How An Economy Grows And Why It Crashes
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As our economy becomes more dependent on technology, it is important to understand how economies grow so you can recognize when things go wrong. Also, as we have seen with the recent economic crash, growth can turn into a crashing fall very quickly.
So what makes an economy grow?
An easy way to think about this is by using the example of someone who wants to eat enough food for their body to thrive. They may start by eating only one meal per day, but that soon leads to two meals, then three.
As they enjoy eating more food, they need to consume more water to process all of the nutrients in their diet. Since most people begin to feel hungry around 2-2½ hours after eating, they will drink more water to make up for the lack of hunger.
This effect crosses science boundaries – even studying plants! Scientists call this phenomenon “hydropathy” because it involves drinking fluid (water) to satisfy appetite.
Similarly, as your body uses energy to function, it needs adequate supplies of glucose or sugar to operate correctly. Glucose comes from foods like fruits, vegetables, and grains that are processed in digestion.
Once again, as you eat more, you must be able to digest and process the extra food which requires insulin to do its work. If there isn’t enough insulin, then glucose cannot enter your blood stream and your body does not get the needed fuel.
Factors that affect an economy
There are many factors that influence how quickly or slowly an economy grows. These include currency, finance, regulation, government spending, unemployment, interest rates, and more.
Some of these factors are internal to the country, like regulations limiting car production or energy resources, while others are external to the country such as trade policies or wars.
A growing nation will have more growth than a shrinking one because they have more opportunities to grow.
Nations with larger economies tend to be wealthier per person than nations with smaller economies. This is due to the wealth generated by their industries and businesses.
Many economists consider the stock market to be a good way to measure the size of a country’s economy. Companies in well-paying industries can attract high quality employees, which boosts productivity and income for the company and its shareholders.
The stock market also generates revenue through investment returns, individual stocks sold, and corporate dividends. All three components depend on the health of the business and its earnings.
Causes of an economic boom
During times of strong growth, there are several factors that contribute to this boost.
One is what economists call investment. This means spending money or resources to create something new or improve an old thing. Businesses invest in equipment, in research and development, or in marketing strategies. They also spend money building or expanding their facilities.
Another cause of growth during times of calm is consumption. People buy things such as cars, gadgets, or homes because they want them.
A third reason is borrowing. You can consume if you have enough income to do so, but you don’t until you get it. Borrowing is when someone else gives you money with which to fulfill your needs. For example, you might take out a mortgage and use the monthly payment for transportation or entertainment.
A final factor responsible for booms is simply people having more kids. Even though this may seem ridiculous, parents enjoy being parents and investing in their children’s well-being.
Causes of an economic crash
One of the key factors in our current, devastatingly slow economy is how much money we as a nation are throwing away due to excessive spending.
We have become so accustomed to having more than we need that we constantly find ourselves buying things that we do not truly want or need.
This was very common during the 1980s, when everyone had a lot of money because of high income growth. However, this can cause problems later.
If you are like most people, you may feel that you have no way to save your money now, since you just spent it all on unnecessary junk. This creates a vicious cycle where people spend less, saving money, which makes it even harder for them to afford the next big purchase.
Another factor leading up to an economic collapse is when too many companies go bankrupt.
Protect your assets
As we have seen, spending can play a major role in how our economy grows or collapses.
When people spend money they are usually trying to fulfill two things; make more money, and feel good about themselves. They want to keep up with their neighbors and colleagues, and show off what they have through their clothes, houses, cars, and other possessions.
Many times, however, these new purchases are not necessary for making more money or feeling happy. They may even cost you money in the long run because you will need to borrow money to buy them!
It is very important to be aware of this when it comes to protecting your wealth. You do not have to avoid buying anything, but you should know where large amounts of money are coming from.
Businesses grow via three main factors; employees, invested capital, and marketing. A lot of companies begin with only one of these, then add another once they reach enough revenue.
This does not always mean that they are wrong to add another, it just means you must look into whether or not the company has overpaid for their current services or products. Check out our article: Tips For Saving Money Online.
Marketing includes advertisements as well as influencers that individuals follow or trust. People who enjoy the product or service will likely advertise for it, passing on a small amount of income along with their endorsement.
Know the warning signs
A growing economy is characterized by higher employment, increased production, and increasing income. When we talk about growth, what we are referring to is adding up.
A growing economy adds up through two processes: investment and consumption. Investment means putting money in things like business loans or buying equipment or land. Consistently high levels of both investment and consumption increase the amount of GDP you have.
But when there’s too much spending without enough saving, we enter into a period of unsustainable economic growth. This isn’t how our economy works; it’s how some third world economies work!
Consumption always has to be supported by savings, so when people are constantly using their resources for more expensive goods, they need to save less effectively. In these situations, even though the economy is experiencing large increases in activity, most of that activity can’t be sustained over time.
Sustainable, long term growth requires adequate savings, which means either lowering your expenses or raising your income. More likely than not, we’ll see a combination of both happening as individuals try to cut back on unnecessary spending while companies reduce hiring until future investments are made.
There will also be changes to the way government functions as it tries to conserve its budget surplus and avoid having to take down the barriers to borrowing and investing again later. All this slowing down happens because everyone wants to be protected from another financial crisis.
A growing economy means people have more money to spend, which creates more opportunities for you as a business owner or entrepreneur. If everyone is spending less, then there are fewer opportunities to create new products or services unless you offer already popular ones at lower prices.
If everything seems like it’s going up for you, that may be why! But if you notice lots of layoffs and cutbacks around you, stay negative instead.
It will make you feel better about your own situation and help you focus on what you can control. Plus, being happy doesn’t always mean buying something nor does it mean telling yourself things that aren’t true about how good you are because you spent some money today.
Running through all of your expenses and looking for areas to save money can also make you happier. You’ll find that you don’t need much to enjoy life most days.
Staying positive will get you into longer term strategies such as investing in savings or putting away money for college tuition, but starting with this one will help you during hard times too.
Give up alcohol
When we talk about how to improve your economy in short term, giving up alcoholic beverages is one of the best things you can do. Alcohol is a large cost factor when it comes to spending money.
If you are drinking less than 2 drinks per night, then this is not a big deal. But if you're drinking more than that, then it's very expensive!
Alcohol has costs both at the individual level (to buy and to drink) as well as social levels (for example, what kind of activities people feel comfortable participating in because of the alcohol). These factors make it much harder for average Americans to enjoy themselves with friends or family after work or school.
Drinking too much also raises health risks, such as cancer or heart disease. Health care costs related to these dangers run higher for drinkers.
Stay away from debt
Debt is our modern day currency. We have gotten so used to spending money to fulfill our desires that we now feel compelled to take on more and more credit card debt in order to keep up with our habits.
With each passing month this habit of overspending gets worse!
The average person has a shopping budget of around $1,000 per month. But you will find that many people spend much more than that due to things like daily coffee purchases or entertainment expenses.
By the end of the year this can add up to a very substantial amount of money! The average household income in America is about $50,000 per year.