Important Economic Factors Everyone Should Know

Economic growth is fueled by two things: consumption and production. Consumption happens when you spend your money buying things such as food, clothes, and cars, while production means creating new products or services to sell other goods.

When people start spending more than they have income, a recession occurs. People are not willing to buy expensive items because they do not have enough money for it. Therefore, there is a decrease in consumerism which eventually slows down the economy.

During a recession, many businesses stop producing new products due to lack of demand. This is called idle production. Because people are not buying their old products, these companies can afford to keep making them lower cost so they will not need to advertise them.

By advertising and marketing different products, people make lots of money, so this drop in idle production does not affect most large corporations very much. Some smaller companies cannot survive, though, so we should be aware of how investing in idle productions could help prevent a future economic collapse.

Factors that affect an economy

how an economy grows and why it crashes quizlet

There are many factors that influence how well or poorly your economy is doing. These include things like government spending, market demand, supply, interest rates, inflation, tax policies, etc.

Some of these factors are internal to the country, while others are external. Internal factors relate to changes happening within the country, like growth or decline in production, employment, or income.

External factors occur outside the country, such as wars or economic crises occurring anywhere in the world. These effects can be positive or negative depending on whether the involved nation is able to deal with them effectively.

Market demand refers to how much people want something- products, services, knowledge, etc. If there’s more of one thing, then there's more need for another. A growing desire for one product can create a need to find something else to buy!

Supply includes what people and companies have available to sell. When someone wants to purchase something, they must first make sure there's enough of it for their needs. If not, they will look elsewhere to fulfill this need.

Interest rates determine how easy (low) or difficult (high) it is to obtain money by exchanging goods or service for it. More money available means you could spend it buying whatever you wanted, which helps create more market demand.

Inflation occurs when prices rise over time due to increasing costs of producing or supplying a good.

Economic growth

how an economy grows and why it crashes quizlet

In any given year, we can identify two main ingredients that make up our economy. Productive activities occur when people work to create new things or improve upon existing ones. These are what economists call productive sectors of the economy.

In addition to these productive areas of the economy, there is also a non-productive sector which you have probably already seen in action today. This includes things like illegal activity (like stealing) and behaviors such as eating while watching television.

When enough people engage in these non-producing acts, it creates an environment where more and more people feel they must do the same. This process is called ‘spiral depravity’ because individuals start doing more and more poorly than before so that other people will keep engaging in similar behavior.

This effect always seems to happen at around the time of a major global economic crisis.

Slow growth

how an economy grows and why it crashes quizlet

According to our definition, an economy grows when more money is spent than saved. This spending can be for anything — buying a car, eating at restaurants every night, or investing in a new business.

With less saving, your wealth decreases over time. Your savings may even get depleted completely if you make all of your monthly payments but never find yourself with any extra money left over.

When we look at the economies that are experiencing slow growth right now, it becomes clear why they’re not as active spenders of money.

Some of these economies are in fact undergoing a sort of “saving mode.” People are paying down debts or keeping their income low to save for what they want future-wise.

This was necessary after the 2008 financial crisis because many people lost a large amount of money due to reckless borrowing and investment.

Since then, people have been putting away slightly less each month, which has allowed them to save some more slowly.

Rapid growth

how an economy grows and why it crashes quizlet

Between 2004 and 2014, our economy grew at a steady rate of 2% per year on average.

This slow growth is what made it possible for you to live your life without too much disruption from changes in the market.

You lived during an era when nothing was changing very quickly!

But this can’t continue indefinitely. At some point, people are going to demand change more rapidly than things are moving right now.

When that happens, we call it a boom or a recession.

A boom is when rapid growth continues for a long time, but then something triggers a collapse. This usually occurs because everyone wants the same thing at once, so there isn’t enough supply to meet their demands.

A classic example of this happened back in 2008-2009, when everything seemed like a house sale. There were just too many houses being sold, making prices go up sharply.

Then suddenly nobody wanted to buy a house, leaving lots of empty homes and no price drops. A similar situation exists today with stocks and real estate. People are investing heavily in these markets, which creates upward pressure.

But they are also staying invested longer due to uncertainty about whether the markets will keep rising, so we don’t have the usual drop after a big rise.

At this stage, even slower growth feels impossible, so economies get stuck in a stagnant state where they won’t grow naturally.

Excessive spending

how an economy grows and why it crashes quizlet

When your economy needs to grow, people must spend money to meet their daily needs such as food, shelter, and clothing. They also need to go shopping for things like laptops or phones that can help them do their jobs more efficiently.

But when too many individuals are consuming at a rate faster than what is being produced by the economy, then something has to give. That gives us a down period of time where the economy comes to a halt in its growth. We have called this downturn a recession.

In our modern-day society, we seem to be in a never ending state of consumption. People strive to impress each other with how much they have, not because it is meaningful, but because it makes them feel good about themselves.

There is always someone younger than you who has a better looking car, house, or boat. This influence hauls away some of the importance of buying these items due to the size of their circle.

It’s very easy to get distracted from important life milestones like marriage, having children, and saving enough money to live comfortably once they occur if you don’t set aside proper time frames.

Generalizing, people want to consume less, but they don’t know exactly why they want to consume less so they just keep going without any changes in lifestyle.

This mental struggle may cause stress which could eventually lead to health issues like cardiovascular diseases.

Bad debt

how an economy grows and why it crashes quizlet

When your credit cards start to rack up more expensive fees, you have to make a decision- do I pay my bills this month or do I put off paying them for a few months?

If you choose to play financial games with yourself, it can quickly get out of control. You may be able to postpone your payments for a while, but eventually you will run into problems if you don’t come up with the money.

A lot of people find themselves in this situation after a major life event like having a kid or getting married. They need to update their budget, so they go overboard spending to cover the new expenses.

This is called investing in your future. It is totally normal and even helpful to spend some time during such times without strict budgets.

But then all too often what happens is that you keep thinking about how you could afford to buy that car next week, so you take out a loan to finance it. This is when things become problematic

You may not be able to repay the loans, which would hurt your reputation as a person who takes responsibility by going into debt. Also, lenders may try to collect on the debts through lawsuits or collection agencies.

These consequences are very serious because we depend on our jobs and income to live on. We cannot survive being sued or having our bank accounts garnished.

Financial crisis

There have been six major financial crises in the history of our country. Each one was caused by something related to the money system, or finance. These include things like credit bubbles, excessive debt, and poor regulation.

When enough people agree that a product is worth buying, we call this a market. When it collapses, those without the item are left with no way to spend their money!

A run on goods happens when many people desire the same thing so much that they all want to buy it at once. This is why there’s a long line outside a new movie’s theater after it opens- everyone wants to see it.

During a run on goods, people stop shopping for anything because they don’t think they will find what they want. So instead, they go out and spend money somewhere else, which weakens the economy as a whole.

This is how economies suffer from a recession.

The future of the economy

how an economy grows and why it crashes quizlet

As we have seen, the way our current economic system works is not sustainable.

It was designed more than 100 years ago when everything operated under very different rules. Today, technology has made it possible to produce almost anything you want or need out of equipment and software that can be accessed through the internet.

This means there’s no longer any reason why people should be paid for performing simple tasks like taking orders or typing text documents. Computers do this work much better and much faster, so most of us are in high-paying positions because we oversee all these computers.

Another thing that has contributed to our growing economic inequality is the widespread use of financial products that actively reward those who spend money rather than save it.

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