Global Economy

Economy – Word Economy comes from a Greek word for “one who manages a household.”

A household and an Economy faces many decisions like –
Who will work?
What goods and how many of them should be produced?
What resources should be used in production?
At what price should the goods be sold?

Economics is divided in two parts – Micro Economics and Macro Economics

Micro Economics focuses on individual parts of economy.
Example – How households and firms make decisions and how they interact in specific markets.

Macro Economics looks at the economy as a whole.
Example – How markets, as a whole, interact at the national level.

Society and Scarce Resources:

In every society there are many resources (labor, natural resources, etc) which are scarce (i.e. in limited supply). Management of society’s resources is important just because resources are scarce.

Economics is the study of how the society manages its scarce resources.

Standard of living – It can be measured in different ways, by comparing the total market value of a nation’s production (GDP) and by measuring the personal income.

GDP (Gross domestic product) -The measure of an economy adopted by the United States in 1991; the total market values of goods and services produced by workers and capital within a nation's borders during a given period (usually 1 year).

Let’s talk about Inflation and Unemployment – Inflation is an increase in overall level of prices in the economy.

Unemployment - The state of being unemployed or not having a job. Unemployment is a serious social evil – rate of unemployment is an indicator of health of an economy.

Usually Inflation and Unemployment are inversely proportional, if Inflation increases Unemployment decreases and vice versa. (Is applicable within a country)
But if we are dependable on other countries this is not applicable.

Example – When software company’s which are outsourced mainly by USA were doing good, I mean to say when USA had an Inflation we all had good jobs and salaries, when USA went into recession (decrease in economy) we lost our jobs and had less salaries and appraisals. This happened because their Supply, Demand and Price factors were badly managed. So to save losses USA started targeting operating costs (salaries, wages and costs incurred for operations). This is the only part from Short term assets which they can touch. Usually short term assets are the assets which company holds for less than an year and fixed assets are something which is for more than an year and it is usually property, land etc..

Companies have to maintain balance sheets, cash flow statements and Income statements to show to its investors. One can make out the financial condition of a company looking at these things. Or you can also say you can make out how well a country is performing if we know the financial condition by seeing at budget. I will talk later about it which is more of macro economics.

Balance Sheet is divided in two parts - left and right.

Left part contains and Assets and right part contains the liabilities and Share holders Capital.

Assets are further divided in Fixed Assets and Long term Assets.
Liabilities are further divided into short term liabilities and long term liabilities.

And one thing we all should know is the left part of balance sheet should tally with the right part of the balance sheet.

So guys what I wanted to convey you guys is that Assets is the thing where everyone plays with, especially the short term assets – operating costs to show profits.

Hope you guys got the message. So please don’t blame your company bosses as the salary is reduced or there is a job cut. If you are in there position you are answerable to the investors (shareholders) who have invested in your company. Even I will not invest my money in a company which is not performing well.

So coming back to Inflation and Unemployment – Yes there are always ways to tackle these. Problem is when there is no money in market government will come into picture. And I believe so far our finance ministry is really doing good as we have not hit into recession yet when most of the major countries are hit by recession.

What government will do – they will act as investors and invest money from government expenditure which they gain from the taxes we pay, as the supply and demand are not met. There is a potential output every economy has, if there is full utilization of potential output there is no inflation. There is no utilization as of now in most of countries as there is no money to utilize it as their respective government has not done well enough to tackle bad situations. We are the buyers and suppliers, we produce things and consume it – so money is rotating here. But there comes a situation when the whole economy is screwed up as a result of inappropriate government policies and less control over the supply demand and pricing. So government tries to bring out the economy out of crisis.

Take example of USA, their economy screwed up because of the less control over the banks, banks in USA provided loans at higher interest rates and keeping mortgage of high values. And these banks gave the mortgage of people as investment to the foreign investors considering it as the short term investments. And later when the economy fell down and went into recession these banks could not encash the mortgage for non payers as the value of mortgage has also gone down below the loan amounts and they also have to suffer heavy losses from the foreign investors as they have to repay back the foreign investors.

Now USA government has started investing from the government expenditure by buying the shares in the companies and reducing the income tax and value added taxes, so that people can afford things and start buying and when the things are back in normal they will start increasing the taxes which they will have to do to maintain the equilibrium between the supply and demand. There needs to be equilibrium of price between the supply and demand, one cannot charge more than price ceiling as this will create an upset in the economy. Usually supply and demand are inversely proportional. Supply increases demand goes down and vice versa. These both things should be maintained as this will lead to shortage and surplus. Both are not good for both consumers and sellers. When there is a shortage prices go up and it leads to black market. When there is a surplus as a seller you face losses for extra produced goods.

Example – Oil prices were too high so demand went down and there was a surplus as no one was buying oil due to high costs and the oil companies started facing losses as there were no buyers. So they have to reduce the prices, but still they faced loss as the cost of production was more than cost of selling, so now they have come up with other strategy they have reduced the supply itself (production), they supply the actual demand so they can maintain profits. Same thing works with our companies as well; they too reduce the supply (production) sometimes to gain profits.

Another example is when our Indian government regulates the oil prices and put a price ceiling we can see that petrol pump owners stop the supply to avoid the losses. So guys don’t scratch your heads when our government regulates price of fuel and you see a big line outside petrol pumps. These things are as simple as it can be.

Now going back to Macro Economics, Government has to maintain a perfect balance between the Potential Output of economy and Actual Output of economy by regulating the consumption and investments by playing with the income tax, value added taxes, money supply and government expenditures which results in control of the inflation, unemployment and foreign exchange rates. This is what happens in a budget.

In general a country should have zero percent to 3 percent unemployment and an inflation of 6 % as zero percent inflation means people are overworked by overtimes.

Hope you guys enjoyed this small passage on economy; hope that it has also answered many of your questions. Your suggestions and questions are most welcomed.
Wish you all and your dear ones a very happy and prosperous new year.