Guest article by Tobias Quante
Economics has been there since mankind has started exchanging goods for one another. The very basics are still persistent, even though everything became a bit more complicated than trading berries for coconuts. Economic classes are being taken by students for many reasons, let it be the understanding of why you’re unemployed, what equality is and why it’s so hard to achieve and what we can do better. In the following article, I wish to give you a brief impression of what economics is and what they are good for. But also, how you can use your income and that there’s more than just spending everything at once.
First of all: What ARE economics? The Cambridge dictionary defines it as “the system of trade and industry by which the wealth of a country [national economy] is made and used“. In national economics, there are different streams of supply and demand which meet on fitting markets. To make things easier, we will break those down to the national financial market (Capital Supply & Demand), the workforce market(Labor Supply & Demand) and the commodity market (Goods Supply & Demand).
The financial & labour sector are where supply and demand for production factors meet. Production factors are used by companies to supply the commodity market with goods which are consumed by households. The households receive income which they can use to consume those goods or save it.
To get started, let me give you a small impression of where you are in your national economy:
And in the following, where your income comes from and what you can use it for: (Note: Investing is one way or rather an instrument of “how” your money is saved.
Another information that’s important:
The Federal Reserve Bank (FED) and the European Central Bank are giant institutes that supply (several) national economies with the money of a certain currency. They also receive an interest by corporate banks which lend their money from them. The interest rate of the central banks is called “prime rate”. Right now, this prime rate is at a historical low. As a result, banks can borrow more money for a constant payment of interest. This means the supply of the currency in the national economy is higher than the demand, resulting in lower interest rates for those who leave their money on their banking accounts. In other words: If you have money on your banking account, it’s less worth than it would be at a higher prime rate. To say it with other words: Leaving your money there is barely worth it. Considering the inflation rate as well you’re even better off consuming all of it instead of letting it be.
Rejoice, however. There are alternatives. The financial sector is more than just banks.
This means: You can take your income from your banking account and, rather than “saving” it, “Invest” it into an alternative.
Here I have put everything in one picture with only one household, the central bank, one corporate bank and one company.
To sum up till here (TL:DR part):
- You receive Income by making your production factors ‘Labor’ and ‘Capital’ available for companies to use.
- You can use your income to buy stuff or leave it be (save it)
- Saving can also mean: Invest
- Banks are not necessary for a working financial sector, they just centralize the process of making savings available.
- There are alternatives