As the web has not only made information readily available, but international communication easier than ever, it’s only logical that economics has become a more popular topic of study. In understanding the economy, it also becomes easier to target the best investment ventures.
Simply put, the economy is an umbrella term that includes personal finance, business, investing, international trade – just about anything that has to do with the exchange of money.
On the other hand, some people learn better through stories and comparisons.
In that case, imagine the economy as a machine as Richard Reis instructs. Like a machine, the economy is made up of cause and effect relationships. Therefore, anything that happens in the world is either caused by the economy, or effects the economy. And, interestingly enough, these same causes or effects take place in the economy cyclically.
What Drives the Economy
There are three basic components of the economy. Any smaller economic term falls into one of these three ‘categories.’
This is measured in GDP (Gross Domestic Product) per capita, per nation. The formula is simple – divide the GDP by the amount of citizens in the country. The GDP is the value of literally every good and service that the country has to offer.
As described in Investopedia, “GDP includes all private and public consumption, government outlays, investments, private inventories, paid-in construction costs and the foreign balance of trade (exports are added, imports are subtracted). Put simply, GDP is a broad measurement of a nation’s overall economic activity – the godfather of the indicator world.” In general, a country’s growth should be positive year after year. This is because there is always new technology, new advancements, and new knowledge. Logically, things should only get better and grow.
2) Short-Term Debt Cycle
As mentioned earlier, the economy is cyclical. This means that the same events in the economy happen every so often, it’s just a matter of predicting when they will come. One thing that always happens in the economy is a short-term debt cycle. This is a five to eight year period where everything trends downward – including the growth in component number one. Because it’s a natural process it doesn’t necessarily doom all investments, but rather it’s just important to be cognizant of these periods.
3) The Long-Term Debt Cycle
This is the same as number two, but on a larger scale. This cycle could last up to seventy-five years. However, it’s a cycle, so it does come to an end – eventually.
So in the vaguest form, the economy is an umbrella term for anything that has to do with money – from a simple transaction to international trade. To break it down a bit further, all of the terms the economy umbrellas over are either a part of growth, a short-term, or long-term debt cycle.