My very good friend Joao Rojas requested a post that explained the difference between macroeconomics and microeconomics. Joao Rojas, this post is dedicated to you!!!
Microeconomics is crucial to comprehend before understanding macroeconomics. Microeconomics focuses on the smaller parts that make up the entire economy. Specifically, it looks at individuals and small companies and how they relate to supply and demand. Microeconomics is important because it shows businesses the right price for certain items, based upon supply and demand models. Microeconomics also studies the conditions for perfect competition, and the makeup of market failure. Now for some examples:
I am selling pecans from my backyard. There was a prosperous pecan season this year, so my competition also has a lot of good, solid pecans. Not many people really want to make pecan pie this season, so we have a ton of pecans with not many people interested in buying them. Therefore, the price of pecans will go down.
I had a great pecan season this year. Luckily, my competitors' pecans are small and few in number. EVERYBODY wants to make pecan pie. There is a high demand for pecans, and a small number of them. Since I have the best pecans, I can raise the price. Success!!
Those are very simple examples of supply and demand in microeconomics. It usually also considers the consumer demand theory, theory of production, cost of production, and labor economics. If the workers caring for my pecans are paid an exorbitant amount of money, then the price I sell my pecans at will be affected. Now on to macroeconomics.
Macroeconomics deals with the structure and behavior of the overall economy. Often times, macroeconomics is influenced by microeconomics. The unemployment rate will affect the number of workers a business will hire, and vice versa. Macroeconomics studies the unemployment rates, GDP, GNP, investments, savings, inflation/deflation, and international finance. Macroeconomics is the big picture.
One must understand both macroeconomics and microeconomics in conjunction because they often go hand in hand. Varying levels of inflation and deflation will force businesses to adjust their prices. Unemployment rates will affect the hiring of employees for companies. Joao Rojas, I hope you now understand the basics between microeconomics and macroeconomics. For everyone else, if there is a specific topic you would like me to touch upon, feel free to suggest it in a comment!
Friday, February 28, 2014
Monday, February 24, 2014
Modern Forms of Capital
When I first began reading news dealing with finance, I was consistently stumped by the concept of capital. Then, I read an amazing book. It was probably one of the best informational books I have ever read, and I strongly recommend it to anyone with the same confusions. The Mystery of Economic Growth by Elhanan Helpman has entire chapters dedicated specifically to the meaning of capital and its impact on an economy. I wouldn't exactly call it a beach read, but the time spent wrapping your head around the content is definitely worth it. Anyways, in this post, I'll briefly describe the different forms of capital that haunted me for so long.
Financial capital, in simple terms, refers to money that is saved up or given by lenders. Usually this money then goes towards starting a business or any other type of enterprise. Businesses include financial capital in their finance reports and use capital almost synonymously with assets. It can be measured in nominal monetary units (Historical Cost Accounting), in which a company only maintains its capital if it has the same amount of capital at the end of the period as it did at the beginning. In theory, this makes sense. If you have six pieces of candy at the beginning of the month, and six pieces of candy at the end of the month, you successfully maintained your capital. Congratulations! However, in actuality, Historical Cost Accounting does not take into account inflation or deflation, so it is not as accurate if those factors play in. Financial capital can also be measured in terms of constant purchasing power. With constant purchasing power, capital maintenance can be accurately accounted for in times of low inflation and deflation or hyperinflation. We continue to use Historical Cost Accounting because it is the standard form of accounting. Okay, so financial capital, to me, was always the most complicated form of capital. The rest are much easier to comprehend.
Natural capital deals with ecological benefits, such as water that supports a village.
Social capital involves relationships between humans that promote economic benefits. For example, if I have a lemonade stand, I will need to buy sugar. You have a business that sells sugar, so I will need to come to you and buy sugar, thus we have a mutual agreement to depend on each other for profits. We both benefit economically from this relationship.
Instructional capital is the knowledge gained from a teacher. Never in my entire life would I have understood the concept of logarithms on my own. They still mystify me. However, my math teacher can transfer her knowledge of logarithms to me, and I can then use the knowledge to benefit society (If I am lucky, I will find a way to benefit society WITHOUT logarithms). This is instructional capital.
Human capital often includes social capital and instructional capital. Human capital is the pure value of a human. Your dog cannot invent the light bulb, create a vaccine for polio, or write the Great American Novel. Humans can do all of these things; therefore, human capital is valuable.
Physical capital refers to manufactured items that are used in production. An example would be the machines used to make the fabulous L.L. Bean boots.
These are the different forms of modern capital. In The Mystery of Economic Growth, Helpman explained that a country needs all of these different forms of capital in order to grow economically. Each form of capital contributes a necessary addition to society. Yay for modern capital!
Financial capital, in simple terms, refers to money that is saved up or given by lenders. Usually this money then goes towards starting a business or any other type of enterprise. Businesses include financial capital in their finance reports and use capital almost synonymously with assets. It can be measured in nominal monetary units (Historical Cost Accounting), in which a company only maintains its capital if it has the same amount of capital at the end of the period as it did at the beginning. In theory, this makes sense. If you have six pieces of candy at the beginning of the month, and six pieces of candy at the end of the month, you successfully maintained your capital. Congratulations! However, in actuality, Historical Cost Accounting does not take into account inflation or deflation, so it is not as accurate if those factors play in. Financial capital can also be measured in terms of constant purchasing power. With constant purchasing power, capital maintenance can be accurately accounted for in times of low inflation and deflation or hyperinflation. We continue to use Historical Cost Accounting because it is the standard form of accounting. Okay, so financial capital, to me, was always the most complicated form of capital. The rest are much easier to comprehend.
Natural capital deals with ecological benefits, such as water that supports a village.
Social capital involves relationships between humans that promote economic benefits. For example, if I have a lemonade stand, I will need to buy sugar. You have a business that sells sugar, so I will need to come to you and buy sugar, thus we have a mutual agreement to depend on each other for profits. We both benefit economically from this relationship.
Instructional capital is the knowledge gained from a teacher. Never in my entire life would I have understood the concept of logarithms on my own. They still mystify me. However, my math teacher can transfer her knowledge of logarithms to me, and I can then use the knowledge to benefit society (If I am lucky, I will find a way to benefit society WITHOUT logarithms). This is instructional capital.
Human capital often includes social capital and instructional capital. Human capital is the pure value of a human. Your dog cannot invent the light bulb, create a vaccine for polio, or write the Great American Novel. Humans can do all of these things; therefore, human capital is valuable.
Physical capital refers to manufactured items that are used in production. An example would be the machines used to make the fabulous L.L. Bean boots.
These are the different forms of modern capital. In The Mystery of Economic Growth, Helpman explained that a country needs all of these different forms of capital in order to grow economically. Each form of capital contributes a necessary addition to society. Yay for modern capital!
Wednesday, February 19, 2014
The TRUTH About Quantitative Easing
I compete in Speech & Debate, and a girl once gave a speech in the final round of a very prestigious tournament about the almighty Janet Yellen. Naturally, when I stood up to question my competitor, I brought up quantitative easing (QE). She denied that it causes inflation- over and over again. Needless to say, this made me very angry. Even worse, the judges were not aware of the practice of quantitative easing either, so the girl was not penalized for her obvious mistake. Therefore, I am making it a priority to FULLY explain quantitative easing.
Why exactly is quantitative easing so pertinent right now? Well, our economy is obviously not in the best shape. Big surprise there. Our country recently confirmed Janet Yellen as the head of the Federal Reserve. She is pretty much my favorite woman in politics- behind Angela Merkel, of course. Yellen is more than qualified for the job; she was the president of the Federal Reserve Bank of San Francisco and became the vice chairman for the Federal Reserve in 2010. Maybe I will compose a full analysis of Janet Yellen in the future... Back to the concept of quantitative easing, quantitative easing and Janet Yellen cross paths in the stimulus package she is supporting. Henceforth, quantitative easing will be used to "stimulate" our economy in the upcoming years. So you should probably know what it is.
The definition of quantitative easing is "an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. It increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are close to zero, and does not involve the printing of new banknotes." Pretty confusing. In simpler, less robotic terms, quantitative easing allows the government to buy assets from banks or private companies. The idea is that the banks will then lend the extra money generated from QE to those who need it. This puts more money into the economy as it allows for the movement of capital between large banks and the Americans who are using the money to buy houses, start businesses, or accomplish any other sort of lifelong dream. QE also works to lower interest rates. In the next round of quantitative easing, the Fed is discussing the purchase of mortgage-backed securities. This would make it easier for someone to borrow money and buy a house. But, like anything else, quantitative easing is not perfect.
There is always the possibility that the extra money available to the banks/private companies will not be used for further investment or lending at all, but instead kept for maintenance or internal investment. This totally defeats the entire purpose of quantitative easing, as no money will be cycled throughout the economy. Furthermore, QE can lead to an increase in inflation. In some circumstances, having more inflation is beneficial- particularly if you are Japan. In the United States, however, we do not want a drastic rise in inflation. This would occur if the interest rates are kept too low for too long, which could happen due to QE. People would continuously take advantage of the opportunity and buy with the lower interest rates. This would introduce excessive spending that causes prices to rise quickly. At the moment, the United States does not need to worry about this. We should keep it in mind, though.
This is the end of my brief explanation of quantitative easing. Now, if you ever happen to judge a speech and debate tournament, you will have a general idea of what is going on. Please remember this for such an occasion; I beg of you. #makingdollarsandsense
Why exactly is quantitative easing so pertinent right now? Well, our economy is obviously not in the best shape. Big surprise there. Our country recently confirmed Janet Yellen as the head of the Federal Reserve. She is pretty much my favorite woman in politics- behind Angela Merkel, of course. Yellen is more than qualified for the job; she was the president of the Federal Reserve Bank of San Francisco and became the vice chairman for the Federal Reserve in 2010. Maybe I will compose a full analysis of Janet Yellen in the future... Back to the concept of quantitative easing, quantitative easing and Janet Yellen cross paths in the stimulus package she is supporting. Henceforth, quantitative easing will be used to "stimulate" our economy in the upcoming years. So you should probably know what it is.
The definition of quantitative easing is "an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. It increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are close to zero, and does not involve the printing of new banknotes." Pretty confusing. In simpler, less robotic terms, quantitative easing allows the government to buy assets from banks or private companies. The idea is that the banks will then lend the extra money generated from QE to those who need it. This puts more money into the economy as it allows for the movement of capital between large banks and the Americans who are using the money to buy houses, start businesses, or accomplish any other sort of lifelong dream. QE also works to lower interest rates. In the next round of quantitative easing, the Fed is discussing the purchase of mortgage-backed securities. This would make it easier for someone to borrow money and buy a house. But, like anything else, quantitative easing is not perfect.
There is always the possibility that the extra money available to the banks/private companies will not be used for further investment or lending at all, but instead kept for maintenance or internal investment. This totally defeats the entire purpose of quantitative easing, as no money will be cycled throughout the economy. Furthermore, QE can lead to an increase in inflation. In some circumstances, having more inflation is beneficial- particularly if you are Japan. In the United States, however, we do not want a drastic rise in inflation. This would occur if the interest rates are kept too low for too long, which could happen due to QE. People would continuously take advantage of the opportunity and buy with the lower interest rates. This would introduce excessive spending that causes prices to rise quickly. At the moment, the United States does not need to worry about this. We should keep it in mind, though.
This is the end of my brief explanation of quantitative easing. Now, if you ever happen to judge a speech and debate tournament, you will have a general idea of what is going on. Please remember this for such an occasion; I beg of you. #makingdollarsandsense
Why A High Schooler Cares About Economics
Sure, making money is probably fun. I would not know myself- I am too busy with school, extra curricular activities, and the tiresome job of being a teenager. However, I would assume that making money is a nice thing to do. In order to dispel any misconstrued notions: talking about how to make money is not the purpose of this blog. I am creating this blog with the purpose of educating today's youth (maybe even today's adults) on various economic principles, concepts, and interesting facts. I will also be blogging about the financial books that I find to be particularly helpful/fascinating. It is very likely that there will be posts about current economic giants and up-and-comings as well. What gives me the right to post about finance? To be quite frank, I am not a professional financial analyst or economics guru. I do have a passion for the material, though, which has encouraged me to learn all that I can on the subject. Of course, all of my posts will be supported with more reputable sources, so no need to worry. Anyways, I cannot wait to begin and subscribe for the utmost exciting discussions on economics! #makingdollarsandsense
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