University & Degrees

The fundamentals of economics

3 min
December 22, 2021
You might have heard that economics is the study of money, but that's not entirely true. Economics is actually the study of the use of limited resources, which sounds pretty complicated - let's break it down.

What is economics?

People need resources to fulfil their desires. Our resources cannot be infinite, but our desires can be, so we need to make choices about how we use our resources. Economists study these choices. Want an example? Economics is a technology company deciding whether to produce smartphones or tablets and how that's influenced by what consumers want to buy. Or when in the midst of the pandemic households rushed to buy toilet paper fearing a shortage.

An economist's job is to study what products we buy and how much we are willing to pay for them.

Economics and running the country

You’ve probably seen the Chancellor of the Exchequer holding up a red briefcase and heard people in the news talking about austerity measures, but what does all of that actually mean? Here we’re going to look at the role economics plays within government. 

The government has three main channels of income:

  • Taxes from people, companies and resources 
  • Natural resources like oil and natural gas
  • Licensing and leases - an example of this would be telecommunications companies paying the government to be able to operate in the UK.

What does the government do with taxes?

So what does the government do with this income? They have to decide the best way of spending the money. First, they have to look after the people; this happens in many forms like putting money into the NHS, education and local authorities etc. Next, they have to look ahead and see what the nation may need and how to invest for its development; this could involve building roads, infrastructure and research centres or developing green energy. 

Why do countries borrow money?

Unfortunately, not every country has its own natural resources or enough taxed income to cover its costs every year. Therefore, they might need to borrow money to provide these services and look after their people. When borrowing money, countries have to think about getting the best deal, and they have to consider two main criteria: interest rates and rate of inflation. Don’t worry, we’re going to explain them!

What are interest rates? 

An interest rate is the percentage of the money you pay back on top of the borrowed sum; if you borrowed £100 with an interest rate of 8%, you would end up paying £108 back. In the vast majority of cases, interest rates vary from 1% to 8%, depending on the country's stability and how the country is run. The more stable countries will receive a lower interest rate. 

What is inflation?

Inflation is the change in the cost of anything you buy over a period of time. If you buy a pack of biscuits for £1.00, fast forward a year and the same pack of biscuits costs £1.02. The 2% rise in the price of biscuits is inflation. If a country borrows too much money or borrows it too quickly, it will increase the inflation rate; when this happens, more money is needed to buy the same items, so people are worse off and have less to spend.

Why is inflation sometimes good?

Small amounts of inflation (2%) are good for the economy because they encourage people to spend now (rather than later), ensuring the economy keeps growing. It also avoids deflation, which causes recessions (a decline in economic activity), leading to lower wages, taxes and unemployment, which all affect the government's income. It's all a big loop! 

What is economic growth? 

Economic growth is described as an increase in the quality and the quantity of the goods and services in the economy that society produces and consumes. Economic growth is one of the main aims of any country, as it means that wages, taxes and the standard of living all increase. 

What is economic development?

Economic development is programs, policies or activities that seek to improve economic well-being and quality of life. Examples of economic development policy are all around; it could be anything from high-speed trains to high-speed internet. Both mean we are better connected, and each benefits our economy.

Why study economics?

Money plays a big part in politics, society, law, and almost everything else. Understanding how and why people, companies and countries control their money is a valuable skill and gives great insight into today's world. 

It's a fascinating study of psychology, why people make their decisions, and how resources are spread worldwide. Economics is studied in two main strands:

  • Microeconomics is the study of how individual parties (people, groups, and businesses) use their wealth.
  • Macroeconomics looks at entire economies and covers the unemployment, inflation, and monetary challenges of cities, countries, and continents.

What jobs can you get with an economics degree? 

Economics helps you to think strategically and make decisions to optimise outcomes - and the good news is that this way of thinking is valuable to any business.

An economics degree is great at preparing you for careers that require numerical, analytical and problem-solving skills. You could go into finance, law, business management, business reporting or policy development, to name a few! 

Want work experience in economics?

A lot was jam-packed into this article but hopefully, you’ve got the basic fundamentals of economics down! To learn more about economics and how finance affects your world, why not check out the finance and accounting virtual work experience programme? 

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