Economics is sometimes one of the least popular subjects in school.
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Generally speaking, business students have very little love for the study of supply and demand. However, for small businesses, supply and demand may be one of the most important factors when determining a production schedule. This summary will go over basic economics, and help you build a foundation upon which you can begin to understand theories of economics.
The basic driver of economics is the theory of growth. There are several things that drive growth, and these things make people more productive and enable countries to increase their standard of living.
First, changes in productivity increase or decrease the amount of production that a single average worker produces for an economy. The more products that a country can produce given a wage, the more products are created in the entire country. This opens the door for exports and can also increase the value of that country's currency.
How does this happen? It is simply supply and demand. The more people want to buy products from your country, the more desired your country's currency is. This increase in demand pushes up the value of the scarce currency. Again, this opens up the door for an increase in the standard of living for the entire country.
Trade is the main driver for innovation and specialization in open economies; many of the gains that can be had from increases in productivity come about as a result of trade. For example, consider two countries that each have one worker. One of the workers excels at making guns, and the other is exceptional at making butter. If the two main necessities for survival happen to be butter and guns, then each of the workers will need to have a supply of each. If the borders of the countries are closed to trade, they will have to go away from their respective areas of expertise to create the items needed for survival.
However, if they are allowed to trade with one another, they can each stick to what they are best at producing, enjoy increases in productivity and trade items to create a better situation for both. It all has to do with a comparative advantage. I will go into this in further detail in subsequent articles.
Putting all of this together, countries create an overall product called gross domestic product (GDP). This is the sum of all products created within a country over a given period of time. The gross national product (GNP) is the product made by all residents of a given country, regardless of where the process takes place. This could include American workers working in Europe, or anywhere else in the world.
All of these things combine to form an economy. As a small business owner, it is important to figure out where your business fits in with the big picture. In other economics articles, I'll explain what the various parts of the economy can do for your business and what you need to do to create value for your customers.