Economics 101 continued..... .(Source Investopedia/others)
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Economics
• A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants.
• Components : Macroeconomics, which concentrates on the behavior of the overall economy.
• Microeconomics, which focuses on individual consumers.
Macroeconomics
• Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.
• Macroeconomics focuses on the national economy as a whole.
• It provides a basic knowledge of how things work in the business world.
• Example would be able to interpret the Gross Domestic Product figures, inflation impact etc.
Microeconomics
• The branch of economics that analyzes the market behavior of individual consumers and firms.
• It attempt to understand the decision-making process of firms and households.
• It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers.
• In particular, microeconomics focuses on patterns of supply and demand and the determination of price and output in individual markets.
• Microeconomics looks at the smaller picture and focuses more on basic theories of supply and demand and how individual businesses decide how much of something to produce and how much to charge for it.
• People who have any desire to start their own business or who want to learn the rationale behind the pricing of particular products and services would be more interested in this area.
Keynesian Economics
• An economic theory of total spending in the economy and its effects on output and inflation.
• Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression.
• Keynes advocated increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the Depression.
• “Keynesian economics” is used to refer to the concept that optimal economic performance can be achieved – and economic slumps prevented – by influencing demand through active intervention of the government .
• Keynesian economics is considered to be a “demand-side” theory that focuses on changes in the economy over the short run.
Economics 101 continued..... (Souce Investopedia/others)
Inflation
• Inflation is defined as a sustained increase in the general level of prices for goods and services.
• Measured as an annual percentage increase.
Deflation
• General decline in prices.
• Often caused by a reduction in the supply of money or credit.
• Can be caused also by a decrease in government, personal or investment spending.
• Has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.
Hyperinflation
• Extremely rapid or out of control inflation.
• There is no precise numerical definition to hyperinflation.
• Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless.
• Famous examples of hyperinflation occurred in Germany in 1922-23. By some estimates, the average price level increased doubling every 28 hours.
Stagflation
• A condition of slow economic growth and relatively high unemployment accompanied by a rise in prices, or inflation.
• Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in.
• This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflate
Monetary Policy
• The actions of a central bank or currency boards that determine the size and rate of growth of the money supply, which in turn affects interest rates.
• Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep as reserves.
• In the United States, the Federal Reserve is in charge of monetary policy.
• Monetary policy is one of the ways that the U.S. government attempts to control the economy.
• If the money supply grows too fast, the rate of inflation will increase; if the growth of the money supply is slowed too much, then economic growth may also slow.
• In general, the U.S. sets inflation targets that are meant to maintain a steady inflation of 2% to 3%.
Accomodative Monetary Policy
• When a central bank (such as the Federal Reserve) attempts to expand the overall money supply to boost the economy when growth is slowing (as measured by GDP).
• This is done to encourage more spending from consumers and businesses by making money less expensive to borrow by lowering the interest rate.
• Furthermore, the Federal Reserve also has the authority to purchase Treasuries on the open market to infuse capital into a weakening economy.
Current Account
• The difference between a nation’s savings and its investment.
• It is an important indicator about an economy's health.
• It is defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers.
• A positive current account balance indicates that the nation is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower from the rest of the world.
• A current account surplus increases a nation’s net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount.
• The current account and the capital account are the two main components of a nation’s balance of payments.
• A country’s current account balance is influenced by factors such as – its trade policies, exchange rate, competitiveness, forex reserves, inflation rate and others.
• During a strong economic expansion, import volumes typically surge; if exports are unable to grow at the same rate, the current account deficit will widen. Conversely, during a recession, the current account deficit will shrink if imports decline and exports increase to stronger economies.
• The currency exchange rate exerts a significant influence on the trade balance, and by extension, on the current account.
• An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit (or narrowing the surplus).
• An undervalued currency, on the other hand, boosts exports and makes imports more expensive, thus increasing the current account surplus (or narrowing the deficit).
• Nations with chronic current account deficits often come under increased investor scrutiny during periods of heightened uncertainty.
• The currencies of such nations often come under speculative attack during such times.
• This creates a vicious circle where precious foreign exchange reserves are depleted to support the domestic currency, and this forex reserve depletion - combined with a deteriorating trade balance - puts further pressure on the currency.
• Embattled nations are often forced to take stringent measures to support the currency, such as raising interest rates and curbing currency outflows.
