Basic Economic Entities

Production

Consumption

Capital Goods

Purchasing power

Factors of Production

Factor payments

Factor services

Consumption/Consumer Goods

Capital Goods

Firms

Households

Banks

Govt

Basic Principles of Economy

Four cardinal principles of Economy

Consumption drives Production
Production enables Consumption (Factor payments)
Capital Goods increases Production
If Purchasing Power rises in-line with Production, economy expands. Else economy recedes

Simple Economy

Hou

Economy in practice

Imp theories

Keynesian Theory

“animal spirits span>
Keynesian wisdom of stimulus

In modern economic terms, animal spirits describes the psychological factors that drive investors to take action when faced with high volatility in the capital markets.

Hobbling economy

Economy that moves unsteadily or moves with great difficult

Goldilocks Economy

Refers to an economy wherein the growth is not so high that it causes inflation, and not so low that it causes a recession.
There are no exact markers of a Goldilocks economy, but it is characterized by a low unemployment rate, increasing asset prices (stocks, real estate, etc.), low interest rates, brisk but steady GDP growth and low inflation.

Circular Economy

A circular economy is one in which economic development and environmental sustainability are interdependent, with a strong emphasis on minimizing pollution, while maximizing reuse and recycling. [Make -Use- Recycle- Use]
It is an alternative to a traditional linear economy (make, use, dispose) in which we keep resources in use for as long as possible, extract the maximum value from them whilst in use, then recover and regenerate products and materials at the end of each service life.
NOTE: Not Recession and Booming cycles
5R principles - Reduce, Reuse, Recycle, Re-manufacture, Repair/refurbish

Welfare Economics

Amartya Sen is the pioneer
Welfare economics focuses on the optimal allocation of resources and goods and how the allocation of these resources affects social welfare.

Imp concepts

Investment Expenditure - Rise in value of inventories of firm

Fixed Business Investment - Addition to machinery, factory building, equipment

Residential investment - Addition of housing facilities etc.

Reserve Money (High powered money) , Broad Money, Narrow money - M0, M1, M2, M3

Money Multiplier

Velocity of Money

How many times money moved from one entity to other entity in a given period of time
It is important for measuring the rate at which money in circulation is being used for purchasing goods and services.
It is used to gauge the health and vitality of an economy. High money velocity is usually associated with a healthy, expanding economy. Low money velocity is usually associated with recessions and contractions.
Higher the velocity of money, higher the total nominal value of transactions in the economy

Secular stagnation

An expression coined by the economist Alvin Hansen in the 1930s
Where savings exceeds investment, real interest rate tends to drop to very low level

Stagflation

Mix of Stagnation and inflation
Condition of slow economic growth and relatively high unemployment – economic stagna ion accompanied by high inflation and a decline in Gross Domestic Product (GDP).

Disinflation

Inflation refers to increase of prices while deflation refers to decrease of prices
Disinflation refers to slowdown in the rate of increase of price level of goods and services
i.e. Disinflation refers to rate of change in the inflation rate

Minsky Moment

American economist Hyman Minsky

A Minsky moment is a sudden major collapse of asset values which is part of the credit cycle or business cycle.
Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money.
The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors.
The cash generated by their assets is no longer sufficient to pay off the debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans.
This is likely to lead to a collapse of asset values.
Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans.
However, at this point no counterparty can be found to bid at the high asking prices previously quoted.
This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash

Black Swan events

A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict.
Black swan events are typically random and unexpected.

Public Good

Public goods are defined by two characteristics:

Non-excludability: It is not possible to exclude non-payers from consuming the good.
Non-rivalry in consumption: Additional people consuming the good do not diminish the benefit to others

Ex: Fresh air, street lighting

Macro Economic Theories & Principles