Controlling inflation

There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations (that is, using monetary policy). High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied.

Monetarists emphasize increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. This would be a return to the gold standard. All of these policies are achieved in practice through a process of open market operations.

Another method attempted in the past have been wage and price controls ("incomes policies"). Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed. Notable failures of their use include the 1972 imposition of wage and price controls by Richard Nixon. In general wage and price controls are regarded as a drastic measure, and only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. Many developed nations set prices extensively, including for basic commodities as gasoline. The usual economic analysis is that that which is under priced is overconsumed, and that the distortions that occur will force adjustments in supply. For example, if the official price of bread is too low, there will be too little bread at official prices.

Temporary controls may complement a recession as a way to fight inflation: the controls make the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the kinds of distortions that controls cause when demand is high. However, in general the advice of economists is not to impose price controls but to liberalize prices by assuming that the economy will adjust and abandon unprofitable economic activity. The lower activity will place fewer demands on whatever commodities were driving inflation, whether labor or resources, and inflation will fall with total economic output. This often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed. See Creative destruction.

Adopted from Wikipedia.

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GDP

GDP — or Gross Domestic Product — is the most widely used indicator of the overall size and health of a country 's economy.

The "Gross" in GDP means that it includes the costs associated with the depreciation of things like buildings machinery and equipment.

The "Domestic" refers to the requirement that the economic activity must take place within the boundaries of Canada, so goods produced by Canadian companies overseas are not factored in, and goods produced for foreign companies in Canada are.

As for "Product," GDP measures the result of production — the value of all good and services produced in one year.

When you see GDP growth figures cited, they're usually "real" GDP figures. Real GDP excludes the effects of inflation, so it's easy to see if the economy "really" grew, or if inflation alone was responsible for the increase in a country's total output.

The growth in real GDP is widely used as a standard to indicate the economy's health. It is this growth figure that economists look for in the GDP reports that Statistics Canada churns out and releases at the end of every month.

How is GDP calculated?

Statistics Canada gathers much of the raw data it uses to calculate GDP from its own surveys, like the monthly survey of manufacturing or the survey of employment, payrolls and hours. It also gathers data from other federal departments and agencies, other levels of government and from private industry.

GDP based on purchasing power parity - 2007 (US$)
Country	Per capita GDP
Qatar	$80,870
Luxembourg	$80,457
U.S.	$45,845
Canada	$38,435
U.K.	$35,134
Dem. Rep. of the Congo	$309
Zimbabwe	$188
Source: IMF

There are many ways to express a country's GDP. Statistics Canada calculates the country's GDP by industry. It divides the economy into goods-producing industries (like manufacturing, construction, and energy) and service-producing industries (like retail trade, health care, and finance).

GDP is calculated on a "value-added" basis. In other words, only the value of production added at each state of the manufacture of a product is counted. If this didn't happen, production would be double-counted and GDP would be inflated.