Understanding the Fundamentals of an Economy
An economy comprises many things, and several factors work to determine how well an economy functions ultimately. All those factors that play such a part are called the ‘fundamentals’ of an economy.
To understand the concept properly, we must learn how there are multiple levels on which certain things occur and how things in these categories have different kinds of impact.
Let’s dive deeper and learn more about the role of fundamentals.
Factors that Affect the Whole Economy
Micro – economic factors are those whose effects are mostly limited to a specific industry or business. At the same time, macro – economic factors have more importance w.r.t the level of impact. These are what affect complete economies and can even grow to a global scale.
Inflation
This is the percentage with which the buying power of a particular currency deteriorates over time. People are often held back by this constraint when looking to make purchases.
As the ability of people to buy goods and services declines, the aggregate demand goes down. This tends to have a huge impact on the GDP, employment levels, and much more.
Market Forces
Demand and supply – often called the ‘market forces’ – are also huge drivers of economic conditions. Any shifts and movements in the demand and supply curves and the subsequent equilibriums determine what prices will be charged and how many goods and services will be supplied.
Multiple factors influence these forces, all of which can combine to trigger results on the macro-economic level.
Monetary Policy
The monetary policy of a government concerns the money supply and interest rates. Both of these determine how people will be shaping their spending patterns until such policies are in effect. This can be used to stimulate economic growth and also to try and bring inflation rates down.
Fiscal Policy
A government may choose to amend its fiscal policies that include taxation and government spending to curb excessive demand or reignite the market forces spiraling downwards.
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