The Economy is a Recipe, Not an Ingredient

The TV was the reason why I avoided economics early on. It only gave me snap shots of small incomprehensible pieces that didn’t make sense in the larger picture. What the last three principles of economics do is show you how to look at the economy as a whole, and three general principle breakdowns of it. With that, here’s principle number 8:

Principle 8: The Ability to Create Goods and Services = High Standard of living

This seems pretty logical, but I do want to throw in a few things in order to get a deeper understanding of this principle. There are three factors of production: Land, Labor, and Capital. These are so important, remember them. In my opinion (not a professional, yet) if you know these, you can consider the argument from any angle. Land, labor, and capital are the factors of production and a country’s standard of living depends on their ability to produce goods and services. The United States has been the leader or, hegemon in this since the early 1900s, before that it was the British, now people say China may be a future contender.

But really, this breaks down into if you have the land to build the factory, the labor to put in the factory, and the labor to put in it, then those people will have the materials they need to be effective to earn the business and themselves money. Firms and households work together as we covered in yesterday’s post in order to achieve greater economic outcome. I’m holding back a little on this principle because there’s just sooo much we can talk about. but later.

Principle 9: If We Print Too Much Money –> Inflation!

Putting too much capital in the market over time increases the prices that consumers and eventually, businesses, have to pay. Nobody likes that. This is part of the reason why there was so much debate over President Obama’s stimulus package in 2008, 2009. This is also linked to demand and supply, these are also fundamental to the study of economics. Basically when supply rises, demand falls and vice versa. Japan did something similar in the early 2000s in order to promote private lending and business growth in the short-term. That leads us to–>

Principle 10: There is a Trade Off Between Short-Run Inflation and Unemployment

No wonder people call economics the dismal science, but here we go. Please refer to Principle 1 to understand trade offs. Putting money into the economy in the short-term does not produce inflation, rather it increases spending, which boosts the economy, and makes it easier for people to get loans to build businesses, which is also good for the economy. We need people to spend money to keep it going, if there’s no money, your economy is sunk. It’s not good to have too many people unemployed then because then that’s less money that can go into the market. So when the government puts money into the economy it does produce benefits such as, increased demand for goods and services; firms may raise prices over time, but if they do that then, they hire more people; unemployment decreases.

These effects are in the short-term. The economy, like the weather comes and goes in cycles, that’s not a bad thing. We just don’t want those cycles to be too big, or else they’re not manageable and are potentially disastrous.

As always, I’m referring to the book by Dr. Mankiw and I’m not a professional (yet) I just want you to get excited about economics with me!

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