Unveiling the underlying logic of economic operations

Economics is not an abstract concept but a complex network of interactions centered around people’s daily lives. It determines how we work, consume, and live, with impacts ranging from commodity prices to employment rates and the prosperity of entire nations. Although the importance of economics to the world is self-evident, many still find it mysterious and difficult to understand.

What Is the Nature of Economics

Economics is essentially a complete system that includes production, sales, purchasing, circulation, and consumption. It is the driving force behind the operation of modern society. Enterprises, budgets, and all activities used to meet social needs are components of the economy.

For example: Company A develops products and sources raw materials from Company B; Company B then sells the products to Company C, which adds value and finally sells to consumers. This forms a complete supply chain. Changes in supply and demand at each link can affect other parts. In simple terms, economics is the core mechanism managing the operation of the world.

Participants in the Economy

Everyone who spends money on shopping participates in economic activity. Likewise, all individuals involved in producing and selling goods are part of it. Each of us, every enterprise, and every country contributes to the economy to varying degrees.

Economic participants are usually divided into three sectors:

Primary Industry: Mainly engaged in natural resource extraction, including mining, agriculture, forestry, etc. Raw materials produced here flow downstream.

Secondary Industry: Responsible for processing, manufacturing, and transforming products. It uses raw materials for production. Some products are sold directly to consumers, while others are components of more complex goods requiring further processing.

Tertiary Industry: Encompasses distribution, advertising, and various services. Some analysts further subdivide it into the fourth and fifth industries to distinguish different types of services, but the three-sector model remains widely accepted.

The Four Stages of the Economic Cycle

To understand how the modern economy operates, policymakers, economists, and business executives must grasp the theory of the economic cycle. But this is also important for ordinary people because we are all affected by it. Understanding economic theory can help us make informed decisions, predict trends, and grasp financial directions.

Economies follow cyclical patterns of expansion and contraction. Usually, growth peaks, then gradually declines, and the cycle restarts.

The economic cycle typically includes four stages:

Expansion: The initial phase of the economy, characterized by vibrant markets and optimistic sentiment. This often occurs after a crisis, bringing new hope. Demand for goods increases, stock prices rise, and unemployment falls. Production, trade, investment, and consumption grow, driving demand and supply in both directions.

Peak: Production capacity operates at full throttle. The economy reaches its maximum growth at this stage. Prices for goods and services slow their increase, sales stagnate, and small businesses gradually disappear through mergers and acquisitions. Interestingly, market participants remain optimistic, but expectations start to turn negative. The economy reaches a peak at this stage’s end.

Recession: Negative expectations from the peak stage begin to manifest. Costs suddenly rise, demand declines. Cost pressures on businesses increase, profits fall. Stock prices start to decline, unemployment rises, part-time employment increases, and incomes decrease. Spending sharply contracts, and investment nearly halts.

Trough: Even when positive signals appear, market participants remain pessimistic. This phase often accompanies an economic crisis. Businesses suffer setbacks, stock values decline, capital interest rates rise, and many companies go bankrupt or file for bankruptcy. At the lowest point, the value of money also drops. Unemployment surges, stock prices plummet, and investment is nearly zero.

Three Types of Economic Cycles

Although the four stages above usually occur, their durations vary greatly. In fact, there are three types of economic cycles:

Seasonal Cycle: The shortest cycle, typically lasting only a few months. Nevertheless, its impact on the economy can be significant. Features include seasonal demand fluctuations, effects on specific industries, and predictability.

Economic Fluctuations: Usually lasting several years due to supply and demand imbalances. These imbalances are lagging, so economic problems are often ignored until it’s too late. They can cause major shocks to the overall economy and may take years to recover. This period is characterized by unpredictability, uneven peaks and troughs, and potential severe crises.

Structural Fluctuations: The longest cycle, often lasting decades. Usually caused by technological and social innovations and their evolution. This is a multi-generational cycle, with no accumulation able to fill the gaps. It often leads to deep poverty and catastrophic unemployment levels. On the positive side, subsequent technological advances tend to stimulate innovative growth.

The Core Forces Shaping the Economy

Numerous factors influence the economy, ranging from dozens to over a hundred. Some have strong influence, others weaker, but all exert some effect. Every purchase increases demand. On a macro level, government policies can have profound impacts on the entire country’s economy.

Role of Government Policies: Governments can profoundly influence economic development through various policy measures. For example, fiscal policy involves decisions on taxation and spending; monetary policy, led by central banks, influences the economy by regulating the total money supply and credit. With these tools, governments can stimulate or cool down the economy.

Power of Interest Rates: Interest rates are the cost of borrowing and have a significant impact on consumer spending and business investment. In developed countries, borrowing and repayment are routine. Consumers rely on loans to start businesses, buy cars and homes, and pay off education or medical debts. Low interest rates mean lower borrowing costs, encouraging more borrowing and spending, thus boosting economic growth. Conversely, high interest rates increase borrowing costs and slow economic growth.

Impact of International Trade: International trade is another key factor. It involves the exchange of goods and services between countries. If two countries have different resources and lack what the other has, they can benefit from trade. But this process can also have negative effects, such as reducing employment opportunities in certain industries.

Microeconomics and Macroeconomics

Economics can be divided into microeconomics and macroeconomics. Microeconomics focuses on supply and demand and other factors affecting price levels, such as how GDP impacts unemployment. It also studies specific parts of the economy, like individual markets. Macroeconomics considers these influences’ broader interactions and their effects on a large scale.

Microeconomics concerns the activities of consumers, workers, and firms; macroeconomics focuses on the entire country. It studies national consumption, trade balance, exchange rates, unemployment, and inflation levels. Ultimately, macroeconomics examines how the global economy functions.

Understanding the Complexity of Economics

Describing economics as complex is a severe understatement. It is an active, ever-evolving system that determines the prosperity of any society and the entire world. This article has outlined the complexity and interconnectedness of economic systems. But there is always something new to learn and explore.