Impact of Inflation on GDP😃

What is Inflation 🤔 ?

It is the decreasing of purchasing power of the currency or increment in the price of goods. Let me explain it simply. Today you brought some goods paying a certain amount of money. After few months the same set of goods cost more.

What is GDP?

GDP or Gross Domestic Product is the market value of all finished goods and services produce within a country in a specific time. When the GDP value increases there will be a growth in the economy.

Moderate inflation.

Moderate inflation is good for GDP growth. When the prices go up, the investment appetite of the people increases. People get interested in investments. As an example today you go and buy a motor vehicle because you know after 5/6 years you can sell it and earn a profit.

Hyperinflation.

Not inflation but hyperinflation is harmful and unhealthy for an economy. Sometimes high inflation helps aggregate supply but not always. If prices are high people show no interest in buying those things. As a result, ultimately those businesses also become unstable. Hyperinflation does not help GDP at all if the inflation is high, investor confidence decrease thus people don’t invest. This does not help GDP in long run.

Deflation.

Low inflation does not help GDP growth at all. Just think you buy $20,000 worth of property now, After 10 years if it is still worth the same there is no point in buying it now. Low inflation decreases the investment appetite of people.

Let's see an example …Zimbabwe faces an economic crisis in 2000 and the country was suffering from hyperinflation. People were unemployed and hungry. As we mentioned before, hyperinflation is crucial for a country, Zimbabwe's GDP contracted by 8.1% by 2019. So the government printed more and more money to overcome this problem 😵. But this newly printed money does not increase either productivity or new investments. So the economy couldn't produce more goods. With more money, people are trying to buy the same set of goods, and this causes an increment of prices of these goods overnight. In 2008 inflation increased 1000% per month, so the government even printed one hundred trillion dollar notes 😱 .

Let me conclude the discussion like this. Moderate inflation is good for GDP, hyperinflation is quite harmful while deflation does not help GDP growth at all.

That's all for today. Hope to meet you all with a new blog. Till then…🙋😍.