Understanding Key Economic Concepts and Policies

Posted on Mar 24, 2025 in Economy

Key Economic Concepts and Policies

Economy: The science of the choices we make and how those choices change.

Microeconomics vs. Macroeconomics

  • Microeconomics: The study of how households and firms make decisions and interact with each other in the markets.
  • Macroeconomics: The study of the functioning of the economy as a whole, including various assets and markets, reducing them to a single good.

Fundamental Economic Concepts

  • Real income: The sum of all production made by all firms in an economy during a period.
  • Fund or stock variables: These are defined in relation to a specific date and time.
  • Interest rates: The price of money itself, not measured in quantities of goods. It measures the opportunity cost of keeping assets liquid and not investing them for profit.
  • Macro variables: Flow, fund or stock, and prices.

Promoting Economic Growth

Factors that promote a country’s growth:

  • An environment conducive to investment in physical and human capital.
  • A favorable framework of institutional and economic policies.

Economic Systems and Ideologies

Trends that influence growth:

  • Capitalism: An economic system where the means of production belong to those who have invested capital.
  • Socialism: Various economic, social, and political doctrines that advocate for a fairer distribution of wealth and condemn private property and production.
  • Neoliberalism: Advocates that businesses have only one social responsibility: to use resources and make efforts to increase profits.

Hierarchy of Needs

  • Secondary Needs:
    • Self-realization needs
    • Esteem and recognition needs
    • Social needs
  • Primary Needs:
    • Security needs
    • Physiological needs

Economic Indicators and Policies

  • Growth rates: Increasing and decreasing.
  • Macro Policy: A set of government measures designed to influence the progress of the economy as a whole.
  • Economic policy objectives: Production, employment, and price stability.
  • Business cycles: Short-term evolution of production, employment, and prices.
  • Economic growth: Long-term trends in production and living standards.
  • Production function of economics: The result of adding the production functions of companies that make up the economy.
  • Inflation: Growth in the general price level of goods and services in an economy.
  • CPI (Consumer Price Index): Measures the cost of a fixed basket of goods purchased by the average consumer.

National Accounts and Economic Measurement

  • National Accounts: Measures the current economic activity over a period, recording transactions between economic agents.
  • Final goods: Goods that are purchased during the year by end-users and are not used as intermediate inputs.
  • Value added: The value of a company’s sales less the value of raw materials and intermediate goods used to produce the goods it sells.
  • Investment: The increase in stocks, equipment, and inventory over a year.
  • Net investment: Gross investment minus depreciation.
  • Gross National Product (GNP): The total final product, including net investment, produced by factors within and outside the country.
  • Calculation of NNP: GNP – Depreciation (D)
  • Personal income: The income received by individuals. It is obtained by subtracting from national income the profits retained by enterprises, income taxes, and corporate contributions.
  • Domestic investment: Net exports equal private savings plus the public sector surplus.
  • Potential GDP: The maximum level of output the economy can achieve with stable prices.
  • Unemployment rate: The ratio between the number of unemployed persons and the labor force, expressed as a percentage.