Economics: Emerged as a subject & the economy is the backbone of a country even for someone!

The insight of Economics!!!

By name, Economics is a noun and also a subject. It is part of social science that concentrates on the study of how a society organizes its money, trade, industry, etc. To ensure production, distribution, and consumption of goods and services are also concerned with economics. In other words, economics is how money influences or is organized within an area of business of a society. Economics is concerned about the well-being of the population of people of a country despite those who are employed or not having employment. At the same time, it is also concerned with those having high income or low income. Economics stated that the incremental production of necessary/useful goods and services might cause environmental pollution. It raises the question of how education would be helpful to make workers skilled. It is also concerned with how government spending, taxes, and regulations impose an effect on the decision on production and consumption. So, it is easily understandable that economics covers a wide range of ground.

Economics has basic two wings:

  • Macroeconomics
  • Microeconomics

The below figure would tell us the overview.

Better talk about Micro and Macroeconomics.

Microeconomics: It highlights an individual’s activities/actions within the economy of a country, or in other words, it is the study of the behavior of individual households and firms in making decisions based on limited resources. Examples might be, households, workers, and businesses.

Macroeconomics: It highlights the performance, structure, behavior, and decision-making of an economy as a whole rather than concentrating on the individual market. Macroeconomics considers a broad range of issues like growth in production, unemployment of the people, deficits of government policy, etc.

Microeconomics and Macroeconomics both exist in the economy of a country but bear different viewpoints. From the above definition of both, we can summarize by saying that the viewpoint of Microeconomics is narrow, not thorough. But Macroeconomics is thorough, and the working platform is wide.

Some relevant topics of both Micro and Macroeconomics would be discussed later.

While talking in detail about economics, more than one term needs to be incorporated into our discussion. That is,

  1. Economic
  2. Economy

First we better talk about the economy which is a noun by name. Economy refers to the relationship between production, trade, and the supply of money in a particular country or region but careful or concerned about the wastage of money. For example, we say that “The world’s economy has been affected significantly due to recent unrest political situation existing between X, Y, Z countries”.

Secondly, the term economy comes out into discussion. It is an adjective. Economic means, it is connected with the economy of a country or an area, or with the money that a society has. We say, “The newly taken government’s economic policy would not be helpful to stabilize the social stability of our country”.

The economists have categorized economics as follows:

4 main factors influence economic growth within a country:

  • Land [natural resources] available.
  • Investment in Human Capital.
  • Investment in Physical Capital.
  • Entrepreneurship.

There are four different types of economies;

  1. traditional economy
  2. market economy
  3. command economy
  4. mixed economy.

Traditional Economy

The traditional economy is mostly rural and farm-based. It is such a system where traditions, customs, beliefs play a role in the goods and services to establish an economic platform.

In reality, the advantage and disadvantages of the traditional economic system are almost the same. The breakdown of the economy happens if the population becomes a failure to produce the goods that they need.

Market Economy

In the market economic system, the price and production both are controlled by the buyers and the sellers.

The advantage of the market economy includes increased efficiency, productivity, etc. The decisions are made by both parties without the interference of the government. That does indicate, this system works based on the free market concept.

The main drawback of this system is, the highest quality worker performs against the lowest wages.

The following six characteristics define a market economy.

· Private Property. Most goods and services are privately-owned.

· Freedom of Choice. Owners are free to produce, sell, and purchase goods and services in a competitive market.

· Motive of Self-Interest.

· Competition.

· System of Markets and Prices.

· Limited Government interference.

Command Economy

As its name suggests, some commanding scenario is available. That does mean, the government determines the goods, their quantity, and the pricing as well. It also determines investments and incomes. The government has got full/absolute control/power over the selling price of the ds and the wages of the workers.

Command economy advantages include low levels of inequality and unemployment and the common good replacing profit as the primary incentive of production.

Command economy disadvantages include lack of competition and lack of efficiency.

Mixed Economy

As the name suggests, a mixed economy incorporates various economic systems. That is, private to public enterprise, free markets with state interventionism, etc. There is no specific definition against the mixed economy.

A mixed economy permits private participation which reflects individual performance. As a mixed economy consists of both government and individual entities, sometimes imposed regulations of the government might cause situations to put the business out of the market.

Some important terms require to be known before proceeding with depth discussion. Those are,

  • GDP (Gross Domestic Product)
  • Inflation
  • Deflation
  • Aggregate demand (AD)
  • Aggregate Supply (AS)
  • LRAS (Long-Run Aggregate Supply)

GDP (Gross Domestic Product)

GDP is the money measurement of all finished goods and services within a country during a specified time. The size of the economy and its incremental scenario both are reflected by the GDP of a country.

There are three ways to calculate the GDP of a country.

  • Using expenditures
  • Production
  • Income

Now, a general curiosity might come to mind about how GDP is calculated. The GDP is as follows:

GDP = private consumption + gross investment + government investment + government spending + (exports – imports).

Here, the term “gross” means that GDP only measures or is concerned with production regardless of various uses of products where those products would be used.

What would happen if the GDP of a country becomes stronger?

If we concentrate on the GDP calculating formula, we would realize that the firms have to hire or deploy more workers and would be obliged to pay a high salary and wages. This would certainly be imposed on consumers to spend more while having goods and services. In this aspect, two obvious questions arise. And that is,

1. Increment of GDP of a country is good or bad

2. Decrement of GDP of a country is good or bad

As GDP overviews the economic strength of a country, the increment of GDP is certainly stated that the country’s economic condition is in good shape and vice-versa.

GDP impacts personal finance, investments, and job growth. Investors incorporate themselves within the stream of that particular country’s economic ground by purchasing shares of companies that are growing rapidly.

The components of GDP include personal consumption expenditures (C), business investments (I), government spending (G), exports (X), and imports (M). GDP is equal to C + I + G + (X – M).

Increment of GDP

Decrement of GDP

Inflation

Inflation is a general rise in the prices of services and goods in a particular country. That results in a fall in the value of money. When Inflation is too high, it is not good for the economy of the country as it always reduces the value of money unless interest rates are higher than inflation. When the economy is not running at capacity, meaning there is unused labor or resources, inflation helps increase production.

Very low inflation usually signals demand for goods and services is lower than it should be, and this tends to slow economic growth and depress wages. This low demand can even lead to a recession with increases in unemployment.

Recession

A recession is a severe scenario of a country’s economy when insignificant trade and industrial activities occur than usual. As a result, more people become unemployed.

Deflation

Deflation is a reduction in the amount of money in the country’s economy so that prices fall or remain the same. As prices fall, production slows, and inventories are liquidated. Demand drops and unemployment increases.

AD (Aggregate Demand)

In macroeconomics, the aggregated demand i.e. AD is the cumulative/entire demand against finished goods and services in an economy of a country at a specified time. AD specifies that all goods and services would be purchased against all possible price levels. It is the demand for the gross domestic product (GDP) of a country.

Typical AD graph

When the price level falls, consumers are wealthier, a condition that induces more consumer spending. Thus, a drop in the price level induces consumers to spend more, thereby increasing the aggregate demand. The second reason for the downward slope of the aggregate demand curve is Keynes’s interest-rate effect.

Aggregate demand is based on four components:

  • Consumption
  • Investment
  • Government expending
  • Exports

If there is a fall in interest rates, then production will increase as technology improves, and output increases.

Aggregate means “total”. So, “Aggregate demand (AD)” bears the meaning of total demand of the population of a country within an economy.

Aggregate demand (AD)= total spending on goods and services

The formula for calculating aggregate demand is,

AD = C + I + G + (X-M)

Here, the components of AD stand for,

C Consumer’s expenditure on goods and services

I Capital Investment

G Government Spending

X Exports of goods and services

M Imports of goods and services

C: Consumer’s expenditure on goods and services: This AD component deals with durable or non-durable goods and services. Multimedia equipment is an example of durable goods and various foodstuffs are for non-durable goods.

I: Capital Investment: It is such an investment that includes capital goods such as plants and equipment and new buildings to generate more consumer goods.

G: Government Spending: This kind of spending is state-provided goods and services which include public goods and merit goods.

X: Exports of goods and services: Exports are an inflow of demand into the local country’s circular flow of income and spending which leads to aggregated demand.

M: Imports of goods and services: Imports are withdrawal of demand from a local country’s circular flow of income and spending.

Aggregate Supply (AS)

In economics, aggregate supply also named as domestic final supply is the total supply of goods and services available in the local market provided by the producers at a specified period. It is the total amount of goods and services that producers wish and got the ability to sell at a given price level in an economy.

The Aggregate Supply (AS) graph curve reflects the gross output i.e real GDP that producers wish and got the ability to sell at a given price level. The curve has got an upward direction.

FAQ:

How does fiscal policy affect the economy?

Fiscal policy affects aggregate demand through changes in government spending and taxation. Those factors influence employment and household income, which then impact consumer spending and investment. Monetary policy impacts the money supply in an economy, which influences interest rates and the inflation rate.

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