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A sacrifice ratio is a type of assessment that is utilized to identify the changes that are necessary to the economic output of a nation in order to move the rate of inflation to a more acceptable level. Depending on what is happening with the economy, this may involve taking action to discourage certain types of growth within the economy as a means of slowing the rate of inflation. At the same time, measures may be taken to promote growth within certain sectors of the economy as a means of moving that economy out of a recession. Calculating the sacrifice ratio makes it easier to understand the costs that are incurred when reducing economic input in order to restore some degree of economic balance.
The basic formula for determining a sacrifice ratio calls for identifying the anticipated impact of slowing portions of the economy in order to deal with rising inflation. Once the cost of that lost production is determined in terms of a monetary amount, the figure is divided by the current rate of inflation, expressed as a percentage. Once determined, the sacrifice ratio makes it easier to see if the changes in output were sufficient to slow or stop the rate of inflation so that the economy is on a more stable foundation.
Determining the sacrifice ratio can also help to determine if the efforts to slow economic output were too severe, effectively paving the way for the economy to enter in to a period of recession or possibly even a depression. When the results that the slowdown on output has produced an extreme shift in the rate of inflation, steps may be taken to begin promoting increased output in selected sectors of the economy. By monitoring the movement of output and using this process to calculate the sacrifice ratio, it is possible to slow the movement toward a recession and control the rate of inflation as a means of moving the overall economy into a state that is considered to be beneficial for the majority of individuals and businesses that function within a defined geographical area.
As with most calculations used to measure the condition of the economy, the sacrifice ratio is only as good as the data collected. This means that if the information regarding the reduction in economic growth is not complete, the ratio will be inaccurate and the results will not represent the true status of the change in the rate of inflation. As a result, actions may be taken that can cause long-term damage to the economy, either by failing to control the forward march of inflation or forcing the economy into a recession or depression that creates widespread economic hardship.