Economics 101 (#35) History of Economic Thought

February 7, 2012

Theres an awful lot of revisionism going on lately as governments across the world attempt to battle the economic crisis with competing left and right wing approaches. Conservatives (generally) favour austerity; slashing public spending to get your fiscal house in order (balancing the books) while lowering taxation to promote business growth, entrepreneurship and consumer spending. Liberals (generally) favour government spending or stimuli packages while maintaining (or increasing) tax levels to bring in additional revenue to balance the books while squeezing efficiency out of the current public service, without cutting too deeply (or ‘freezing’ employment). Of course, many countries have adopted a bit of both.

This isn’t a huge surprise. Historically, both doctrines and many halfway house hybrids have had their day, in various forms –  from mercantilism and the classical school to Keynesianism and monetarism, from the 16th century to the 21st. And yes, history tends to repeat itself. Turns out that economics isn’t as predictable  and tamable as some would like to think.

We left the best chapter till last. PIIGSty highly recommends reading it regularly…you’ll definitely need this one (and its a handy conversation starter, at the very least).

Heres the PDF PIIGSty Econ 101 #35 History of Eco Thought


Economics 101 (#34) Economics of Population

February 7, 2012

Studying the population is known as demography and, as you probably have guessed, the population/citizens are broken down into categories, known as demographics. This chapter provides a brief overview of the study of population and its component parts, including the all important effects of emigration.

Heres the PDF PIIGSty Econ 101 #34 Economics of Population

Economics 101 (#33) Economic Development and Growth

February 7, 2012

Right now, most Western economies are at a pivotal point in their histories. You read stories of the BRICs (Brazil, Russia, India, China) and South Africa, as well as several Asian and Latin American ‘tiger’ economies. Economies are all different and grow at different rates depending on their level of development. Like for a child, growth is good but its not continuous – you can grow a lot when you’re a teen, and then stop at 16.

Development is different as it involves a process of maturity and lasting change. For economies, this means society must be significantly changing and the economy is absorbing the growth effectively. Rostow devised an economic model – the ‘5 stages of economic growth‘ which illustrates well the changing structures economies/societies go through.

Heres the PDF PIIGSty Econ 101 #33 Eco Development and Growth

To be more specific…

But how we know if a country is ‘least developed’ and how can government encourage economic development? Simple really…

Economics 101 (#32) The International Economic System

February 7, 2012

After WW2, a number of international institutions were formed to steamline the flow of trade across borders. It was feared that without agreed and structured intergovernmental bodies independent of political tinkering, European countries would raise their protectionist barriers (tariffs) and seek to keep foreign competition from hurting their own industry (and so, their own people). This marked the formal creation of an international economic system.

Free and unhindered trade was (and remains to be) seen as a vital component for recovering degraded economies. PIIGSty gives you a summary of the 3 main institutions, all of which remain in operation today.

Heres the PDF  PIIGSty Econ 101 #32 International Eco Sys

Economics 101 (#31) Balance of Payments

February 6, 2012

International trade can be a profitable enterprise but many rich countries buy far more (in terms of €£$) than they produce thanks to the demands of consumers for highly finished, expensive goods which are produced cheaply in economies with lower costs (lower wage rates, lower cost of raw materials, lower production costs, lower operational costs etc).

A governments main account details the interaction between what it buys and what is sells. This is known as the balance of payments. This details all the financial flows (credit and money)  between a country and its trading partners.

Heres the PDF PIIGSty Econ 101 #31 BOPs

Lets have a look at some sample figures…

Economics 101 (#30) Currencies and Exchange Rates

February 6, 2012

A currency is essentially like any other good. It follows the law of demand and the law of supply and prices of it adjust accordingly (more abundant, the lower its price/value – the more scarce, the higher its price/value). Currencies facilitate trade because trade needs an established price value of goods. This price is expressed in a local currency i.e. US$, EUR€, GBP£ and others, and it determines demand for a good. As a result, the price of a currency determines demand for what you produce which determines how much you sell (as exports) and how much money you make as an economy. The price of a currency relative to another is called the exchange rate.

Heres the PDF PIIGSty Econ 101 #30 Currencies and Exchange Rates

A ‘strong’ currency isn’t necessary a good thing….

Economics 101 (#29) International Trade

February 6, 2012

Countries can’t possibly produce everything within their borders they need to keep their citizens happy. The only solution is to produce what you can based on the resources you have and buy all the rest from abroad. Producing everything would mean spreading a country’s resources and labour very thinly and inefficiently (imagine Ireland had to build its own cars, electronics etc).

Like any business, a country focuses on what it can best produce with trade making the whole system operate smoothly. This means Ireland can buy cars from Japan and electronics from the US or China while it focuses on producing agricultural, chemicals, medicines, financial services and all the other things Ireland has an advantage in (whether absolute, or relative vis-à-vis the trading partner in question)

Heres the PDF PIIGSty Econ 101 #29 International Trade

A government, through its resources, has substantial economic power. As such, a government can regulate trade (limiting it, making the country more ‘protectionist’ or promoting it, making the country more ‘open’)

Economics 101 (#28) Fiscal Policy

February 6, 2012

In these days of austerity and governments scrimping and saving, the most important policy activity of government is fiscal policy. ‘Fiscal’ policy is any action by the government which affects the size or make up of government (exchequer) revenue/income or expenditure/spending. This section will deal with the all important issue of the national debt and how its size and growth affects the overall economy.

Heres the PDF PIIGSty Econ 101 #28 Fiscal Policy

How does a government tackle the national debt?  Like your average consumer with your typical debt, you have to tackle spending in the first place (and so control your overall debt levels) and pay down your debts by spending more money on them. A government does this by slashing public spending (education, transport, health etc) and increasing taxation. But what makes for a good tax system and what tax options does a government have?

Economics 101 (#27) Economic Objectives of the Government

February 5, 2012

In #26, we saw that government can (and does) take action to tackle inflation. But this is not all government can do. Backed by massive tax revenues and so substantial resources (huge money reserves and the power associated with that), governments have significant policy controls at their disposal which they manipulate as they see fit. Of course, juggling these is a very fine balancing act as they each objective can conflict with each other.

Heres the PDF PIIGSty Econ 101 #27 Economic Objectives of the Government


Economics 101 (#26) The Price Level (and Inflation)

February 5, 2012

Prices rarely stay the same for long. Over time, prices can rise or fall on most goods but usually, its one way traffic. Like a balloon, the rising of prices is called ‘Inflation.’ Remember that the price of any good is determined by the quality demanded and quantity supplied of that good (or, to use one word, scarcity). If a good is scarce, theres not much of it around but people still demand it so those who produce that good can charge more and increase their profits (think of oil).

If the cost/price of what you buy is rising at a faster rate than your income is growing – your real income (purchasing power) is falling (because you now can buy less per €). In a general sense, the government can control prices and incomes through taxation and other methods. But to do this, we need to measure prices.This isn’t always straightforward.

Heres the PDF PIIGSty Econ 101 #26 The Price Level

A big question then is whether inflation is a good thing or a bad thing? First of all, there are many different types of inflation and each has its own causes. Second, you’d think that the higher inflation runs, the less likely it is that our incomes are rising at the same rate – so high inflation is a bad thing?  The real answer is: It depends on who you are and what you do in the economy itself.