods that are non-excludable and non-rivalrous, meaning one person’s use doesn’t diminish another’s, and people cannot be excluded from using them.
Examples: National defense, public parks, and street lighting.

Basic Economic Concepts – General Knowledge Notes