Macroeconomics What Is Inflation, Stagflation,

Macroeconomics

What is Inflation, Stagflation, Recession, Depression, Expansion and Contraction?

Inflation is growth in the value of goods and services that are available to customers. It results in a decline of the purchasing power because one dollar buys lesser worth of goods when the inflation is high. For example, when the rate of inflation is 3%, the cost of one piece of chocolate that was costing $1 before, would cost $1.03 now. Though this is not a significant change, it affects customers when the same amount of increase is applied to all products. This is the reason most Governments try to keep the inflation between 2% to 3%.

Stagflation is more complex than inflation because it is a combination of slow economic growth and high inflation. During this period, there is a high unemployment rate because of slower economic growth and the high prices of goods makes it difficult for people to buy anything at all. A good example of such a situation happened during the 1970s when many Western countries faced high levels of inflation due to the increased oil prices and the economy did not grow fast enough to keep pace with the inflation. This resulted in a period of stagflation that was later resolved as oil prices dropped and economy boomed.

Recession is a part of the cycle of economic growth and in this phase, the economic activity across all sectors go down. The unemployment rate goes up and there is economic hardship for most residents of the country. When the Gross Domestic Product (GDP) of two consecutive quarters is negative, then the economy is said to be in recession. It usually lasts anywhere between a few months to a couple of years before the economy bounces back again due to fiscal and monetary measures taken by the central bank.

Economic depression is a term used to describe a severe economic downturn that lasts for many years. The effects of such a downturn is felt across an entire generation of people and it transforms the mindset of the people as well as the country's economy drastically. An example of such a downturn was the Great Depression of 1929 that saw extremely high levels of unemployment, underemployment and economic suffering.

Economic expansion is a favorable period in which the economic activity increases across all sectors and industries. During this period, there is an increase in GDP, credit is readily available and there is an overall air of prosperity. Economic contraction, on the other hand, is a period during which there is a decline in GDP, the economic growth slows down and unemployment increases. The expansion and contraction are part of a business cycle and they follow each other.

Relationship between these terms