What Is ‘The Economy’ And Why Should I Care?
Our desire for stuff is endless. Stuff is not endless. Economics is the study of how we make, distribute and consume stuff that is in limited supply. It involves money but it’s not about money. It’s about the invisible forces that influence how we use the money to buy and sell the stuff.
What’s the invisible thread tying the world together? It’s the economy, stupid. We break down the jargon in this handy list so you can talk smart at dinner parties.
It’s the system by which we organise the stuff. It’s the network of resources, labour, goods, services and money – oil, wheat, working hours, wages, breakfast cereal, bonds, interest rates, supermarkets, private schools, Spotify, public transport, coffee, pet food, health care, foreign trade, manufacturing, dairy farming, divorce and weird Etsy stores selling knitted boob pillows.
A pair of Adidas Yeezy Boost 350 ‘pirate black’ sneakers cost USD$200 in August 2015. In September 2015, they cost USD$750. Wanna know why? Microeconomics looks at the relationship between buyers, sellers, borrowers, lenders, producers and distributors, finding patterns to explain how each little corner of the market works.
Macroeconomics zooms out to a global scale, studying the forces that affect individual countries and international markets. For example, Europe represents one fifth of China’s export market. Weighed down by bankrupt but stoically unrepentant Greece, Europe has plunged into a debt crisis. People in Europe are out of work and buying less of China’s stuff, contributing to a slow down in China’s economic growth.
Over the last decade, wealthy Chinese investors have been buying up houses in Australia, increasing demand and driving up prices, but with the Chinese economy slowing down, investors have less money to spend on Australian property. Demand has eased off, causing the Australian housing market to cool slightly, with auction clearance rates falling to 60% in the final quarter of 2015.
In sum, macroeconomics is where the stubborn entitlement of Greek people means you can maybe one day afford a house.
Gross Domestic Product
The Gross Domestic Product (GDP) measures what a country’s economy is worth, based on the total value of goods and services it produces in any given year.
To compare the economic health of different countries, we talk about GDP per capita. Per capita is Latin for ‘by heads’ – in this case it means dividing the total GDP by the number of people in the country to get a GDP figure per person, so you can compare the economic health of countries that are totally different sizes.
Conventional wisdom tells us that a growing GDP is a good GDP. A growing economy is theoretically creating more jobs and more wealth, year after year. Certainly if you live in Zimbabwe, where the GDP per capita is less than $800, more jobs and more wealth will drag a whole lot of people out of catastrophic poverty. But what about here in Australia, where the GDP per capita is closer to $40,000? Why do we need to keep growing? Some people argue that economic growth in developed economies is no longer improving our quality of life, it’s simply lining the pockets of the super rich while depleting the world’s limited resources. Others disagree.
In 1980, a litre of milk cost 63 cents in Australia. Today, it costs roughly $2. Inflation is the gradual increase in the cost of things over time and it’s the force that makes your money worth less. Prices go up, so your “purchasing power” goes down.
Demand-Pull Inflation is when there are too many people with too much money, chasing limited goods (see China’s hand in Australian property prices). Cost-Push Inflation is when it costs more to produce things and those costs are passed on to the consumer. Hyperinflation is where a loaf of bread costs 80 billion dollars and people use banknotes as kindling because a bunch of German fascists have confused currency with confetti.
The important thing to understand about inflation is that when it rises faster than your income, you effectively become poorer.
The unemployment rate measures how many people have jobs compared to how many people want jobs. If 100 people want to work and 4 of those people can’t get a job, the unemployment rate is 4%.
The national unemployment rate is a good indicator of how well our economy is doing overall. If you look at unemployment rates in particular industries, it can tell you how well those industries are doing. Employment in Australia’s mining industry more than tripled between 1994 and 2014, for example. This is part of how the Mining Boom buoyed Australia during the Global Financial Crisis – while some of the profits paid for Gina Rinehart’s propaganda videos, some of it made it’s way into the pockets of hardworking Australians. Seems fair.
How the government collects taxes and spends money has a massive impact on a country’s economic health, because the government is the biggest kid in the playground. In addition to controlling a multi-billion dollar budget, the government sets the rules by which everybody else must play, which is what we call “fiscal policy”.
It’s kind like being the banker in Monopoly, if you also invented the game of Monopoly and reserved your right to change shit up should the game not be running well for the benefit of all players. I mean, maybe Monopoly is a bad example because the whole point of that game is that one person ends up with everything while the other players are left destitute and that is definitely not the aim of democratic capitalism. Right?
Feel a bit smarter? Go back and click the links to complete your education. They’re good.
Simone Ubaldi is a ghostwriter, music journalist, film critic and has co-authored four books, including memoirs of Bon Scott and Mark ‘Chopper’ Read.