The “economy” is often referred to in newspapers, discussion forums, radio, and television as a measure of how a country is performing financially – and often discussions around how the economy is performing mention a direct impact on a person’s finances, their ability to manage debt, as well as their saving and investment plans for the future. But what is the economy, really?
The economy is an umbrella term that refers to the state of a region in terms of the supply of money, as well as in terms of both the production and consumption of goods and serves. For that reason, the term economy can refer to the fiscal performance of a general area, town, city, region, province, or a country at large.
How is the economy measured?
The measure of how an economy performs is often used as an indication of how citizens of that area can expect their finances to perform; for example, a slow or stagnant economy can indicate a slow production or consumption of goods and services, few jobs, and little purchasing power.
Typically, two important terms are used to measure an economy:
GDP
Typically, economies are measured by their growth or decline within set periods. Usually, a country’s economy is measured by its Gross Domestic Product, or GDP, which is the value of all final goods and services produced within a country in a given year or, sometimes, within a quarterly period.
Many economists and news outlets use GDP as a ‘snapshot’, that is used to estimate growth or decline in an economy. Importantly, GDP can be calculated in a variety of ways and might be measured by expenditures, production, or incomes.
GDP per Capita
GDP per capita is a metric that measures a country’s economic output per person and is calculated by dividing the GDP of a country by its population. GDP per capita shows how much economic production value can be attributed to each citizen and is used as a measure of a nation’s productivity.
Remind me, what are stock markets?
When investing or dealing in finance, commentators may often refer to the condition of ‘the markets’ – and it’s important to note that this doesn’t represent a country’s economy itself. A stock market is an exchange where investors can buy, sell, and issue shares in companies. In South Africa, our primary stock market is the JSE (Johannesburg Stock Exchange).
Notably, when economies grow or shrink, there is typically a knock-on effect on stock markets as investors adjust their plans accordingly; for example, a country heading into depression may have stock markets that react negatively and can see shares lose value.
What is volatility?
‘Volatility’, in financial terms, refers to the unpredictable and sudden movement in markets that can either see investors or traders suddenly see the value of their assets significantly appreciate or depreciate.
Volatility in the economy can be caused by a tangible concern – such as social unrest, disease, or the supply of basic services – and will usually affect the performance of stock markets and other financial instruments as well.
What is the private sector?
When referring to the economy, analysts may often point to the performance of ‘the private sector’, which refers to the part of a nation’s economy that is not under the direct control of its government. This means that while private companies do pay tax and contribute to a nation’s economy, the government of that nation does not explicitly govern the operation of such firms or how they choose to operate beyond the national laws and regulations they adhere to.
What is the public sector?
The public sector, in contrast, refers to companies or services that are under state control. These most often include the supply of basic services such as water or electricity. Often, governments will create what are called State-Owned Enterprises (SOEs) which serve as companies that, similar to their private counterparts, are designed to employ people to deliver specific services. Governments, however, remain in control of these organisations with the intent of assisting these companies to deliver what they need to.
How does the economy affect me?
Though the ‘economy’ can sometimes feel like a foreign concept that doesn’t directly impact anyone’s daily life, the performance of an economy – or any national events that concern it – can affect a person’s livelihood and wellbeing.
For example, the spread of COVID-19 and South Africa’s national lockdown has prompted a downturn in the economy, where businesses have been unable to deliver their goods and services and consumers cannot purchase them as they normally would.
These impacts mean that governments may be forced to change interest rates to encourage consumer spending or investment growth, and for employed persons, this might affect their ability to work for an income and purchase services that they would typically use.
What is a boom?
While COVID-19 has placed strain on governments worldwide, economies can also enter into a ‘boom’, which is where a well-performing economy encourages spending, the supply of goods, and creates further jobs and additional income for citizens.
What is a recession?
Conversely, a recession is where an economy shrinks for two consecutive quarters or more and begins to affect the ability of consumers to purchase services and businesses to deliver their goods. An economy in recession marks lagging growth, and governments will typically introduce new measures to stimulate the economy.
What is a depression?
An economic depression refers to a sustained, long-term downturn in economic activity. During a depression, credit may not be as freely available, suppliers may cut back on their production or investment, and major financial institutions may experience bankruptcy. Depressions are notable in the fact that while they do not last indefinitely, they are generally noteworthy for lasting several years with significant effects.
