What Is Economics?

What Is Economics?

Why Should We Learn About Global Markets?

Economics is the science that teaches us how to use limited resources. In other words, it is a branch of social science that analyzes the production, distribution, and consumption of goods and services. Overall, economics is the study of how to efficiently allocate limited resources to satisfy unlimited needs.

Two Main Perspectives in Economics

1. Microeconomics

2. Macroeconomics

Macroeconomics

Macroeconomics looks at the economy from a top-down perspective, focusing on issues like inflation, gross domestic product (GDP), and unemployment levels. Since this approach views things from above, the effects of economic changes are usually observed later and take time to impact markets.

Main Topics in Macroeconomics:

• The big picture

• National and international issues

• Governments and economic policy

Microeconomics

Microeconomics looks at issues from within — like inside a company or a factory. Because it examines individual and internal factors, the effects of changes are observed more quickly.

Main Topics in Microeconomics:

1. Consumer decision-making and behavior at an individual level

2. Goods and services

3. Households and firms

Principles of Economics According to Gregory Mankiw

1. The cost of something is what you give up to get it (opportunity cost)

2. People are involved in trade (e.g., households)

3. People respond to incentives

4. Trade can make everyone better off (comparative advantage)

5. Markets are usually a good way to organize economic activity

6. Governments can sometimes improve economic outcomes

   • They intervene for fairness and better resource allocation

7. A country’s standard of living depends on its ability to produce goods and services

8. Too much money printing leads to inflation

9. Society faces a trade-off between inflation and unemployment

The Circular Flow of Income

This concept divides the economy into two major groups: households and firms.

• Firms need labor, capital, and physical space to produce goods — which they acquire from households.

• Households then consume the goods and services provided by firms.

Two Key Economic Terms:

• Income: Net profit or income related to households

• Revenue: Gross sales or income related to firms

Gross Domestic Product (GDP)

GDP is the total value of all final goods and services produced within a country — both by domestic and foreign resources — during a specific period (usually one year). It reflects a nation’s overall economic activity and performance and includes foreign workers.

Key Points About GDP:

1. GDP helps us understand how much money was spent on goods and services in a year.

2. Final goods are those purchased for end-use and not used in the production of other goods.

What Is Excluded from GDP?

1. Non-market activities (e.g., unpaid housework)

2. Black market/illegal activities

3. Used goods

4. Intermediate goods

5. Financial transfers (e.g., bonds, bank transfers)

6. Foreign production

7. Transfers like subsidies

Gross National Product (GNP)

GNP is the total value of goods and services produced by a country’s domestic resources, regardless of whether production occurs inside or outside the country. This includes citizens working abroad.

GDP Calculation Formula:

GDP = G + C + I + NX
Where:

• G = Government Spending

• C = Consumption

• I = Investment

• NX = Net Exports (Exports – Imports)

Important Equation:

Total Production = Total Income = Total Expenditure
Or:
GDP = Aggregate Demand = Aggregate Supply

Types of Investment

1. Fixed Investment: Equipment, buildings

2. Inventory Investment: Raw materials and goods

If demand falls, sales decrease → profits fall → investment declines → production drops → unemployment rises → purchasing power decreases → consumption falls.

Types of Consumer Goods

• Durable Goods: TVs, cars

• Non-durable Goods: Food, clothing

Types of Spending

1. Government Spending: Education, security, healthcare, infrastructure

2. Consumer Spending

Net Exports (Trade Balance)

Net Exports = Exports – Imports
A key component of GDP. The trade balance should ideally be positive for economic equilibrium.

Leakages vs. Injections in the Economy:

• Leakages: Savings, Taxes, Imports

• Injections: Investment, Government Spending, Exports

Equation: I + G + X = S + T + M

Factors Affecting Demand

1. Income (higher income → higher demand → higher prices)

2. Prices of other goods

3. Overall price level (inverse relationship)

4. Expectations

5. Tastes and preferences

6. Net exports

7. Monetary policy (interest rates)

8. Fiscal policy (taxation, government spending)

Types of Goods

1. Normal goods

2. Substitute goods

3. Complementary goods

4. Inferior goods

Three Main Macroeconomic Goals

1. Economic Growth & GDP

2. Low Unemployment

3. Price Stability (Inflation control)

Economic Growth – Pros & Cons

Pros:

• Higher production

• Better employment

• Improved living standards

Cons:

• Unequal income distribution

• Resource depletion

• Environmental pollution

Countries with the highest GDP: USA, Europe, China, Japan

What Is Unemployment?

An unemployed person is actively seeking a job but is unable to find one. Full employment, along with economic growth and price stability, is a key macroeconomic goal.

Unemployment Rate = (Number of Unemployed / Labor Force) × 100

Major Economic Recessions in the U.S.

1. The Great Depression (1930s)

2. The Great Recession (2008)

3. COVID-19 Recession (2020)

Types of Unemployment

1. Frictional: Time taken to switch jobs

2. Seasonal: Due to seasonal demand (e.g., agriculture)

3. Structural: Technological or regional causes

4. Cyclical: Related to business cycles (main cause of recessions)

Excluded from unemployment statistics:

• Housewives

• Retirees

• Non-job seekers

• Students

What Causes Currency Devaluation?

1. Global wars

2. Excessive money printing

3. Inflation

Currency Floating

Currencies used to be backed by gold. After global economic instability (post-WWII), in 1994, countries agreed to use the U.S. Dollar as a global standard, leading to currency floating and the rise of the Forex market.

Forex Market (Currency Pairs)

When the U.S. dollar became the global reference currency, currency exchange markets flourished. Understanding economics is vital to succeed in such markets.

The Saving Rule (20/30/50 Rule)

• 50%: Daily needs (food, shelter)

• 30%: Personal wants

• 20%: Savings

7 Core Economic Principles

1. Save at least 10% of your income

2. Control your expenses

3. Multiply your money through smart investments

4. Protect your assets (avoid risky investments)

5. Own your home and invest in real estate

6. Secure your future with insurance

7. Increase your skills and knowledge

Negative Inflation (Deflation)

Some countries experience deflation, which can:

• Cause job losses

• Drive out foreign labor

• Lower prices of housing and oil

Causes of Deflation

Supply-side factors:

1. Contractionary monetary policy

2. Financial crises reducing bank lending

Demand-side factors:

1. Improved productivity

2. Decreased consumer spending

3. Bursting of asset bubbles

What Is an Economic Bubble?

A situation where prices rise rapidly without a basis in intrinsic value.

Four Stages of a Bubble:

1. Stealth Phase

2. Awareness Phase

3. Mania Phase

4. Blow-off Phase

Causes of Inflation

Monetary Causes:

• Excess currency (cash, checks, accounts)

Cost-Push Causes:

1. Rising cost of raw materials

2. Higher wages

3. Energy price hikes

4. Supply chain disruptions