HOW THE ECONOMY WORKS

Inflation, unemployment, and exchange rates have been on the high side in Nigeria in recent times. As a result, it is normal for the people to be concerned about the country’s economic situation. We would like to help you understand how the economy works.

WHAT IS AN ECONOMY?

An economy, in simple terms, is the aggregate of all production and consumption activities that determines how resources are allocated in a region. It exists to satisfy the needs and wants of its participants. The three types of economies are stated as follows: 

Capitalist economy: In a capitalist economy such as the United States of America, the means of production are mostly controlled by private entrepreneurs (the capitalists) in the state.

Socialist economy: In a socialist economy such as China, Vietnam, and several others, the means of production are mostly controlled by the government.

Mixed economy: In a mixed economy such as Nigeria, resources are controlled by the government and private entrepreneurs. The entrepreneurs control the resources with interferences from the government in a bid to ensure the needs of the society are met. 

WHAT ARE THE PARTS OF AN ECONOMY?

Think of the economy as a machine comprising integrated parts that all need to work well to keep the machine running optimally. Any part failing will result in the machine running improperly. Now, take those parts to mean the diverse markets that make up the economy. Each market comprises many transactions mainly driven by demand, supply, and government policies within the market.

Businesses, individuals, banks, and governments all participate in market transactions with the government and its agencies as the biggest spenders. The government oversees maintaining the economy as a whole and ensuring favorable market conditions for all participants. The government ensures this by exercising its expenditure and taxation policies (fiscal policies). The Central Bank of Nigeria oversees money supply in the economy and influences this through its monetary policies.

The government oversees stabilization of the economy by regulating the market transactions through:

•      Providing the legal and social framework of the economic markets.

•      Ensuring monopoly minimization, public goods, and services provision, income redistribution between the rich and the poor.

HOW IS THE MACROECONOMY ASSESSED?

Macroeconomic indices are various statistical indicators used to assess the general condition of the macroeconomy. Economic indicators are regularly gathered by the government or private business intelligence organizations in the form of a census or survey, which is then analyzed further to generate an economic indicator. These indicators include:

Consumer Price Index: This measures the rate of inflation in a country. Inflation is defined as a persistent rise in the prices of goods and services in a country over a given period of time. Inflation occurs when the nominal value of the currency (i.e. the purchasing power of the currency in the base year) has lower purchasing power. Steady single-digit inflation rates i.e. below 10% are considered healthy as inflation will always rise when the economy is growing and money supply increases while double-digit inflation rates are an indication of poor economic health and may cause concerns for policymakers. CPI is calculated as (Price of current period – Price of base period) / Price of base period X 100.

Gross Domestic Product: This is the aggregated sum of all expenditure or income activities in an economy within a given period of time. GDP growth rate would then measure the rate at which these activities increase as periods change.

Unemployment rate: Unemployment occurs when people who are capable and willing to work cannot find work. The unemployment rate would then measure the portion of the entire labor force regarded as unemployed. This is calculated as the Total number of unemployed people / Total Labour force X 100.

Balance of Payment: This measures the international flow of money between a country and the rest of the world. It takes into consideration all exports and imports made by the country in a given period of time. If it is positive i.e. exports are greater than imports, we say the country has a favorable balance. Where negative i.e. imports are greater than exports, the country has a balance deficit.

Interest rates: This is an important factor that affects the supply and demand of credit. Higher interest rates may seem too costly for borrowers so the demand for credit reduces, while lenders may not want lower interest rates as it would mean they get lower returns from lending credit. Interest rates are influenced by the supply and demand as well as the competitiveness level in the financial market. The Central Bank of Nigeria may purposely set a benchmark for interest rates within the country as a means of stabilizing the credit market. A stable credit market will encourage investors to take more loans to be used in the production of goods and services which will prompt economic growth.

We hope you have enjoyed and most importantly learned from this article. Do have a great week ahead. Share with friends and families, drop your comments in the comment box, and engage with us via our social media platforms @broadstreetfinancialreview on Facebook, Instagram and LinkedIn; @broadstreet_fin on Twitter.

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REFERENCES

Dalio, R. (2013, June 8). How The Economic Machine Works by Ray Dalio. YouTube. https://m.youtube.com/watch?v=PHe0bXAIuk0

Exploring How an Economy Works and the Various Types of Economies. (n.d.). Investopedia. Retrieved September 8, 2021, from https://www.investopedia.com/terms/e/economy.asp

Kulkarni, P. (2014, June 9). Five macro-economic indicators that may affect your investments. The Economic Times. https://economictimes.indiatimes.com/news/economy/indicators/five-macro-economic-indicators-that-may-affect-your-investments/articleshow/36198431.cms?from=mdr

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