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Understanding Economics: Importance, Types, and Insights into Macroeconomics

Economics is the study of how societies allocate resources, produce goods, and distribute wealth. It encompasses both macroeconomics, which examines the economy at a large scale, focusing on interest rates, inflation, and unemployment, and microeconomics, which looks at individual and business decisions. Understanding economics helps individuals and policymakers make informed choices that impact financial stability and growth. By grasping these concepts, you can better navigate personal finance, investments, and global economic trends.

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Understanding Economics: Importance, Types, and Insights into Macroeconomics

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  1. Economics

    What is it? Why should I care?
  2. Types Macroeconomics – Looks at the economy as a whole concentrating on things like interest rates, inflation and unemployment Microeconomics – Looks at individual people and businesses attempting to explain where and how we spend our money or save it
  3. Macroeconomics The Big Picture
  4. GDP Gross Domestic Product (GDP) calculates the value of all goods and services in a given country in a given time period In simple terms this is the measure of a nation’s wealth
  5. Inflation Inflation is the situation in which the general level of prices in the economy are rising. Inflation is caused by a money supply that grows too quickly So if the supply of money increases (i.e. The government prints more) than prices go up. How much will prices go up if more money is printed? In general terms if the supply of money is doubled than prices will double
  6. Causes of Inflation Since inflation is primarily caused by governments printing more money, why would they print more money? Governments can’t raise enough tax revenue to pay their obligations Governments feel pressure from debtors who want inflation so they repay their debts using less valuable money Governments want to try to stimulate the economy in a recession
  7. Measuring Inflation Because inflation is a general increase in prices you can’t just watch the prices of 1 or 2 items you need to look at a large selection The Consumer Price Index (CPI) is a basket of goods that a typical family of four would buy in a month and because it covers such a wide range of goods it is considered a good measure of inflation
  8. Inflation Good and Bad No inflation or its opposite deflation may seem good but in fact economists consider it as bad as high inflation Having said that high inflation is equally bad for the following reasons: Inflation weakens the value of stored money Inflation discourages people from lending money Worst case scenario money is no longer an effective means of exchange
  9. Historic Inflation What is a good level of inflation? Economists tend to think that an inflation rate between 3 to 5 percent is optimal. At this level the economy is going strong and yet people are not being significantly hurt by it.
  10. Value of the Dollar In recent years we have seen notable changes in the value of the Canadian dollar the question is why? The reason for the changing value includes the following: Business activity in Canada International investment in Canada Speculative trading of the dollar How much money is available
  11. A High Canadian Dollar The Good The Bad Cheaper to buy foreign made goods Travel to other countries is cheaper Increased foreign investment in Canadian companies leading to improvements Canadian manufactured goods cost more and therefore will sell less Fewer tourists coming to Canada Increased foreign investment in Canadian companies leading to more foreign ownership / loss of control
  12. Business Cycle Recession – periods of time where output decreases Recoveries – periods of time where output increases
  13. Definitions Recession: A period of slow or negative economic growth, usually leading to widespread unemployment. Economists define a recession either as a period when the economy is growing at less than its long-term rate of growth, or more specifically as two consecutive quarters of the year when the Gross Domestic Product (GDP) has fallen below zero. Depression: A severe and prolonged recession. National Debt: The total amount of money a country’s government has raised that has not been paid off. Deficit: When a country’s government spends more in a given year than it collects from taxes and other sources of revenue.
  14. What Causes a Recession? In very simple terms recessions are caused by notable decreases in demand. This loss in demand causes business to need to drop their prices but they may not be able to do so because it costs them to much to make the product. The primary cost for most products is wages, so this leads companies to either cut employee wages or just fire employees. In turn this means that the employees have less money to spend so demand drops lower resulting in more changes to wages and a vicious negative wage cycle has begun.
  15. How do you get out of a Recession? The simplest way is if businesses are able to deal with the drop in demand by changing inventory or some other factor instead of wages. If this is not possible then governments tend to get involved by: Spending money Lowering interest rates
  16. Microeconomics The details
  17. Monopolies and Oligopolies Monopoly is where a firm has no competitors in its industry Examples: Power / Energy industry, Licensing Oligopoly is where there is an industry with only a small number of firms in it Examples: Soft Drinks, Gas Stations
  18. Monopolies The Good The Bad They encourage companies to invest in research and development by protecting patents Reduces unneeded competition Can lead to services being provided where competition wouldn’t provide it They produce less of their product than competitive firms do They sell their product at higher prices than competitive firms do They are less efficient in making their product than competitive firms are
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