October 31, 2023

5 min read

Investment and Life insurance

Economics for everyone: 10 basic concepts for understanding economics
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  • What is economics?

  • Some famous economic theories

  • Ten basic concepts of economics

The word economics is a combination of two Greek terms: “oikos” and “nomos”, which translate literally as “household management”.

What is economics?

Economics studies the way members of society meet their needs by using scarce goods and services.

In other words, economics is a social science that studies human behaviour and the way different entities interact.

Economists who’ve made History

Like other disciplines, economics boasts numerous scholars who’ve come up with a wide range of different theories over the centuries. Dating back to the late 18th century, for example, is Malthusian theory, concerning the relationship between population and resources. This period also saw the advent of the theory of David Ricardo, one of the greatest exponents of the classical school. Around a century later, in the late 1800s, Irving Fisher put forward his quantity theory of money, while the theories of celebrated economist John Maynard Keynes and the Austrian Joseph Schumpeter, responsible for the theory of economic development, also emerged.

But studying one economic theory or another isn’t enough if we want to understand economics; we also need to explore some economic principles. Banca d’Italia’s financial education portal, “Economics for everyone”, provides at least a partial solution to this necessity.

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Ten basic concepts of economics

Here is a brief round-up to help you grasp ten key economic issues that influence our day-to-day lives. A brief guide to economics for beginners, just for you!

In common usage, the term spread normally refers to the differential between the yields on 10-year German and Italian government bonds, i.e. the BTP-Bund Spread.

Measured in basis points, each equivalent to a hundredth of a percentage point, this indicator may go up or down in value.

Fluctuations in the BTP-Bund Spread indicate a greater or lesser risk to the investor when buying a German or Italian government bond.

In financial terms, the word spread refers to the difference between prices, yields or interest rates for two financial instruments.

In economics, inflation is an ongoing and general increase in the price of goods and services: it leads to a drop in the purchasing power of money.

Inflation is measured using the consumer price index, the price of an average basket of goods and services as purchased by consumers in a given country.

Factors causing an increase in inflation include an imbalance of supply and demand, an increase in the supply of money, higher production costs, a weakening exchange rate or a jump in the prices of imported raw materials, such as oil.

Public debt is the outstanding debt owed by a nation to both public and private entities.

A nation funds its expenditure through public debt, thereby meeting the financial requirements needed to keep the machinery of state running.

Public debt is usually based on issuing government securities - short, medium or long-term bonds - that require the repayment of capital plus interest, which varies according to a range of factors.

High public debt poses a risk to the nation and those who hold the bonds.

The former will have greater difficulty raising finances, and may need to implement restrictions such as raising interest rates or cutting public expenditure.

The interest rate is the cost value incurred when borrowing money, but it also indicates the return earned by the entity granting the loan.

Anyone applying for a bank loan will need to pay back the capital they receive, plus an additional amount of interest.

Anyone depositing money in a current account or buying a bond will receive a return on the sum, corresponding to the interest rate.

The interest rate may be fixed (remaining the same for the duration of the loan), variable (linked to fluctuations in the market), or blended (a combination of the previous two).

In any monetary system, it’s the Central Bank that sets the interest rate, which is then used as a reference for financial transactions.

Basic concepts of economics also include the gross domestic product, often referred to by the abbreviation GDP: the monetary value of all the final goods and services produced in a country over a given period of time.

The reference period is usually a calendar year, but it may also be measured in other units of time, such as quarters.

The word “domestic” refers to economic activities carried out within a given country, while the term “gross” points to the fact that GDP also includes depreciation.

GDP is an important measure of macroeconomics since it reflects a country’s state of health, and therefore the wealth of its citizens.

GDP is defined as “nominal” when it is measured at current prices, and “real” when it is calculated net of variations in manufacturing prices.

All clear so far? We’re sure it is! The aim of this article is to provide key information, enabling you to explore what interests you most. We want to ensure economics is for everyone!

Deflation is a general decline in the prices of goods and services, in other words, the exact opposite of inflation; it therefore results in an increase in purchasing power.

Just like inflation, deflation is also measured in percentage points over a given period, using an index that tracks consumer price trends; it may be positive or negative: in the first case we have inflation, and in the second, deflation.

Deflation may be the consequence of a period of recession, which causes the demand for goods and services to fall sharply, resulting in a drop in prices.

Stagflation is a particular economic cycle in which inflation and an economic slowdown/stagnation occur simultaneously.

A classic example of stagflation was triggered by the global oil crisis in the 1970s.

When OPEC turned off the oil taps, this led both to a drop in output and an increase in prices, thereby driving inflation.

There is currently no common consensus on the causes of stagflation, which may be sparked by an increase in the cost of raw materials or sharp rises in energy prices.

Quantitative easing is an exceptional injection of cash flow by a Central Bank.

It is an unconventional expansionary monetary policy.

Quantitative easing was invented by Ben Bernanke, chair of the Federal Reserve from 2006 to 2014, following the 2008 financial crash.

The aim of adopting quantitative easing is to reboot the economy, manufacturing, employment and inflation.

When central banks buy short-term government bonds, fresh cash is injected into the system via QE (short for quantitative easing).

In economic terms, a deficit occurs when there is a shortfall between revenues and expenses on a balance sheet.

Public deficit refers to a situation in which public expenditure exceeds total revenues, thereby creating a budget deficit.

European countries must follow strict rules to avoid infringement proceedings for an excessive deficit.

This happens when the budget deficit exceeds 3% of GDP and public debt exceeds 60% of GDP, without falling by 1/20 over a year.

The unemployment rate is the percentage ratio of people aged 15 or over seeking employment to the work force as a whole.

This economic indicator is an important gauge of a country’s financial health: a low unemployment rate points to widespread economic security, and vice versa.

An optimal unemployment rate lies between 3.5% and 4.5%; when the parameter rises or falls, Central Banks can intervene by raising or lowering interest rates.

To sum up
  • Economics is a social science that studies human behaviour

  • A range of different economic theories have emerged over the years

  • It’s easier to understand once you’ve grasped the fundamentals

  • And, most importantly…economics is for everyone!

Good to know

The ideal unemployment rate for a country lies between 3.5% and 4.5%.

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