The GDP Growth Rate and the Inflation Rate

In this article, we will try to understand why a low inflation rate is more important for a country’s economic growth than a high GDP growth rate.

What does economic growth mean? The answer is clear: it is the result of a country’s economic development. But how can the economic growth be measured?

If we want to estimate the level of prosperity of any person, we need to look at his net worth. The more he earns, the more he can afford. The same goes for a country’s economy. The more the total income of a nation, the more goods and services its citizens can purchase.

The function of GDP

But the only thing is that the estimation of income of one person is much more difficult task than the evaluation of income of the entire nation. That’s what GDP (the overall cost of goods and services produced in a country within a certain period of time) is all about. Consequently, if the GDP growth rate is growing, a country is experiencing an economic growth.

GDP per capita is another important economic indicator. It shows the income of an average citizen of a nation.

But can high GDP growth rates truly tell us whether the citizens of the country enjoy a high standard of living?

The answer is a no.

Other factors of economic prosperity

The GDP rate doesn’t account for such indicators as the state of the environment or the level of personal happiness. So it’s hard to actually call it the measure of well-being. The quality of life isn’t necessarily dependent on the amount of money that you have in your wallet.

Economic growth depends on various other factors, for example: how much workforce, skilled professionals and natural resources there are in the country, how many new, cutting-edge technologies are being introduced into production facilities, how successful a nation is at bringing investment into its economy, how stable political and social situation are, etc.

However, there is one thing that has a positive impact on the environment for the economic growth mentioned above. And we’re talking about an inflation rate.

A low inflation rate is crucial for the economic growth

In the presence of high and unpredictable inflation rate, people, entrepreneurs and enterprises seek to spend their money as fast as possible. They refuse to accumulate savings and give up on long-term investment. Instead, they spend their earnings on buying expensive goods, property and foreign currency, the latter serving as a hedge against their own depreciating currency and often turning into a merely speculative activity in the financial markets.

Under high inflation, long-term planning becomes impossible, and yet it is an essential condition for investment and the economic growth as a whole. Its absence hinders the long-term development of science, technologies and innovation production, without which modern economy is inconceivable.

Of course, there is a chance to achieve the economic growth in the presence of high inflation, for example, by virtue of increasing exports of natural resources at a high price (the extensive nature of economic growth), but such scenarios are merely theoretical and unsustainable in the long run.

The effect of these factors can be over at some point, and with it, the economic growth will collapse.