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Knowledge Kit

Deflation, Economic Growth, BOP, IMF definition - SME Knowledge Kit

Jun 2009

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Deflation

In economics, deflation is a decrease in the general price level of goods and services.[1] Deflation occurs when the annual inflation rate falls below zero percent, resulting in an increase in the real value of money a negative inflation rate. This should not be confused with disinflation, a slow-down in the inflation rate (i.e. when the inflation decreases, but still remains positive).[2] Inflation reduces the real value of money over time, conversely, deflation increases the real value of money.

Currently, mainstream economists generally believe that deflation is a problem in a modern economy because of the danger of a deflationary spiral.[3] Deflation is also linked with recessions and with the Great Depression. Additionally, deflation also prevents monetary policy from stabilizing the economy because of a mechanism called the liquidity trap. However, historically not all episodes of deflation correspond with periods of poor economic growth.

Economic Growth

Economic growth is the increase in the amount of the goods and services produced by an economy over time.[1] It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," which is caused by growth in aggregate demand or observed output.

As an area of study, economic growth is generally distinguished from development economics. The former is primarily the study of how countries can advance their economies. The latter is the study of the economic aspects of the development process in low-income countries. As economic growth is measured as the annual percent change of gross domestic product (GDP), it has all the advantages and drawbacks of that measure.

GDP per capita is not the same thing as earnings per worker since GDP measures only monetary transactions for all final goods and services in country without regard to who receives that money. For example, in the US from 1990 to 2006 the earnings (adjusted for inflation) of individual workers, in private industry and services, increased by less than 0.5% per year while GDP (adjusted for inflation) increased about 3.6% per year over the same period.

Balance of payments (BOP)

In economics, the balance of payments, (or BOP) measures the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific time period, usually a year. The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits). Balance of payments is one of the major indicators of a country's status in international trade, with net capital outflow.

The balance, like other accounting statements, is prepared in a single currency, usually the domestic. Foreign assets and flows are valued at the exchange rate of the time of transaction.

IMF definition

The IMF definition: "Balance of Payments is a statistical statement that summarizes transactions between residents and nonresidents during a period."[1] The balance of payments comprises the current account, the capital account, and the financial account. "Together, these accounts balance in the sense that the sum of the entries is conceptually zero."[1]

• The current account consists of the goods and services account, the primary income account and the secondary income account.

• The financial account records transactions that involve financial assets and liabilities and that take place between residents and nonresidents.

• The capital account in the international accounts shows (1) capital transfers receivable and payable; and (2) the acquisition and disposal of nonproduced nonfinancial assets.

In economic literature, "capital account" is often used to refer to what is now called the financial account and remaining capital account in the IMF manual and in the System of National Accounts. The use of the term capital account in the IMF manual is designed to be consistent with the System of National Accounts, which distinguishes between capital transactions and financial transactions.

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