Economics for Normal Readers

In this series of articles I will be researching the common terms thrown into press articles, and will look at the economy through the eyes of a “regular guy” type individual. My goal is to spark an understanding of economics, and thus our economy in English.

Percent sign Stock Photos

Economics plays a great part in the wealth and development of nations and communities around the globe. Having at least a basic understanding of economic terms will also help you see the interplay between economics and personal financial growth.

Part 1 – Money Supply

Thank you for reading this installment of a multipart series on economics. This is a topic that is in the minds of many people, and yet there are people out there who have a quizzical and clouded understanding of economics. Why?

Nest egg
courtesy istockphotos

In a bit during his comedy show, comedian Gallagher, the fruit-smashing prop comedian would talk about the Reader’s Digest™ version of the college degree. He questioned the high cost ad long time commitment to education in a variety of topics typically studied in college for academic degrees. He, like a lot of us, simply reduced th subject to the mile high overview of the subject, and encapsulated the learning of the topic.

During the routine, he presented history as something not to repeat, because it wouldn’t do to repeat the mistakes of a bunch of dead guys. Sociology was simply learning about what you should have learned in kindergarten – get along, share, and take a nap. This went on to the point where he reached the topic of this series: Economics. His presentation was succinct: Supply and Demand, I have it, you want it, you buy it, I sell it when you will buy for what I want to sell for.

Sounds pretty good, so far? It works in personal, micro, and macro levels. The more you want to see the higher you take the balloon or helicopter up.

Today’s topic will deal with money, and specifically the ways in which money finds its way into the economy. What is the money supply in relationship to the economy, and economics, in general.

Let’s look at how the money supply is defined. There are four parts to the money supply, named unimaginatively M0, M1, M2, and M3. I have the drill out, so let’s use it to get down to the meat of the terms.

money pile
M0 – courtesy istockphoto.com

M0, is the smallest measure of the money supply in a market It is the ras cash in the money supply, and that which is the most quickly available assets in the money supply. It is King cash, plus any other assets that can quickly be converted to currency, like Canadian Maple Leaf coins. It is called narrow money.

M1, at the next turn is an attempt of economist to quantify the amount of money in circulation. It is a liquid measure of the money supply. It is a lot like the M0, except this is a measurement of money moving in the market, instead of the amount of money available to it. It also contains cash, or easily converted assets.

M2, around the next bend, is a category in the money supply which includes cash and

chart
Money Supply

quickly converted assets, plus time deposits in non-institutional accounts, such as CDs, certsain money market funds, checking, and savings accounts. Those accounts may have early withdrawal penalties.

M3, completes the four corners of the money supply. It is the mile high view of the economy which looks at all deposits, plus the money supply, and all deposits.

So now you know what the economists are referring to when they refer to the various money supply sections

All definitions paphrased from those contained at www.investopedia.com
Photos courtesy Google Images, istockphoto, and stockphoto

Part 2: Balance of Trade and Deficit Spending

Where media moguls like to incite a reaction from the public on economics, we find that often they incite fear

courtesy istockphoto

pontificating about the trade deficit and balance of trade. Numbers are batted about like shuttlecocks on a badminton court until their point of view, or, if you are trying to understand them in print, your local wasted investment in newsprint creates the usual mass hysteria. That sells news. Notice how the media reports on the economy: good news gets barely a mention, and bad news gets days of the same repeated presentations.

Cooler heads must prevail, because we need to understand the terms, their meaning being crucial to how we plan, instead of reacting to the “cry wolf” style of news we now receive.

In that light, let’s explore two more of their favorite terms used to incite more angst. Let’s begin with the Balance

courtesy Google™ images

of Trade. In this term, we find really a gauge of the amount of money traded between nations, expressed in terms of goods and services imported and exported between them. If trade were truly balanced, the value of the imports would equal the value of the exports. Countries with weaker economies will want to export goods and services to fight inflation and recession. Countries with healthier economies can import more, to maintain price competitiveness without causing inflation (investopedia.com).

Countries will normally trade their excess goods and services for those goods and services the themselves o not produce, or for specific good for which there is public demand, such as Ferraris, and cameras, or Kobe beef.

Coutesy Google™ Images

Trade deficits are caused when a country imports more than it exports. Countries achieve prosperity by having trade surpluses. Recessions are caused by importing too much more than exports for to long.

The Balance of Trade affects, as does deficit spending, and trade deficits the Balance of Payments which indicates the net cash flow of a country. A healthier economy will have more payments flowing in than out. In other words, it will be receiving more for its exports than paying out as imports, or going out in foreign aid.

Stay tuned for more brief explanations of the terms that make up the economics we all see daily.

Credits: graphs and images investopedia and google

 

Part 3 – Gross, As in GNI, GNP, and GDP

In the continuing series on economics, are three more terms that are played on media outlets like the Three Stooges. Just what are the three Grosses of economics? Let’s take a look at this trio, first by definition. When considering the terms, a little word substitution is in order. Think of your paycheck. Your gross income is the total amount of money you earned in a given pay period. Likewise the same thinking applies to these three important economic terms. Thus, we can substitute the word “Total” for the term “Gross.”

Gross National Income (GNI)

This term reduced to its simplest understanding, is, by definition a rough measure of the total national income, per capita (person), of a country. The more developed the nation, the higher the GNI. Thus, a higher GNI should also be an indicator of a healthier economy, since it should be higher if the economy id growing. You can chart this figure over a period of time to see how it is changing to get a reflection of the health of a nation’s economy. (www.eb.com)

Gross National Product (GNP)

This total is the total output of finished goods for consumption. It is the measure of the available final goods which have been produced and are ready for purchase. Theis measure counts the tangible goods of society, such as: bread, cars, medicines, and clothes, as well as the outputs of care for a society, such as: education, health care, and other services. It is a relative measure of the outputs of a society, and a gauge of wealth of a society. (www.cftech.com)

Gross Domestic Product (GDP)

This total is a measure of the goods and services produced only for consumption wihtin a distinct society. It also provides a standard measure for coparison of one society to another. Thus, the relative wealth of the U.S. Can be measured against another, like Borneo, or England. (www.cftech.com)

This glossary provides a basic overview of the terms, to create an introduction to terms commonly seen and used to discuss economics. By using them in context, whcen we hear that the GDP or GNP is up, or the GNI has improved, we can at least have some idea what is meant.

Here are these numbers expressed in chart form so you can see them:

Next time, I’ll be examining the terms Contraction and Expansion in economic terms.

 

umba and Economics – the Final Workout

 

 

This is the last article in the series for all of us normal readers. It has been such a fun time looking up the information for these articles, and I hope they have been of value to you, too. This article will cover more terms than prior articles, but this is just like the last leg in a marathon, and so we’ll give it a little kick, and hit the finish line strong.

 

 

 

Any economy goes though its own version of exercises, just like humans do. Economies flex and relax their muscles, and getinjured and heal, just like a human body. Don’t sound too surprised. Economies are made up of the actions of hundreds of thousands of people, after all. Global economics work a lot like muscle groups. One economy might contract, while another expands. One may grow, while another declines. With this in mind, let’s explore the final set of terms in this series.

 

 

Contraction

 

This occurs on business cycle slowdowns, where production slows, and other events, such as bankruptcies and unemployment rise. Inflation tends to fall during a contraction, since people are buying fewer produced goods and services

 

(wikipedia.com)

 

 

Deflation

 

 

Deflation occurs when prices and assets continue to fall. The cause of this is widespread drops in demand for goods and services. This is a long term drop. Deflation signals a recession already underway, due to unemployment increasing, wages decreasing, and declines in value for such things as homes and investments. It is the result of businesses dropping prices to get more people to buy their products.

 

(About.com)

 

 

Depression

 

A Depression, in the economic sense occurs when a long term recession precipitated a continued loss of jobs, low production, low sales, , and a high rate of business failures and unemployment. (Dictionary.com)

 

 

Expansion

 

Economic expansion can be thought of in terms of a hot air balloon, and it it like on e, at time. In fact, we have all heard about bubbles bursting. This is a reference to economic expansion. During an economic expansion, business is booming, and these surges in gross Domestic Product continue until things reach a peak. (Then, under normal economic times, business contracts until the next surge. So, the economy works more like your lungs.

 

 

 

 

So, if we take out the standard expression of a ballon, and trade it for a more organic
model, the economy can be seen to breathe, like a set of lungs. You can imitate this by drawing as much air into your lungs as possible. That is expansion at its peak.

 

 

 

Inflation

 

When the amount of currency in circulation increases, the value of the total amount of
that currency falls, and prices increase. Inflation can also be the result of a decline in the supply of goods decreases, resulting in a sharp increase in prices. One example of this is gasoline prices. In 1970s, during the oil embargoes, gasoline prices tripled in some areas of the country, and they have never fallen.

 

 

More modern definitions of the term have stated that a persistent increase in consumer prices, or persistent decreases in the purchasing power of money, caused by an increase in available currency or credit beyond the available goods and services.

 

 

These are both, according to Websters Dictionary. The first is from 1983, and the second is from the 2000 version. (Websters.com). I find both definitions useful, but the earlier version is the one I prefer, because it explains the term more elegantly.

 

 

 

Why? The earlier version explains things more in line with Adam Smith, while the second is more the work of that economic Devil and numbskull John Maynard Keynes. The views expressed in the former statement are mine alone. Thinks what you will, but in the simplified view, Mr. Smith (my hero) thought that markets were made, in terms of supply and demand, elastic and changeable, determined by how much of what producers made and what goods people desired. Mr. Keynes, in my less-than-flattering-opinion sought to determine and control the economy in a more static manner, with price controls, and and other artificial contrivances. Clearly, people will do anything but act is a standard manner. That is why I have little respect for his theories. I believe the thoughts of mr. Smith more capitalistic and democratic, and Mr. Keynes’ thought tending more Socialistic and closed market, depending too much on services, too.

 

 

Recession

 

Recession can be thought os as two consecutive quarters of decline in real GDP. This is decided by an austere group, in a think tank called the National Bureau of Economic Research, which is a private organization, and their dating of such occurrences is a judgment call. There is no universal term for what is not a recession.

 

(econmodel.com)

 

 

 

Stagflation

 

 

This is a period of high inflation, coupled with low GDP growth. It is difficult to control, because you have higher prices, lower economic growth and higher unemployment coupled together. You have to focus simultaneously on all three elements to control it. In other words, you cannot focus on inflation or GDP growth alone. Easing credit can trigger runaway inflation, and increasing GDP too quickly can cause overproduction in a market that is hit by higher unemployment, which causes a reduction in consumers.

 

 

(Farlex Financial Dictionary)

 

 

More simply, stagflation occurs when there is simultaneous stagnation and inflation in an economy.

 

 

Stagnation

 

An economic cycle marked by growth of less than one percent per year.

 

(investorwords.com)

 

 

When the economy flatlines like this, it is like trying to find a cool breeze on the hottest, most windless day of the year. The economy is as parched as your dry, sticky mouth, and nothing seems to slake the thirst. It is though the economy is sweating out value for all of the production it can drink. Unfortunately, we all know that sweat evaporates…

 

 

There are many more terms that could be discussed, but it is not my intention to create the most exhaustive economic compendium available. The terms I have covered are the most widely used in the media, and I think that once the mystery is removed, common sense insered into understanding, and proper application of the term ensues we will all be a bit wiser to the tricks the media uses to influence mass hysteria. We have the power over the economy, but only as long as we take the time to understand it a bit more, and involve ourselves in how it is managed.

 

 

First, we start with our personal economics, and then enlarge the view gradually, until we can see the effect of millions of people in our national economy. Next, we look for distortions in presentations on the economy and refute them. Third, we take action by contacting those who have macroeconomic power (our elected officials). Finally, we stay aware of what is going on and affect change by doing.

 

 

 

Stay tuned for a new series to follow this one.

 

 

 

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