How The Economic Works
Economics 101 -- How the Economic Machine Works.
A Economics 101 -- "How the Economic Machine Works." Created by Ray Dalio this simple but not simplistic and easy to follow 30 minute, animated video answers the question, "How does the economy really work?" Based on Dalio's practical template for understanding the economy, which he developed over the course of his career, the video breaks down economic concepts like credit, deficits and interest rates, allowing viewers to learn the basic driving forces behind the economy, how economic policies work and why economic cycles occur.
To learn more about Economic Principles visit: http://www.economicprinciples.org.
Understanding the economy in 10 easy steps
The Reserve Bank of Australia's decisions about the cash rate are not just about setting the interest rate for mortgages. The economy is not controlled by one set of numbers but reviews a variety of factors.
It helps to understand the various signals that experts look for when making decisions that will ultimately affect your pocket book. For most households, key indicators that affect your daily life the most are interest rates, inflation and unemployment.
Staying abreast of the economic signals can assist you to make wise financial decisions and not get caught out.
Here are my top 10 basic economic factors worth understanding:
1. Cash rate
The cash rate also called the official interest rate, and it is the interest rate off which all borrowing is based. The rate is controlled by the Reserve Bank, though technically it is the rate the banks charge each other for overnight borrowing, to maintain positive balances with the Reserve Bank. When the economy is improving, the Reserve Bank raises interest rates to slow the economy; when the economy needs some stimulation, interest rates are reduced to low levels such as today's 2 per cent. The Reserve Bank uses the cost of money to control demand.
Inflation is the rising cost of goods and services. The Reserve Bank uses the cash rate to keep inflation within the bounds of 2-3 per cent. The idea is that when money is cheap, we'll spend a lot and prices will rise; when interest rates are high, we won't spend so much and prices won't rise so fast. Inflation is currently 1.7 per cent – don't expect a rate rise soon.
The growth of gross domestic product (GDP) measures how fast the economy is growing. GDP growth is like a national scorecard and is currently around 3.0 per cent, above the global trend.
4. Global growth
The Reserve Bank looks at global growth because it defines the health of our broader market place. The International Monetary Fund put global growth at 2.4 per cent in 2015 and forecasts 2.9 per cent for this year.
5. Labour market
Strong employment is essential when you control the economy with interest rates. Banks won't lend to those with no job and economic confidence is weak with high unemployment. The Australian unemployment rate is currently 6.0 per cent; in comparison, in Canada it's 7.2 per cent and in the UK it's 5.1 per cent.
6. Exchange rate
The current "low" exchange rate of the Australian dollar against the US dollar is more a return to trend. It makes some imports more expensive but it helps exporters.
7. Industrial v services economy
The RBA refers to the "mining economy" and the "non-mining economy" (all industries other than mining). Economic growth has traditionally been based on the mining industry in Australia, which is currently not experiencing growth. However, Australia has seen recent growth in the non-mining sector. This economic transition matches the recent Chinese shift from industrial to a services economy.
8. Household consumption
Household consumption equals consumer confidence in buying and selling goods and services. It is currently strong.
9. Balance of trade
This is simply the difference between how much we export and how much we import. Every economy would love to export more than it imports and Australia usually hasn't. Since 1971 our normal state is to have a trade deficit.
10. Business investment
One of the big stimulants for not only the economy but also the jobs market, is business investment. In 2015, capital expenditure was down around 16 per cent on 2014.
Mark Bouris is executive chairman of Yellow Brick Road.
NB. This article has been altered to correct the definition of "cash rate".