What You Need to Know about Economics - Softcover

Buckley, George

Softcover

ISBN 10: 0857081144 ISBN 13: 9780857081148

Verlag: Capstone, 2011

Inhaltsangabe

George Buckley & Sumeet Desai: What You Need To Know About Economics

Economics Matters. But with confusing things like GDP and interest rates, it's often hard to get you head around.

So What do you really need to know about economics? Find out:

• What economic growth is and why it matters
• How inflation happens
• How jobs are created and lost
• How the property market works
• What central banks do and how it affects the rest of us
• The impact of government spending on the economy

What You Need to Know About Economics cuts through the theory to help you to do your job and understand the world around you better.

Read More in the What You Need to Know Series and Ger Up to Speed on The Essentials... Fast.

Über diesen Titel

Über die Autorin bzw. den Autor

George Buckley is Chief UK Economist at Deutsche Bank, and highly-regarded commentator on economic developments.

Sumeet Desai is an economics journalist and commentator.

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George Buckley & Sumeet Desai: What You Need To Know About Economics

Economics Matters. But with confusing things like GDP and interest rates, it’s often hard to get you head around.

So What do you really need to know about economics? Find out:

• What economic growth is and why it matters
• How inflation happens
• How jobs are created and lost
• How the property market works
• What central banks do and how it affects the rest of us
• The impact of government spending on the economy

What You Need to Know About Economics cuts through the theory to help you to do your job and understand the world around you better.

Read More in the What You Need to Know Series and Ger Up to Speed on The Essentials… Fast.

Economics Matters. But with confusing things like GDP and interest rates, it’s often hard to get you head around.

So What do you really need to know about economics? Find out:

• What economic growth is and why it matters
• How inflation happens
• How jobs are created and lost
• How the property market works
• What central banks do and how it affects the rest of us
• The impact of government spending on the economy

What You Need to Know About Economics cuts through the theory to help you to do your job and understand the world around you better.

Read More in the What You Need to Know Series and Ger Up to Speed on The Essentials… Fast. 

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What You Need to Know about Economics

By George Buckley Sumeet Desai

John Wiley & Sons

Copyright © 2011 John Wiley & Sons, Ltd
All right reserved.
ISBN: 978-0-8570-8114-8

Chapter One

GROWTH

WHAT IT'S ALL ABOUT

* How to measure the size of the economy and how fast it's growing

* How flows of money move around the economy

* How people's incomes affect their decisions about spending or saving

* How activity moves up and down but generally rises over time

* Why a rise in spending can have a magnified effect on the economy

* What recessions are and why they happen

WHAT IS ECONOMIC GROWTH?

We hear regularly on the TV and radio news, and in newspapers and online, about how quickly the economy is expanding or – as has been the case during the financial crisis – contracting. But what exactly is this thing we call 'the economy', and how do we measure its size and rate of growth?

The size of the economy is often referred to as GDP – which stands for 'Gross Domestic Product'. One way to measure the size of the economy is to add up the total amount (Gross) in a country (Domestic) of all the goods & services made (Product). This is called the output measure of GDP, but there are two other ways we can get to this number. We can add up the total amount that we spend on goods & services. Or we can measure economic activity by looking at the total amount of income that has been earned.

We usually measure economic activity over a period of three months – a 'quarter' – or over an entire year. The rate of economic growth is then simply the percentage change in GDP from one quarter to the next (the quarterly growth rate), or from one quarter to the same period a year later (annual growth). Sometimes, the quarterly growth rate is shown as an 'annualised' figure – in other words, how quickly the economy would grow over an entire year if it continued at the rate achieved during that one quarter.

THREE MEASURES OF ACTIVITY

The three measures of GDP, or economic activity, outlined above should be identical, in theory at least, because any income earned is then spent on the goods & services that have been produced. In practice, however, it is difficult to measure economic activity precisely so getting the three measures to equal one another can be difficult. Let's take a closer look at these different ways of working out the size of economy.

1. Output

The output measure adds up the value of all goods & services produced in the economy. This includes the output of manufacturing, mining and energy supply companies – collectively called 'industrial production' as well – as construction and agricultural output.

It also includes the output of the service industries, even though they do not make physical products like manufacturers do. These include transport and telecommunications firms, restaurants, hotels, banks, accountants and estate agents to name but a few – all of which provide valuable services to the economy. In developed economies such as the UK, US and Europe, the service sector has become much more important in recent years, while the manufacturing base has become ever smaller.

2. Income

We can measure GDP by adding together how much is earned across the economy. This means adding together wages paid to workers, rent paid to land owners and profits paid to the owners of firms. You may sometimes hear these three key inputs – labour, land and capital – referred to as the 'factors of production'. This is because they are the three basic components, combined together with technological know-how, required when we produce goods & services.

3. Spending

Most importantly, let's turn to the spending measure of GDP. If we were to measure the size of the economy by looking at everyone's outgoings we would need to think not just about how much we spend as individuals, but spending by other groups too. Investment spending by firms, for example, must be included. We often think of investment as the purchase by a firm of buildings and machines, but we must not forget that when firms change their stocks (or inventories) that is also a type of investment because they can be stored and sold at a later date. Governments spend money on goods & services – both current expenditure and for investment purposes – which is also a part of GDP. It is worth noting that we do not include benefit payments like jobseekers' allowance – these will already be included in how much individuals receive from the government which they may then go on to spend, so to include it would be double counting. Finally, we also add in how much is spent by people abroad on our exports, less the amount we spend on imports from abroad (as the latter represents an outflow of money from the economy).

So, in summary total spending in the economy is made up of:

* how much households spend;

* investment by firms (including stock-building);

* spending by the government;

* spending on exports (less imports).

HOW IT ALL FITS TOGETHER

The interaction between these groups – households, firms, the government and the international sector – in an economy is called the 'circular flow of income', and getting a flavour of this helps us understand how economies work. Put simply, firms produce goods & services and pay their employees an income for doing so. Firms also pay rent to landowners while the profits go to the firms' owners. Households then use some of that income up by spending it on the goods & services produced by firms – which is why it is called the circular flow of income. The best way to show all of this is in the diagram on page 12.

As you can see, it is not quite as simple as that. As income moves round this circular system, some money is removed, but at the same time some money is injected back in. Money can be removed in three ways: (i) by spending on imports (as the money goes abroad), (ii) paying taxes to the government, and (iii) saving money in banks and other financial institutions. Additions of money come about in similar but conceptually opposite ways: (i) people abroad spending money on our exports, (ii) the government spending taxpayers' money on public services, and (iii) firms borrowing people's savings from banks to invest.

When the amount of cash that leaves the circular flow (imports, taxes, savings) is the same as the cash that enters the system (exports, government spending and investment) then we have some sort of happy balance – or, as economists call it, 'equilibrium'. When they don't match up this can cause either the economy to run too fast (additions higher than withdrawals) or alternatively too slow (withdrawals higher than additions).

In the diagram overleaf, the grey circles are the various groups or 'sectors' in the economy, while the white circles show the markets for jobs as well as goods & services. The arrows refer to money flows – the red ones represent money removed from the system, the blue ones money added back in. Take some time to look at this diagram and it should become clear how it all fits together. In particular, it helps to explain why the output, income and spending measures of GDP should all be the same – because they are just measuring the flow of money at different points in the circle (the three measures are shown in capital letters in the diagram above to make them...

Details zur Ausgabe

• Verlag: Capstone
• Erscheinungsdatum: 2011
• Sprache: Englisch
• ISBN 10: 0857081144
• ISBN 13: 9780857081148
• Einband: Taschenbuch
• Auflage: 1
• Anzahl der Seiten: 306
• Kontakt zum Hersteller: Wiley-VCH GmbH; product_safety@wiley.com; ; Boschstrasse 12; Weinheim; 69469; Deutschland