5 Answers to 5 Questions You’ve Always Had About the Economy

| Updated on March 27, 2024

The economy seems to be a regular feature in the news. Still, for those who aren’t too savvy about what it means, we will look at the five pressing questions that might be bugging you about the economy. It can be a difficult subject to tackle, with news items about a whole range of topics that are hard to understand at first. Including bonds, interest rates, and other questions such as what causes inflation and a combination of other factors, you can feel dizzy trying to understand what all these terms mean.

#1 – What Causes Inflation?

We touched on this one in our introduction, so we may as well unpack this for you first. Many factors cause inflation, the main one being the average price of essential goods and services becoming more expensive at a rate that is higher than usual. 

One example of this is the war in Ukraine causing a huge increase in the price of oil and gas across Europe. This is because Russia is a major supplier of these commodities and has responded to sanctions imposed on it by limiting the amount of gas and oil it releases. These are both crucial goods, and this has caused the cost of living to skyrocket.

Oil isn’t just used for cars. It is also used in the most important sectors, including food production, mass transportation, and a host of other goods. When the price of these goods or services increases, then the overall inflation rate follows suit.

#2 – What is Full Employment?

Full employment is when everybody within a country has a job. Many societies have attempted to achieve full employment over the last century, but very few have managed it. 

The idea of full employment means that the economy is operating on all cylinders and is producing its maximum possible output. Some economists have argued that a small percentage of unemployment (less than 1%) is good for an economy as it can increase competition in less skilled jobs. Low unemployment is considered a sign of a strong economy, and it is a figure that many governments aim for, to try and highlight that their economic policies are working.

#3 – Who Controls Economic Policy?

Depending on where you are from, there are different answers to this question. All main global economies have a central bank that oversees economic policy and advises the government accordingly. However, the government usually has the final say and can make an executive decision in very limited and dire circumstances. Usually, a combination of the two ensures that one doesn’t have absolute power over the other and that a fair decision is reached. If there is a situation that requires oversight from all of these parties and a decision can’t be reached, this might indicate a critical economic incident.

One of the best examples of this was the UK government intervention in 2008. Following a long and intense meeting with the Bank of England, the Labour government at the time, led by Gordon Brown, settled on a policy to save the banks from financial collapse. This is a policy that has proved to be successful as time has passed. However, when it was initially announced, plenty of commentators and opposition politicians claimed that this would result in widespread inflation and the deprecation of the GBP on a global scale. Until mid-2016, the GBP was one of the strongest world currencies before sliding down the scale in purchasing power.

#4 – What is the Main Factor in a Strong Economy?

There isn’t only one main factor when it comes to a strong economy. However, an economy comprising a few or all these aspects is considered to have a strong advantage:

  • High expected GDP growth figures for the upcoming year. For instance, Guyana’s economic forecast is incredibly positive, with an expected GDP growth of over 50% due to huge oil discoveries.
  • Low unemployment (less than 1% of the working population). However, as we discussed, some economists can disagree on the specifics of this type of detail.
  • A strong currency on an international scale. Usually, a currency that can hold its stability when paired with other major world currencies, such as the Dollar or Euro, is a sign of a solid currency.
  • High living and health standards. Economies where the life expectancy is over 80 gradually increase. If this figure beings to slide, this is the sign of an economic system that is beginning to struggle.
  • High amounts of disposable income. If a country can tick all these boxes, these are signs of a strong economy. This list is only some of the examples, though. There are plenty of others that economists consider strong enough to place on this list. However, we have rounded up the main points for you today.

#5 – What Causes an Economy to Shrink?

One of the main things that cause an economy to shrink is a negative factor such as a poor economic outlook, the outbreak of war, high unemployment, or the weakening of the currency on a global scale – essentially, the opposite of all the points we touched on in the fourth section. When one or more of these variables is in play, this indicates there is a serious underlying issue in the economy that is causing major problems and negative consequences. If an economy stagnates, this can also be viewed in a negative light. However, an economy that retracts is what all governments and central policies look to avoid, as it can snowball into huge issues further down the line if not halted quickly.

You can find plenty of information on the internet regarding other factors that could play a crucial role in what causes an economy to shrink. An economic contraction can be considered healthy if it is a one-off event, as year upon year of growth can signal that the economy is not growing naturally. For example, between the late 90s and mid-2010s, China’s economic growth was astonishing. 

 Operating as the workshop of the world during this period, the Asian powerhouse become the second-biggest economy on Earth. The figures released by the central administration regularly showed that annual percentage GDP growth was in the double figures when anywhere between 2-4% is usually considered of good quality. For them to consistently post double figures for over a decade was an economic triumph of seismic proportions. 

 Even though the economy has recently slowed down, and there have been some issues with companies such as Evergrande, the bigger picture over the last three decades has been an immense achievement. Despite the short-term shrinkage, the overall picture is positive, and the long-term picture remains incredibly positive. It can be a case of what length of time you are looking at before deciding whether or not the economy is in a position where it is truly struggling.

The beauty of the internet is that you can find the answers to many questions, and it can help you expand your knowledge in sectors you wouldn’t have otherwise understood. As long as you check that your source is reliable, the options for boosting your knowledge on any subject are almost limitless.

John M. Flood

John is a crypto enthusiast, Fintech writer, and stock trader. His writings provide guides to perform your best in the crypto world and stock planet. He is a B-Tech graduate from Stanford University and also holds a certification in creative writing. John also has 5 years of experience in exploring and understanding better about the FinTech industry. Over time, he gained experience and expertise by implementing his customized strategies to play in the crypto market.

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