Definition of Economics

Domestic Demand, External Pressures, and Inflation

Domestic Demand refers to the accumulated (that is, aggregate) demand within all the markets of an economy. As such, it can be handily summed up in a formula, C+I+G+X-M, where C is consumption, I is investment, G is net government spending, and X-M is net exports. This is usually referred to as ‘AD.’ Consumption is the largest part of AD. All the consumption decisions within the economy, including all non-investment purchases by households, individuals, and firms, add up to around two thirds of AD. In addition, the Keynesian economic theory asserts that there is a link between consumption and investment, which can drive AD upwards, as firms invest more when they see that consumers are purchasing more goods and services. Investment is a sustained addition to long-run aggregate supply, or capital for short. AD can be plotted against LRAS on a two-dimensional graph. If AD and LRAS meet at the point where there is maximum real GDP/GNI with no tendency for the price level to rise, t

Higher Energy Prices and The Economy

Energy prices are a basic cost. They are semi-variable for most businesses, in that a basic fixed cost of energy is generated by the need to heat or to cool buildings, and to carry out operations. In addition, a marginal cost exists for producers in terms of the energy required to increase production. Finally, energy costs are also built into the transport of raw materials, and the distribution of finished goods and services, which again contribute to marginal costs. If global energy prices are rising wholesale, it is unlikely that businesses or individuals will be able to lower the retail cost of energy by switching between suppliers. Energy storage is expensive and encourages economies of scale and oligopolies, in which consumer choice is limited at times of higher wholesale prices. When energy prices are low, smaller companies can purchase wholesale and make money at the margin undercutting bigger companies as storage costs will be a burden for the latter and the small companies

Understanding the Balance of Payments

The balance of payments is the measure of all economic transactions between an economy and the rest of the world. As such, it covers the whole economy and should not be confused with the Government Budget. The balance of payments must always balance and if there is a deficit or surplus in goods, services, or some other component of the balance, it will be met with an equal change in the value of money or other asset. In a free exchange market, for instance, the currency of the country will adjust to alter living standards and the source of any surplus or deficit. The balance of payments consists of a current account, known as the balance of trade , a financial account , and a capital account. The current account is a record of net exports, plus income from abroad and direct transfers into a country. Many countries, particularly in the English-speaking world, run a deficit on this current account, because consumers and businesses purchase more imports than exports. This may well

EconomicsNotes

Search This Blog