Hi all, today, I am going to dive into some breaking news that’s sending ripples across the world’s food markets.
There’s a rice ban in play by the Indian government, and it’s set to have some major consequences.
Brace yourselves because this ban is no small deal. It’s projected to reduce the world’s rice shipments by almost half, leaving many wondering what this means for inflation and food prices worldwide.
What is causing the ban?
So, you might be asking, “Why the ban in the first place?” Well, here’s the deal –
Last week, the Indian government put a ban on the export of non-Basmati rice varieties.
Retail prices for white rice have been on the rise in India, and it’s got the Indian government on high alert.
In just one month, white rice prices shot up by 3%; over the past year, they increased by a whopping 11.5%. Ouch!
But here’s the kicker: Devastating monsoons, on which Indian agriculture relies heavily, are the main reason affecting this price surge.
The unpredictable weather has wreaked havoc on rice production in India, creating concerns about food supplies in India and beyond.
And that’s why the Indian government had to make some tough decisions.
Key points showing the impact
Now Let’s break down some key points to get a clearer picture of the impact:
A rice ban of this magnitude will affect about half of the world’s rice exports – that’s a huge chunk!
India is a major player in the global rice market, accounting for a whopping 40% of all rice exports. So, when India makes a move, the world will notice.
Here’s a staggering statistic: rice is a staple food for over 3 billion people worldwide. Yes, you heard that right, 3 billion! That’s roughly 40% of the entire world’s population relying on rice as a dietary staple.
NRI community in the US is hoarding rice further increasing the price and shortage
In the US, the ban on non-Basmati rice exports from India is causing quite a stir. This is especially among the Telugu community living here. People are rushing to stock up on rice, fearing a potential shortage and higher prices.
Indian grocery stores in major cities like Texas, LA, Michigan, and New Jersey are seeing long queues and a surge in demand for rice.
Why all the fuss over rice? Well, a 9kg bag of rice is being sold at a massive PRICE OF 27 dollars due to the export ban, which is contributing to the worries.
These grocery stores have even implemented restrictions, allowing only one rice bag per customer to manage the situation.
Why is this panic buying happening?
The panic buying might be twofold:
First, there’s concern about the scarcity of fine variety rice like Sona Mahsuri, which is much sought-after.
And secondly, with the ban in place, there’s a possibility of rice prices skyrocketing.
According to a leading economic news source in India, Economictimes, several countries, including Benin, Nepal, Bangladesh, China, Cote D’Ivoire, and others, heavily rely on non-basmati rice imports from India. With this recent ban, it’s projected that world rice shipments will be cut almost in half, raising fears of global inflation in food markets.
So, guys, this rice ban is causing quite a stir in the world’s food markets With half of the world’s rice shipments set to be impacted and India being a significant player in the global rice trade, we can’t underestimate the potential consequences.
The bureau of labor statistics (BLS) just released the inflation number for January 2023 for the United States.
There is a 0.5% increase from the December number, and inflation sits at still a whooping high of 6.4% over the last 12 months from January 2022.
As you can see in the BLS chart above, the year-to-year inflation is 6.4% for all the items, 10.1% for food, 8.7% for energy, and 5.6% for all the things except food and energy. Also, in their press release, they mentioned the index for shelter was the largest contributor to the monthly inflation number.
By shelter, they mean rents and owner equivalent rent cost of housing.
If you look at this detailed table from them, it shows the breakdown in prices for all the individual items.
Source: BLS
Under the energy category, fuel oil is still up by 27.7% for the 12 months. Natural gas is also up by 26.7% in the 12 months.
There is a 14% rise in Dairy and related products in the food category.
You can see that the highest inflation happened in cereal and bakery products. This was mainly because of the rise in egg prices because we felt that in the grocery stores.
What caused egg prices to rise so much?
Economists think the bird flu was the main reason behind increased egg prices because about 40 million egg-laying hens died in 2022 because of this disease.
At the same time and the demand for eggs continues to rise because it provides a cheaper source of protein to many Americans. Thus both these supply and demand factors contributed to a significant rise in egg prices.
Was this inflation expected?
This came as a little bit of a disappointment because people were expecting the overall inflation not to rise if not fall from the December level, even though fuel prices seem to be falling.
Inflation is still high on many essential things, and it continues to be the biggest hit to poor Americans. It acts like an indirect tax on them.
Unfortunately, most of this inflation we are experiencing is caused by supply-side factors, which are difficult to fix in the short run.
Policy implication
The government can only focus on controlling the demand aspect of inflation in the short run. As a result, the Fed will continue to tighten the monetary policy and raise interest rates until inflation reaches around 2%
The federal reserve has been trying to control inflation using interest rate hikes to slow the demand in the economy.
To learn more about inflation, how it is calculated, and the factors that cause it, please see my post here.
In 2022, the U.S. stock market experienced what we call in finance a bear market. There was a prolonged drop in stock market prices because of the Russia-Ukraine war and tightened monetary policy. The S&P500, the U.S. broad market index kept falling by more than 20% from its high at the beginning of 2022.
With continuous interest rate hikes, S&P 500 index showed a downward trend in 2022 and hasn’t recovered to its Jan 2022 level Source: Google Finance
But if this scared you and you concluded investing in stocks is not a good idea, you must think again.
Financial literacy is critical for building wealth. It is important for any person to know how market trends work, but particularly important for younger adults who are in their 20s.
Although I have taken the U.S. stock market as an example for this post, the principle applies to almost any country with a developed stock market.
In this blog, I will highlight two key points:
Investing in stocks should always be done for the long term. If you look at the data over the long run, the overall stock market gave an average annual rate of return of 10% to 14%.
This chart from Google Finance shows that S&P 500 index, which is the benchmark index for US stock Market has an upward trend over the long run.
Source: Google finance S&P500 index
Sure, there are years (including 2020, 2022 as you see in the chart below) when it has fallen sharply because of various economic reasons. However, in the long run (5 yrs or more), if you see the trend line, it is going upwards.
Source: Google finance S&P500 index. I added my captions to explain the dips
So, yes if you just invested at the beginning of 2022 and wanted to take out your money after that, you would lose money on your investment. But if you plan to withdraw the same money in the next 5 or 10 years, I am sure it is going to fetch a much higher return.
2. Business Cycles are real
The reason for this is due to the occurrence of business cycles or sometimes what we call economic cycles. Most stable economies exhibit boom and bust. The chart below shows how there are periods of expansions and recessions where the GDP and stock market grow and contract respectively.
Most governments including the U.S. government through their fiscal policy and the Fed, through monetary policy, take corrective measures to bring the economy back on track. For the US, the target rate of inflation is 2% and the target unemployment is around 5%.
Over the long run, most stable countries show a pattern of economic growth as seen by the black trend line sloping upwards.
So yes, if you invest in the stock market for a long term, greater than 5-10 years, you should get a positive return. It will still be positive even after adjusting for inflation.
So don’t panic and start selling when the market starts falling, instead, wait and let it recover.
This actually would be the best time to start investing or adding more towards your monthly contributions. The best way to do that is by following a safe investment strategy such as dollar cost averaging. I have discussed that in detail in my previous articles on personal finance.
Have a balanced portfolio
But don’t put all your money in the stock market. For any investor, it is critical to have a balanced portfolio. Make sure to have an optimal mix of riskier and safer asset classes based on your age and risk tolerance.
Bonds are a relatively safer investment option compared to stocks, real estate, and gold, and therefore, have low returns on them.
Anyone who is less than 50 years old can have more of their money invested in the stock market versus anyone who is 50 and above. As you approach retirement age, you would like to have less money invested in the stock market and more in safer options. So, whenever you want, you can withdraw your money without worrying about market fluctuations.
Investing in stock is done to make your money grow over time. Yes, overtime is the keyword here. It is not meant for becoming rich overnight or for short-term gains.
Also, it is best to start investing early to reap the maximum benefits. Although, starting at any age is better than not starting at all unless you are close to your retirement age. Ideally, as soon as you get your first job you should think about investing a portion of your salary. You can start with 10-15%.
Create an emergency fund and pay off debt first
But before you start any type of investment, ensure you have enough cash to cover at least 3-6 months of expenses in an emergency fund. Usually, people like to keep it safe in an FDIC-insured high-yield savings account. This is the liquid money that will cover any type of contingency, which you can withdraw whenever you want to.
So it is essential you save enough money to cover the downpayment of your house, job loss, car breaking down, or any unforeseen event where you need immediate cash.
This is especially true if people fear a recession coming in 2023. Having a buffer in a safe place such as a savings account will give you peace of mind.
Also, don’t forget to clear all the high-interest loans (over 5%), such as credit cards. Western countries have taught the world to live on credit. We buy almost every single day so many things on credit cards. But sometimes people don’t realize it and by living above their means, go into a debt spiral.
The interest rate that you are paying on credit card loans is usually higher than what you earn from savings.
We must remember that we do most investments for the long run. We won’t get a 10%-12% guaranteed return from investing in stocks the very next year. It takes at least a couple of years to average out market fluctuations.
Cherry-picking stocks is not worth it
As I mentioned in my other article, it’s always best not to invest too much money in individual stocks. It’s too much work to go through the company’s financials, thoroughly reading their annual reports (10-Ks) and quarterly reports (10-Qs) to understand the company’s fundamentals and prospects.
Even professionals and seasoned investors cannot time when to buy or sell stocks based on the earnings call of the companies. The reason is simple. The stock price that we see on the market has already incorporated any type of news that is available to the public. Thus everybody already knows and you won’t know any better story.
You will not know any insider news about the company’s prospects unless you are the owner of that company or in the senior management. Speculating what the price is going to be tomorrow will be nearly impossible to do.
Diversification is the answer
Index funds or ETFs in this case are the best and safe options because they diversify your risk across so many different stocks. So even if one or a few companies underperform, you will be still fine.
With ETF you have to set reminders for periodic contributions. Which type of fund is right for you depends on many factors. I have a detailed article on this topic here if you want to learn more.
My two cents
So, after you have saved for an emergency fund and paid off high-interest debt, start by investing at least 10%-15% of your paycheck every month. You can put this money in some type of broad-based index fund on an ETF. You make monthly contributions so that your investment grows over time. The good thing about index funds is that they are automated. Money automatically transfers to your brokerage account from your checking account.
The key takeaway from this article is that do not panic if you see the stock market going down in a particular year. This is not the time to sell. In the current scenario, it is a good idea to invest the money that you have sitting idle in your bank account. Do it after paying off your high-interest debt and establishing an emergency fund to meet your 6 months’ expenses.
Spend wisely and realize the importance of saving and investing. Most millionaires are not just born wealthy. They just make good investment decisions early in their life and build wealth. Instead of spending a lot of money on things that actually depreciate in value, such as buying a fancy car, they save and invest that money from the beginning. As their investment grows, they begin to reap its benefits for a substantial part of their life. Investment in a diversified portfolio is an easy passive way of getting rich, where money does the work for you.
What people like you and me think about inflation directly impacts the actual inflation rate. So, if we think inflation will be high in the coming months, it will most likely be. In this post, I will explain how this phenomenon works.
If we expect that overall prices are going to rise in the coming months, we may buy more things now, rather than in the future. If a lot of people do that, this increases the demand for goods and services.
High inflation is directly linked to a higher demand that is not immediately matched by an increase in supply. As a result, firms increase the prices of goods and services when there is more demand. This enables them to make more profit. As a result, we see increased prices passed on to the consumers causing higher inflation.
On the other hand, if people expect prices to fall in the future, they may delay spending now to get a better deal. This will result in a decrease in demand for goods and services and businesses will end up lowering prices to clear up their stock.
So, now we understand how inflation expectations affect actual inflation. If you want to know more about inflation and how it is calculated, you can refer to my post here.
What is the current inflation expectation in the U.S.?
After suffering from really high inflation close to 8%-9% for over half a year, we foresee some good news. A survey conducted by the Fed reserve bank of New York shows a decrease in these expectations.
People in the U.S. feel that one and three-year-ahead inflation are now going to be 5.7 % and 2.8 % respectively.
These are clearly lower than 6.2 % and 3.2 % in June for one and three years ahead inflation rates respectively. In the figure from the Federal Reserve of New York website, you can see how there is a decline in the curve of the expected inflation rate towards the end. This is the survey done in the month of August 2022 about what people think inflation may look like for 1 year and 3 years.
It shows that people’s expectations are consistent with what the Fed is trying to achieve. By raising interest rates, the Fed is trying to slow down the demand in the U.S. When borrowing becomes expensive, people generally tend to borrow less for things like cars, mortgages, etc.
In their September 20 meeting, the Fed is most likely going to raise the key federal funds rate by another 75 basis points. The Fed has been raising interest rates to fight the high inflation in the U.S for the last 6 months. Central banks in a lot of other countries fighting inflation have been doing the same.
To learn more about the role of the central bank, stay tuned for my next post.
Two days ago, President Joe Biden proudly posted that the unemployment rate in the US was 3.5% in July. This matched the lowest rate in the last 50 years. He also said that since he started, 10 million jobs have been created in the US economy.
The Bureau of Labor Statistics (BLS) in the US publishes data for the unemployment and labor force statistics every month. These are based on the data collected from household surveys and establishment surveys on sample-based estimates of employment.
I got this Civilian unemployment rate graph from the BLS. You can see that the US unemployment rate is now at its lowest level at 3.5%. This had happened three times before in Sep 2019, Jan 2020, and Feb 2020, when it hit 3.5%.
But have you ever wondered what is the unemployment rate anyway?
Well, the unemployment rate is the percentage of people who don’t have a job but can work and have actively looked for a job in the past 4 weeks. This is relative to people in the labor force.
According to the BLS, The labor force is the sum of employed and unemployed people ages 16 and older at a given period.
Their recent report about July’s unemployment rate was contrary to what many people would have expected. People were expecting a somewhat slowdown in the job market, but clearly, this hasn’t happened yet. The Fed has been raising interest rates to control inflation. The Fed’s policy aims to cool the overheated economy by reducing overall spending by individuals and businesses.
So what does a low unemployment rate mean for you?
If you are looking for work or want a change of job, right now could still be a good time for that. There’s a huge likelihood of you finding it sooner than later and as per your terms. With many employers paying higher salaries, it is a good time to ask for a raise if you think you deserve it.
When the effects of tightening monetary policy start showing up and we see a reduction in jobs created, it might be a little late to negotiate.
As always, if you enjoyed reading my post and learned something, please feel free to write your views in the comment section below. Thank you, till we meet again next time!
You might have heard in the news might have heard that the US economy has contracted in the first quarter of 2022. When we talk about economic contraction or expansion, we look at the % change in the most widely used statistic to measure the overall economic health of a country, also known as the GDP. Many were surprised by this decline, and it’s said as the worst quarter since the pandemic started in March 2020. To know more about what GDP is, please click here.
The official source of publishing GDP numbers in the US is the Bureau of Economic Analysis. In their April 28, 2022 press release, they projected an annual 1.4% decline in the real Gross Domestic Product of Q1 2022 vs a growth projection of 6.9% in Q4 2021. If you want to see the details about the calculation, data, and assumptions, you can check this page here. https://www.bea.gov/data/gdp/gross-domestic-product
What were the reasons for this decline?
The main reason that made the GDP growth negative was the trade deficit, meaning imports were far more than our exports, as US domestic supply couldn’t keep up with the domestic demand. In addition to the trade deficit, the GDP was also deflated by the omicron variant of COVID that shut down some businesses, and the government-funded pandemic relief to businesses and households decreased or stopped altogether by the first quarter of 2022.
Should we worry about this slowdown?
Despite the projection, economists are saying that there is no reason to panic yet because this GDP decline happened due to the net export component. In the chart below, data collected from BEA shows the percent shares of each of the four main contributors to the US GDP in the 2022 Q1.
The two major contributors to the US GDP have been consumption and investment, and both remained strong. Consumption, which is the most important driver of the US economy (contributing to almost 70%) increased during the first quarter at a rate of 2.7% annually, compared to 2.5% during the fourth quarter of 2021. Similarly, the business investment such as capital expenditure on factories, equipment, software, etc. remained robust and hence should increase productivity for the remainder of 2022. Firms’ investment had grown at a rate of 9.2% in the first quarter of 2022 which is a significant increase from the 2.9% increase in the last quarter of 2021.
In summary, even though the GDP first quarter fell, it is not indicating a recession coming. A recession is defined as a fall in GDP in two successive quarters. And we may only hope for a better future and some happy news in the economy.
The most talked-about topic affecting everyone for now almost a year is inflation. Your money loses its purchasing power, you need more money to buy the same amount of goods and services you purchase or use. If you are hiding a lot of money under your mattress or in a safe place at home, trust me it’s a bad idea. You will only be able to buy fewer items with that in the future than now.
The easiest way to define inflation to a layman is the sustained increase in the average prices of a basket of goods and services that we buy over a specific period. So, when there is inflation, the cost of living goes up. This becomes a real problem if your income doesn’t rise as quickly as inflation, then with your current income, you will only be able to buy less same stuff than before.
The inflation rate is expressed as a percent change from the previous period. Below is the actual inflation rate in the US in the last 6 years. So if the annual inflation is 6%, it means on average, prices have risen 6% from the last year. As you can see, the inflation slope became steeper in 2020, after the pandemic hit the global economy.
So, what causes inflation?
This can happen in two ways: either through demand-pull factors or through cost-push factors.
The quantity theory of money explains inflation caused by demand-pull factors.
Demand-pull inflation
This occurs when people have too much money and they want to buy more, whereas there is not enough supply to meet that demand. Or in other words, too much money is chasing too few goods. This usually happens when the economy is at (or very close to) full employment/full capacity. By full employment, we mean people who are looking for jobs can find one. Also, in this situation, the country’s GDP grows at a rate faster than its long-run trend rate. This happens when there is too much money in circulation. If the bank interest rates are too low, people, both households and businesses can borrow easily and as a result, can buy more goods and services than what the firms can supply. We call this phenomenon “too much money chasing too fewer goods”. Producers increase prices and profit because they can’t increase supply in the short run.
Using the demand and supply curves, I explain this idea. You see that the demand curve always slopes downwards, meaning people always want to buy more items at a lower price, Also, note that the supply curve faces upward, which means the firms producing those goods would like to supply more at higher prices, With the same assumption that is everything else staying the same. Equilibrium price and quantity are established at P and Q where the supply and the demand curve meet. We call them P and Q.
To explain this graphically, let’s look at the demand and supply model. On y axis, we denote the general price level, since inflation reflects general price level rise. On x asis we will show the real quantity of goods and services or real GDP. In the graph below, demand will be aggregate demand as this is represents demand from the whole economy. This demand is also downward sloping curve, as the demand for any normal item will be. It shows people overall demand lower quantities when the prices are high and demand more quantities when the prices are low. With the same assumption that nothing else is affecting the demand and everything else stays constant. The aggregate supply curve always is upward sloping meaning producers are willing to supply more at higher prices, so they can get more profits and vice versa. With the assumption that everything else is staying the same, the price level and quantity are set where aggregate demand meets aggregate supply at e. This is the price level consumers are willing to pay and producers are willing to accept and is denoted by P. And the corresponding quantity supplied and demanded is denoted by real production of goods and services or real GDP at Q. Economist call this equilibrium price level and quantity.
If there is excess money in circulation in the economy, people can afford to buy more, so for each price level, there is an increased demand. Or in other words, too much money is chasing fewer goods.
In our graph, you will see the aggregate demand shifting to the right or upwards. Now we get the new equilibrium e1, where the new demand and supply meet, and you can see that the new price and the quantity both have increased to P1 and Q1. This happens in the short run when producers don’t increase the supply of goods and services but instead, charge more prices because of increased demand.
Over time when producers can increase their production, the supply will be increased. In the graph below, this will mean the supply curve shifts to the right. So we can see at the new equilibrium, the prices will fall back. How much the prices fall, will depend on how much adjustment (increase) in supply is made in the long run. If the supply is adjusted enough to meet the increasing demand, then the prices will back to level P and the quantity demanded and supplied will be even higher, as shown at Q2. And the increase in the general price level is controlled.
Cost-push inflation
When the supply of the good is reduced due to an increase in the price of inputs in making that good or service. Supply shocks can cause cost-push inflation. Supply can fall due to a variety of reasons, such as if the cost of inputs for production goes up or if there is a natural calamity. Most recently after the pandemic, lockdown jams in major ports have contributed to a slowdown in the supply of a lot of items.
In the graph above, supply shock has pushed the price up to P1, and Quantity is reduced to Q1.
How to calculate the inflation rate?
Inflation is expressed as a % change in the price level of a market basket of goods and services over a period. To understand how inflation is calculated, let’s start with a very simple economy, where people only bought and consumed 3 items – bread, internet, clothing, and a house. You spend 30% of your yearly income on bread, 10% on clothing, 10% on the internet and 50% on renting an apartment. Then let’s assume the price of bread in year 1 is $2 and the price of internet is $45, price of clothing is $10, and rent is $25000. The price of bread in the year 2022 goes up to $2.5, price of internet becomes $60, price of clothing increases to $15 and rent in year 2 is $30000. We also, in the table below, list the proportion of income or weight they spend on all these items. The sum of these weights needs to add to 100%.
Inflation from year 1 to year 2 is calculated as (CPI2 – CPI1)/ CPI1 * 100 where CPI1 is the price level in year 1 and CPI2 is the price level in year 2. CPI is a weighted average price of many day-to-day goods and services that a typical American person living in a city buys at a particular time. Don’t be frightened by the term “weighted average”. Weight here refers to the importance of spending on a particular item compared to total expenditure. It simply means more weight is given to goods and services where you spend more money of your income. This could be because you buy that thing more often like, daily or you spend a lot of money buying it.
If we change the weight of some things from table 1, even with the same absolute increase in price, the inflation % will change. As you can see in table 2, it became 20.02%.
If the change in prices is more compared to that from table 1, even with the same % of weight, the inflation % will be greater.
BLS calculates and publishes inflation in the US
However, our consumption is not just restricted to these four items. In fact, a typical American urban consumer consumes a wide variety of goods, known as the market basket of goods.
In the US, the Bureau of Labor Statistics calculates something called the CPI (consumer price index). To collect the monthly price data, BLS-trained representatives make personal visits, phone calls, and get online surveys to collect data on what goods and services American people are buying.
The price and weight info are essentially based on a survey of people of what proportion of their income people spend on a given good or service. BLS tries to calculate the prices of the same basket of goods and services. Now, here some people will argue that what if people don’t consume the same things after some years? That is a subject of further investigation, but the general idea is that the BLS tries to calculate the prices of the same goods and services consumed by the average person over a period for which it is calculating the inflation rate.
Since CPI is a sample of retail prices and does not cover the complete universe of all prices, it is subject to some errors. However, that sampling error is not statistically significant to change the calculation by a lot. You will have to get into statistics class to understand the more technical aspects of what is considered a significant error or not, but for now, you can understand the error possibility is very small, so it is a reliable indicator of how the prices are behaving in general.
But when do we need to worry about inflation?
Well, some inflation is not bad and is considered healthy for the economy. Since our salary/wages have also increased over time and in most cases, some general rise in price level doesn’t hurt our purchasing power.
The BLS calculates this measure at 1-month, 3 months, 6 months, and 1-year intervals, and publishes that data. Over the last 40 years, we have seen this inflation % on average staying close to 2% annually. That means the same basket of items that you buy is 2% more expensive from 1 year to the next. The goal of monetary policy is to keep the inflation number close to this target-rate.
But in some countries like Zimbabwe and Venezuela, the prices had risen to a level making it very difficult for people to hold on to their currency. That situation where general prices rise at a rate of 50% per month is called hyperinflation. People know that they won’t be able to buy the same set of goods with that amount of money, even the very next day, so they demand more wages to cope with it. This, in turn, causes firms to pass this burden by increasing the prices of goods and services they provide. This, in turn, causes an increased demand for higher wages and the spiral continues. This is called the wage-price spiral. This can cause a severe crisis in any country.
To know more about how the Fed uses monetary policy to control inflation, click here.
IMF projects lower global GDP growth of 3.6% for the next two years
IMF’s World Economic Outlook report published on April 19, 2022 has predicted a drop in the GDP growth of the world economies in the years 2022 and 2023 to 3.6%. This downward revision is from their previous estimate of 6.1%, largely because of the war in Ukraine. IMF publishes this report twice every year.
Below is the chart from IMF showing these growth projections by region. These projections are for real GDP growth and not nominal GDP growth. As changes in real GDP are the most popular indicator of a country’s overall economic condition. If you want to know more about the US GDP and its components, please click here.
Countries, like the United States, the EU, Japan, the UK, Canada, and other advanced countries are projected to grow on an average of 3.3% in 2022 and only 2.4% in 2023.
The emerging market and developing countries such as India are projected to grow at 8.2% in 2022 and 6.9% in 2023. Whereas because of the lockdown in Shanghai, China, the projected growth is slightly lower at 4.4% in 2022 and it is expected to be 5.1% in 2023, as the lockdowns are eased.
As expected, there is a severe double-digit drop (-35%) in GDP projection for Ukraine in 2022. They also project a contraction for Russia due to sanctions and European countries’ decisions to reduce energy imports. The war has also severely impacted emerging and developing Europe, which shares proximity to the war area with an expected fall of 2.9% in their real GDP in 2022. There is a hope of some recovery in 2023 with GDP growth returning to 1.3%. Russia will see a GDP growth of -8.5% in 2022 and -2.3% in 2023.
The two charts below show the GDP growth comparison in some major countries of the world after the start of the global pandemic. The first chart shows the performance in the years 2020 and 21.
The second chart shows the projections by IMF for the years 2022 and 2023.
Sadly, the war just doesn’t affect the countries directly involved, its economic costs and implications are widespread. Through commodity markets, trade, and to some extent financial interlinkages of the countries, the war can indirectly affect so many more countries.
Globally we are seeing rise in fuel and food prices since late 2021. The fear of War is aggravating high inflation problem even further. Unfortunately, the world’s poor population, particularly in low-income countries is getting the most impacted by this. To know more about inflation, please click here.
Many leading economists propose mutual efforts by countries to respond to the war crisis and prevent further economic fragmentation. At the same time, it is important to manage the debt problem, tackle climate change and end the pandemic to bring back economic growth.
Fighting inflation without slowing down the economy is the toughest challenge many central banks are facing currently. To know more about monetary policy and the role of a central bank, in controlling inflation, please click here.
A lot of people think economics is all about money, banks, complicated graphs, and mathematical modeling, but truly speaking it is much more interesting than that.
So, what exactly is Economics?
Economics is a study of human behavior, understanding the choices people make with their limited resources. By resources, we mean the tools needed to produce goods and services for humans consumption for a comfortable life. These resources are usually classified into 1)land, 2)labor, 3)capital such as tools and machinery, 4)human capital or entrepreneurship, and 5)our precious time.
We don’t usually have an infinite amount of these resources, so how do we allocate the limited resources to make us better off and happier? In short, Economics deals with our struggle to achieve happiness in a world full of constraints and limitations.
The word Economics comes from the Greek word oikonomia, which means household management. It starts with an individual making a tradeoff, choosing the best option that satisfies their wants, and forgoing the other best alternative use of their resources. From individual households, it moves to businesses, deciding what and how much to produce and sell. And lastly, government and the central bank decide when and how to intervene to ensure maximum happiness for its citizens.
We are making choices every single day. For example, if you are reading this, you have chosen to gain some knowledge vs. maybe, watching a TV Show or doing something else.
While reading this, you think you are making the best use of your time. (or at least I hope you do 😉 In short, you apply economics every minute (even when you don’t know it).
What does the field of Economics cover?
As you learn Economics, you can find answers to some fascinating questions such as:
How the price of anything is set?
How do we measure a country’s prosperity?
Why are some countries rich, while others are still poor?
What is inflation?
How do we understand business cycles?
What tools do the central bank and government use when the economy is facing inflation or a recession?
Is international trade a good thing?
And is reading this article even worth my time?
Trust me, the list is endless. There is a wide variety of areas that economics can cover. Economists try to solve many of these problems our world is facing today by simply understanding human behavior and the choices people make. I might have used the word choice a lot here, but hope you got the idea?
You will understand our rapidly evolving complex economies and how the economic fundamentals can still explain the changes.
You can apply Economics in your day-to-day life, such as while analyzing the cost and benefits of a particular decision you are going to make and managing your finances.
Similarly, you will also understand how economic principles apply to the businesses around us from a small local donut shop to a big company like Apple.
Understanding economics will enable you to evaluate the feasibility of promises made by politicians to get your vote.
Believe it or not, Economics can also help us understand the best strategy to deal with environmental issues, such as global warming and pollution.
Last but not least, since Economics is based on human behavior, there can be more than one view on any economic issue. It’s not an absolute science and many times economists differ on how a certain situation should be handled.
When you study Economics, you can acquire the necessary skills to argue why a specific viewpoint makes more sense to you.
Some key principles of economics are:
Everything has an opportunity cost and experiences diminishing returns.
People are rational (for the most part) and act in their self-interest (even charity is considered self-interest since it gives you some happiness).
Supply and demand interact through an invisible hand.
Comparative advantage fosters trade.
People think on the margin.
I will explain the above points in detail in my other posts. We will also dig into the two main subdivisions of economics: macroeconomics and microeconomics. We are only getting started!
