GDP, Business cycle, Demand supply, Money Supply, elasticity and monetary and fiscal policy etc

What Is the GDP Growth Rate?

The GDP growth rate measures how fast the economy is growing. It does this by comparing one quarter of the country's economic output  (Gross Domestic Product) to the last.

The GDP growth rate is driven by the four components of GDP.

1.    the most important driver of GDP growth is personal consumption, which includes retail sales.

2.    GDP growth is also driven by business investment, which includes construction and inventory levels.

         3.  Government spending is another driver of growth, and is sometimes necessary to jumpstart the economy after a recession.

4.        4. exports and imports. Exports drive growth, but increases in imports have a negative impact.

Why Is the GDP Growth Rate Important?

The GDP growth rate is the most important indicator of economic health. When the economy is expanding, the GDP growth rate is positive. If it's growing, so will business, jobs and personal income.

If it's slowing down, then businesses will hold off investing in new purchases and hiring new employees, waiting to see if the economy will improve.

This happened most recently in late 2008 / early 2009, when U.S. GDP growth was negative for four quarters in a row. The last time this happened was during the Great Depression. The growth rate turned positive in Q2 2008, and then turned negative again, prompting concerns about a double-dip recession.

Boom and Bust Cycle/business cycle

 

The business cycle is the four phases of economic growthand subsequent decline. It's more commonly called the boom and bust cycle.

 

The goal of economic policy is to keep the economy in a healthy growth rate -- fast enough to create jobs for everyone who wants one, but slow enough to avoid inflation.

The most important factor is confidence -- of investors, consumers, businesses and politicians.

 

The economy grows when there is confidence in the future and in policymakers, and does the opposite when confidence drops.

The 4 Stages of the Business Cycle

There are four phases that describe the business cycle. At any point in time you are in one of these stages:

1.      Contraction - When the economy starts slowing down. It's usually accompanied by a bear market.

2.      Trough - When the economy hits bottom, usually in a recession.

3.      Expansion - When the economy starts growing again. It's usually signaled by a bull market.

4.      Peak - When the economy is overheated, and is in a state of "irrational exuberance." This is when inflation rears its ugly head.

 

The boom and bust cycle is the alternating phases of economic growth and decline. It's how most people describe the business cycleor economic cycle.

In the boom cycle, economic growth is positive. If GDP growth remains in the healthy 2-3% range, it can stay in this phase for year.  It's accompanied by a bull market, rising housing prices, wage growth and low unemployment.

During a boom cycle, everyone thinks they will get super-rich. 

The bust phase is like life in the Middle Ages--brutish, nasty, and mercifully short. It usually only lasts 18 months or less. GDP turns negative, the unemployment rate is 7% or higher, and the value of investments fall. If it last more than three months, it's usually a recession. It can be triggered by a stock market crash, followed by a bear market.

What Is Monetary Policy? Objectives,Types and Tools

 

 Monetary policy is how central banks manage the money supply to guide healthy economic growth. The money supply is credit, cash, checks, and money market mutual funds. The most important of these is credit, which includes loans, bonds, mortgages, and other agreements to repay. 

Objectives of Monetary Policy

The major objective of central banks, including the U.S. Federal Reserve, is to manage inflation.

The second objective is to reduce unemployment, once inflation has been controlled.

Central banks have three main tools of monetary policy:

1.    open market operations,

2.    the discount rate, and

3.    a bank's reserve requirement.

1.       Open market operations is when central banks buy or sell securities from the country's banks. Buying securities adds cash to the banks' reserves, allowing them to lend more.

 Fiscal policy is how the government guides spending and taxation. It's usually expansionary, but can be contractionary.

Tools of Fiscal Policy

The first tool is taxation, whether of income, capital gains from investments, property, sales or just about anything else. Taxes provide the major revenue source that funds government. 

The second tool is spending. The government provides subsidies, transfer payments including welfare programs, contracts to perform all kinds of public works, and of course salaries to government employees -- to name just a few. The reason government spending is a tool is that whatever or whoever receives the funds has more money to spend, thus driving demand and economic growth.

Demand:

Demand in economics is how many goods and services are bought at various prices during a certain period of time. Demand is the consumer's need or desire to own the product

Determinants of Demand

2.      There are five determinants of demand. The most important is the price of the good or service itself.

3.      The next is the price of either related products, which are either substitutes or complementary.

4.      The next three are driven by consumer circumstances: their incomes, their tastes and their expectations. 

Demand elasticity means how much more, or less, demand changes when the price does. It's specifically measured as a ratio -- the percent change of the quantity demanded divided by the percent change in price. There are three levels of demand elasticity:

1. Unit elastic is when demand changes the exact same percent as the price does.
2. Elastic is when demand changes by a greater percent than the price does.
3. Inelastic is when demand changes a smaller percent than the price does.

Elastic demand means that consumers are really sensitive to price changes. If the price goes down just a little, they'll buy a lot more. If prices rise just a bit, they'll stop buying as much and wait for prices to return to normal. This relationship between price and the quantity bought is guided by the Law of Demand.

Deposit money banks are resident depository corporations and quasi-corporations which have any liabilities in the form of deposits payable on demand, transferable by cheque or otherwise usable for making payments

1.     In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.

Money supply in Bangladesh

Current money supply 

Sources:

http://www.bangladesh-bank.org/econdata/moneysupply.php

Paper money or coins of little or no intrinsic value in themselves and not convertible into gold or silver, but made legal tender by fiat (order) of the government. 

Fiat money is an intrinsically worthless object, such as paper money, that is deemed to be money by law. To place it into historical context, one could think of three phases concerning the development of money.

First, money itself was a valuable object, such as gold, fur or peppercorns.

Second, paper money circulated, but this money was backed up by holdings of gold, and indeed could be converted into gold at a fixed price at any time.

Third, paper money circulated, but it was not backed up by anything other than the government’s promise that it will refrain from printing too much money so as to make it worthless. Since Bretton Woods, almost all paper money is of this type. 

Example
The problem, of course, was that sometimes governments broke their promise. Following World War I, Germany printed so much money that what could be purchased for one mark in 1918 cost about one trillion marks in 1923.

For instance, in 2009, one US dollar brought you more than 6 billion Zimbabwe dollars at the official exchange rate (and this was even after multiple currency reforms due to prior excessive inflation rates).

In both cases the government lost credibility so that it could not borrow to finance large budget deficits, and hence had to pay its bills with massive amounts of newly-printed fiat money

Elasticity is the relative change of dependent and independent variable.

The most common type of elasticity is the price elasticity. This type of elasticity is used as a measure of relative changes in quantity demand due to relative changes in commodity prices when all the other factors are held constant. The other types of elasticity of demand are income elasticity of demand and cross price elasticity of demand. Income elasticity of demand is a measure of the relative change in quantity demanded relative to the changes in consumer’s income