Here Is The List Of Basic Economic Terms And Their Explanation

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economy

You don’t need to be an economist to understand the condition of a country’s economy. A quick judge about the country’s stability can be done if you are aware of few economic terms. Knowing these will also help you to form an opinion regarding the performance of a government.

Let’s start with the easy ones.

Inflation

 

A sustained increase in the general level of prices

When the prices of the necessary items go up in the market, making it difficult for the local public to afford; this is called direct inflation. No government in the world would ever want to carry out mass inflation willingly because it would eventually lose its vote bank. However, all the decisions are taken according to the country’s economic conditions.

There are many causes of inflation: let’s understand the different types of inflation.

  • Demand-Supply Inflation

We all know that the prices go up when there is more demand and less supply. We call it ‘temporary inflation’ which run away with the passage of time.

  • Cost-Push Inflation

This depends upon the prices of certain items in the international market. If the import cost of certain items increases, it will cost direct inflation. For example: if the prices of oil go up in the international market, it will cause immediate inflation in the country because many things are directly and indirectly attached to the prices of petrol.

  • Devaluation

What happens when the currency of a country devaluate? The worst thing Is, it causes direct inflation. While currency devaluation has its own reasons and causes, but it will increase the prices of imported items. However, local products (which are manufactured within the country) will have little to no effect with the currency devaluation. Still, it will affect the country’s exports.

There are many other reasons for inflation, but these are the major ones that cause immediate inflation in a country. So if your country has gone under a currency devaluation period or if you see a rise in cost in the international market, inflation is obvious.

  • Debt

If your country is going through a reasonable amount of debt, it will cause massive inflation. Whether it’s a circular debt or an external debt; they have a direct effect on the prices because the government plans to earn enough to return the loan at the right time.

Take an example of Pakistan; the country is facing an external debt of $85.5 Billion which includes loans from the IMF, ADP, World Bank, and other borrowers. As a result, the country has removed the subsidies and imposed heavy taxations on people and the business community. It is taking necessary measures to pay the loan in time to avoid excessive interests.

To many economists, the healthy rate of inflation is around 2% to 3%.

Current Account Deficit:-

You must have heard your politicians in assembly or on media talking about current account deficit; so here is what you need to know about it.

Let’s consider the following example of Pakistan’s trade in order to have a better idea of the current account deficit. (This is taken from the 2017 fiscal report)

Exports = $22 Billion

Imports = $55 Billion

Current Account Deficit (Trade Deficit) = $23 Billion

The current account deficit or trade deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports. This causes the balance of payment crisis in a country. When the amount of imports increases over the number of exports, the minus amount is the trade deficit.

So why does it happen in the first place? Or in other words, why trade deficit occurs in a country?

There can be hundreds of reasons for the increase in the trade deficit.

  1. Insufficient Local Production

Trade deficit happens when everything isn’t produced in the country and the country is left with no other option than to import it. This increases the number of imports in a country that causes a deficit in the trade.

  1. Leverage on imports

If a country’s taxation policy is based on giving leverage to imports and are difficult for exports, the current account deficit will eventually increase. If it is difficult to do business in a country due to indirect or direct taxation, un-friendly environment, crime, or due to the lack of investment or machinery; the country will face a downfall in the local production while an increase in the imports.

  1. Bad economic environment for business

Uncertain conditions together with poor economic policies can create a toxic business environment. This causes the industry to shut down permanently which directly affects the GDP. This is one of the major reasons behind the decline of the country’s export.

Note: A decline in exports and an increase in imports is always a worry some indicator for a country’s economy.

  1. Less foreign investment

Lack of foreign investment adversely affects the country’s economic growth by limiting the local production of goods.

For example: In 2017, Pakistan‘s trade deficit was $23.1 Billion

The foremost way to reduce the Trade deficit is to develop a business friendly environment in your country, while taking measures to reduce the unnecessary import of luxury items. On the other hand, people should start relying on locally manufactured products over the imported ones as that would help reduce trade deficit to a much larger extend. If you are a Pakistani, here is the list of locally manufactured goods that you should buy over the imported ones

Fiscal Deficit:-

A fiscal deficit occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings.

For Example:

A government gives a budget of $6 Billion for the fiscal year. If the government earning on the revenue receipt is less than the budget allocated, it will be counted as “Fiscal Deficit”

Government Budget = $6 Billion

Revenue Receipt (Tax Revenues + Non Tax Revenues) = $5.5 Billion

Fiscal Deficit = $0.5 Billion

Fiscal Deficit depends upon a country’s monetary policy and its taxation policy. And it adversely effect the growth rate of a country (GDP).

Revenue Deficit:-

Revenue deficit is excess of total revenue expenditure of the government over its total revenue receipts. It happens when the outcome revenue is less than the projected revenue.

Revenue deficit = Total Revenue expenditure – Total Revenue receipts

Primary Deficit:

Primary deficit is defined as the fiscal deficit of current year minus interest payments on previous borrowings

Primary deficit = Fiscal deficit – Interest payments

Remember! Fiscal deficit is calculated without the interest being added, therefore;  the interest here is the primary deficit.

What do you think about the progress of your government? let us know in the comments below.

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