I don't understand economics.. and how does the economy work?

Question

I don't understand economics, share markets, those kind of things in general. Can someone please explain it to me? I really don't understand what the subject economics is about and how it works. =='

thanks ;)

Answer 1

Economics covers a whole lot more than just the economy (see Steven Levitt, Freakonomics)

But in your case, you seem to be talking mainly about the economy. Heres the skeleton of it.

Individuals and firms make income by working and doing business and through investment spending. The government, in turn, taxes these people and firms and uses the money for many things, including fiscal policy, which is used to stimulate consumption spending and investment spending (different from stocks, etc), which increases the profits and incomes of firms and individuals. Not everyone is employed 100 percent of the time, hence, we have an unemployment rate. This is the first major indicator of how an economy is performing. Also, there are central banks in several nations (we have the Fed) that regulate the money supply to influence the economy. The income of a nation, (also equal to its expenditure) is called GDP. This is the second number that is used to determine how the economy is doing (usually expressed as a percentage growth rate, not the actual value, which is in the trillions for the US).

The third major indicator of an economy is called the consumer price index, a measurement of inflation.

Theoretically, when an economy is doing well, GDP growth will be strong, unemployment will be low, and inflation might be rising or eventually will rise. The fed, therefore, will tighten the money supply to stop inflation until it recedes. By now, the economy may have slowed down (GDP growth down, unemployment up, inflation down) The Fed will then increase the money supply to stimulate the economy, at least until inflation seems to rise again. This pattern is called the business cycle

NOTE The Fed (independent of the government, actually) is not the only policymaker for the economy. Fiscal policy is made by congress and the president. This is those spending bills and stimuli you hear about in the news.

Thats a basic rundown, hope it helps.