How is it determined how much money a country has

UK consumer spending growth 'falls to record low'. Does GDP tell the whole economic story? Image source, Getty Images. What is GDP? What is a recession and how will it affect me? How does GDP affect me? Image source, Reuters. GDP figures are central to the decisions the Chancellor, Rishi Sunak, will make about running the economy.

Where does the government borrow billions from? How is it measured? GDP can be measured in three ways:. Output : The total value of the goods and services produced by all sectors of the economy - agriculture, manufacturing, energy, construction, the service sector and government.

Expenditure: The value of goods and services bought by households and by government, investment in machinery and buildings - this also includes the value of exports, minus imports. Income : The value of the income generated, mostly in terms of profits and wages. Why is it often changed later? What are its limitations? GDP growth doesn't tell the whole story. Hidden economy: Unpaid work isn't captured in official figures, such as caring for an elderly relative Inequality: GDP growth doesn't tell us how income is split across a population - rising GDP could result from the richest getting richer, rather than everyone becoming better off.

Let me try to remove some of the confusion. Now suppose the government simply prints more dollar bills and gives you and imagine everyone else an additional hundred dollars. If you want to eat more than lbs of corn a month, now you can do so but presumably, since others like you also want to do the same, the demand for corn in the economy would go up and very likely its price as well.

This, roughly speaking, is inflation, and it is eroding the real value of your dollars -- you are getting less corn for every dollar than you used to. You ask, won't firms rush to meet this extra demand caused by everyone having an extra hundred dollars? Yes, they would but they'd have to hire people to work in the farms and the higher demand for workers would likely raise their wage.

Also, workers will see the inflation around them and want higher dollar wages so they can continue to buy as much corn as before.

In short, wages in real terms would rise and this would erode profits and as such, farms will not hire as many workers as you'd think. So yes, there can be a short-lived stimulative effect of printing money. Bottom line is, no government can print money to get out of a recession or downturn. The deeper reason for this is that money is really a facilitator of exchange between people, a middleman in a trade.

If goods could trade with goods directly, without a middleman, we would not need money. By accepting the currency, a merchant can sell his or her goods and have a convenient way to pay their trading partners. There are other important benefits of currency too. The relatively small size of coins and dollar bills makes them easy to transport. Consider a corn grower who would have to load a cart with food every time he needed to buy something. A farmer who relies on direct trade, for example, may only have a few weeks before his assets spoil.

With money, she can accumulate and store her wealth. However, currency has taken a number of different forms throughout history.

In many early societies, certain commodities became a standard method of payment. The Aztecs often used cocoa beans instead of trading goods directly.

However, commodities have clear drawbacks in this regard. Depending on their size, they can be hard to carry around from place to place. And in many cases, they have a limited shelf life. These are some of the reasons why minted currency was an important innovation. As far back as B. Metallic money in the form of coins made from precious metals such as gold, silver, or copper have been commonplace since early civilization.

Other forms of currency that have existed include large circular stone in the Pacific Islands, cowrie shells in pre-modern America, tobacco leaves, measurements of grains or of salt, or even cigarettes and packages of ramen noodles in prisons. More recently, technology has enabled an entirely different form of payment: electronic currency.

Today, electronic payments and digital money is not only common, but has become the most important and ubiquitous money form. However, it retains its worth for one of two reasons. The dollar fell into this category in the years following World War II, when central banks around the world could pay the U. In other words, it holds value simply because people have faith that other parties will accept it. Today, most of the major currencies around the world, including the euro , British pound and Japanese yen, fall into this category.

Fiat money moreover derives its value from the trust in the government and its ability to levy and collect taxes. While currency technically refers to physical money, financial markets refer to currencies as the units of account of national economies and the exchange rates that exist across currencies.

Because of the global nature of trade, parties often need to acquire foreign currencies as well. Governments have two basic policy choices when it comes to managing this process. The first is to offer a fixed exchange rate.

Here, the government pegs its own currency to one of the major world currencies, such as the American dollar or the euro, and sets a firm exchange rate between the two denominations. The main goal of a fixed exchange rate is to create a sense of stability, especially when a nation's financial markets are less sophisticated than those in other parts of the world. Investors gain confidence by knowing the exact amount of the pegged currency they can acquire if they so desire.

However, fixed exchange rates have also played a part in numerous currency crises in recent history. This can happen, for instance, when the purchase of local currency by the central bank leads to its overvaluation. The alternative to this system is letting the currency float. Instead of pre-determining the price of foreign currency, the market dictates what the cost will be.

The United States is just one of the major economies that uses a floating exchange rate. In a floating system, the rules of supply and demand govern a foreign currency's price. Therefore, an increase in the amount of money will make the denomination cheaper for foreign investors. And an increase in demand will strengthen the currency make it more expensive. Suppose the dollar gained value against the yen. Suddenly, Japanese businesses would have to pay more to acquire American-made goods, likely passing their costs on to consumers.

This makes U. Most of the major economies around the world now use fiat currencies. While this provides greater flexibility to address challenges, it also creates the opportunity to overspend.

The biggest hazard of printing too much money is hyperinflation.