Economics is essentially a study of trade.
You are, for example, trading time that you could have spent playing Angry Birds in exchange for time spent spent reading this blog. When you go to work for a firm, you are trading your free time in exchange for getting paid for work done. The firm is trading the money that it pays you in exchange for whatever role you fulfill in the production of whichever goods your firm makes. And so on and so forth.
Trade takes place only when both parties sense they will benefit from the transaction. The more trade there is in an economy, the more benefits there are to the economy - this is what we mean when we say economies grow.
Identifying the trading parties as households, firms, governments, the international economy and the financial system, and thereby distinguishing one from the others enables us to understand which part of the economy is responsible for growth in the economy.
Before we go deeper into our model though, let's tackle a fairly important concept early on - what do we mean when we say growth in the economy? How can one measure how much an economy has grown?
Economists usually account for growth in an economy by measuring something called GDP - a concept you'll hear bandied about in newspapers often enough. GDP, or Gross Domestic Product is a concept often used, and oftener misunderstood.
In terms of our model, it simply is the adding together all the economic activity that households, firms, governments and financial systems do, and netting out the influence of the international economy. That's GDP.
Yes, but over what duration of time? Are we taking about the economic activity done in a day? A month? A year?
The numbers that you hear about in newspapers, news channels and the like usually refer to either annual GDP, or quarterly GDP - that is, all of the economic activity that goes on in our little world, as measured over a year.
This might seem like a fairly easy concept to understand at first blush, and it actually isn't all that difficult to grasp. The difficulties begin when one starts thinking about the nuances, which is what we shall do the next time around.
You are, for example, trading time that you could have spent playing Angry Birds in exchange for time spent spent reading this blog. When you go to work for a firm, you are trading your free time in exchange for getting paid for work done. The firm is trading the money that it pays you in exchange for whatever role you fulfill in the production of whichever goods your firm makes. And so on and so forth.
Trade takes place only when both parties sense they will benefit from the transaction. The more trade there is in an economy, the more benefits there are to the economy - this is what we mean when we say economies grow.
Identifying the trading parties as households, firms, governments, the international economy and the financial system, and thereby distinguishing one from the others enables us to understand which part of the economy is responsible for growth in the economy.
Before we go deeper into our model though, let's tackle a fairly important concept early on - what do we mean when we say growth in the economy? How can one measure how much an economy has grown?
Economists usually account for growth in an economy by measuring something called GDP - a concept you'll hear bandied about in newspapers often enough. GDP, or Gross Domestic Product is a concept often used, and oftener misunderstood.
In terms of our model, it simply is the adding together all the economic activity that households, firms, governments and financial systems do, and netting out the influence of the international economy. That's GDP.
Yes, but over what duration of time? Are we taking about the economic activity done in a day? A month? A year?
The numbers that you hear about in newspapers, news channels and the like usually refer to either annual GDP, or quarterly GDP - that is, all of the economic activity that goes on in our little world, as measured over a year.
This might seem like a fairly easy concept to understand at first blush, and it actually isn't all that difficult to grasp. The difficulties begin when one starts thinking about the nuances, which is what we shall do the next time around.
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