HOW THE ECONOMY WORKS

The economy is the backbone that determines the functioning of the world and affects the daily life of every individual. This requires a deep understanding of it.

While there are many different ways of understanding the “economy,” it is essentially the area where goods are produced, consumed, and traded. The economy is discussed at the national level, with experts and journalists often referring to the economies of countries such as the United States, China, and others. However, we can look at economic activity from a global perspective by looking at the activities and jobs of individual countries.

In this article, let's FUNDGO Explore deeper into concepts related to the economy, based on the model of Ray Dalio, one of the most influential figures in the world of finance.

Who makes the economy?

Measuring economic activity

Credit, debt and interest

Lenders and Borrowers

Banks and interest rates

Why is credit important?

Some economists say this is not positive, but many believe that increased spending is a sign of a strong economy.

If people spend more, more people will have higher incomes. Banks tend to lend money to people with higher incomes, which means people have access to more cash and credit. With more cash and credit, people can spend more, which creates income for more people, and the cycle continues.

Of course, this cycle cannot continue indefinitely. Ray Dalio has described this concept as the short-term debt cycle, illustrated below. He estimates that these patterns repeat every 5-8 years.

Central banks, inflation and deflation

Assuming everyone has access to a lot of credit, they can buy more than they would without it. However, although spending is increasing rapidly, production is not increasing accordingly. In fact, the supply of goods and services does not increase materially, but the demand does.

Next, this leads to inflationary: is when you start to see prices of goods and services rise due to higher demand. A common indicator to measure inflation is Consumer Price Index (CPI), which tracks the prices of popular consumer goods and services over time.

How does a central bank work?

As you might guess, deflation is the opposite of inflation. We define deflation as a general decrease in prices over a period of time, usually due to a decrease in spending. When consumers spend less, deflation can be accompanied by economic recession. Similar to inflation, deflation can also be measured through the Consumer Price Index.

What happens when the economic bubble bursts?

When compared to short-term cycles, long-term debt cycles take place over a much longer time frame, believed to occur every 50 to 75 years.

Hope with the sharing that FUNDGO brought has helped you gain more useful knowledge thereby helping you understand more deeply about the operating mechanism of the economy. By taking a comprehensive and thorough look at how the economy operates, we can clearly understand the risks and opportunities to make smarter decisions in managing personal and business finances.