Introductory Economics, Essays (university) of Market economy

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CIE

Islamic Financial System

2017/2018 Semester 2

Dr Tan Tuck Cheong

ASSIGNMENT 2

Economic Growth and Inflation

Prepared by

Ahmad Haikal bin Ahmad Mochtar

CIC

Definition of Economic Growth Economic growth is the increased capacity for an economy to produce goods and services across different periods of time. It is measured in terms of dollars. The traditional metric used to measure economic growth is gross domestic product (GDP). It is the monetary measure of all final goods and services produced by the economy in a stipulated duration. Malaysian Inflation Rate Period (Year) Inflation Rate (Annual, %) 2016 2. 2017 3. Inflation rate is the rate of price increase in a given period of time. It is usually measured as a difference between consumer price index (CPI), the measurement of price for a basket of goods most commonly purchased by citizens for a certain period of time. In this scenario, it can be said that in the year 2016, the average rate of price of goods increased by 2.1% from early 2016 to the end of 2016. Whereas, the average price increase of goods was 3.8% from early 2017 to the end of the year. Is Inflation Rarely Bad? Inflation is a double-edged sword in the sense that it can be both good and bad. Mild inflation is necessary as an indicator of economic growth. Without inflation, price of goods will remain stagnant or deflate, causing less earnings for firms. This will cause firms to save more and invest less, or not to invest at all. This will reduce economic growth and perhaps cause unemployment as firms lay out workers to maintain profit. This scenario can be observed in Japan as it faces a period of deflation and little to no economic growth since the Lost Decade. Hyperinflation is bad as it causes instability in the price of goods. An unending increase in price of goods will cause consumers to suffer as they could not afford to pay for the most basic necessities. An example of this was during Germany’s Weimar Republic.