the economy

money

  • Money is used as a medium of exchange in the modern economy like bartering items were in early economies. It also has an agreed value.
  • This agreed value remains basically the same, dollar per dollar, and this means it can be used as unit of account.
  • In addition to be being a unit of account and a medium of exchange it is a store of value. This is because money does not lose value over time like other mediums of exchange such as barter items.
  • Systems of money have changed to reflect society and how what money was and is. The first system was a commodity based system. It relied on the inherent value of traded goods like food or precious metals.
  • The second system was a representative money system. This relied on banks and financial services to store money. True money in this system was precious metals like gold and silver.
  • The third system is a fiat money, relying on the government, or an appointed central bank to issue and regulate.

the economy

  • The economy is based around the production and exchange of goods and services and the exchange of money.
  • The spending of an income provides an income for others via this exchange.
  • Banks and other lenders provide money to their customers in the form of credit. It must be paid back to the lender.
  • Taxes can be considered payment for the goods and services government provides, such as hospitals and schools.

economic cycles

  • Common symptoms of a booming economy include businesses making higher profits, house prices rising, and lower unemployment levels. GDP is one way of measuring the net effect of this.
  • Leveraging is another way of saying ‘going into debt’ while deleveraging means paying off your debt.
  • Broadly two factors impact the GDP and economic growth. The first is credit and the amount of leveraging or deleveraging which effects liquidity and spending in the economy.
  • The second is structural factors. If a country has assets like commodities it can sell these to increase its GDP. Further, social aspects such as the median age of a population effects GDP. This is because a very young population of children will not be supporting the economy while they are at school; similarly an ageing population will be supported by government and will not be earning an income to contribute to the GDP.

fiscal policy

  • Fiscal policy is how the government redistributes taxes across the economy, and is outlined in its Budget.
  • In times of slow growth or recession government spending or redistribution will increase. This aims to encourage spending in the economy and the government may decide to go into more debt.
  • A balance is needed between taxing businesses and individuals for the government to generate revenue. Tax on individuals which is too high, will lead to less disposable savings and thus less spending in the economy. High tax on business may lead to fewer jobs being available, or divestment from Australia.
  • Government debt must be at some stage deleveraged. This results in decreased spending on government services like health or education.
  • The government may also initiate its own projects, such as infrastructure, to provide jobs and stimulate growth. Often the wealthier Federal government will invest in projects for the poorer State government to support the overall economy.

monetary policy

  • The Consumer Price Index measures inflation. Inflation is the change in price of a good or service. Growth of 2-3% per annum is considered normal and healthy.
  • The overnight cash rate is one monetary policy tool which the central bank can use to influence the economy. It indirectly effects how much liquidity is in the market by influencing the volume of credit lending banks provide. Lenders will lend less cash to consumers if the rate is high and more if the rate is low.
  • The Reserve Bank decides the OCR. If it lowers the OCR banks will be able to borrow more money from its reserves and lend more to their customers, helping to drive the economy. The opposite would apply if inflationary pressures are mounting.

globalisation

  • Globalisation refers to a process of economic integration between nations.
  • It has been accelerated in recent years due to factors such as the reduction of trade and investment related barriers.

the global financial crisis

  • The 2008/09 global financial crisis was a cataclysmic event that had far-reaching implications for many participants in the global economy.
  • Whilst many economists debate about the origins, it is commonly understood that poor regulation around credit in developed economies such as the US, led to overbearing debt burdens for homeowners and large financial institutions. 2008 marked the breaking point.

the global financial crisis (ii)

  • To combat worsening conditions, governments and central banks in numerous countries collaborated to initiate policy “easing”.
  • This included a combination of greater fiscal spending to rescue ailing institutions (referred to as “bailouts”), and significant interest rate cuts.
  • As an individual managing personal finances, it is important to acknowledge that crises are endemic to modern day economies.

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