Two Idiots Try: The Literal Basics of the Economy

Somehow, we are missing the part of the brain that understands the economy, because we have no clue what any of it means. Luckily, we did some learning and dumbed it down so we can all become economic geniuses together! 

 

Inflation 

Freddos going up by 5p every year? That’s inflation! 

Inflation is basically a rise in prices. Inflation will eventually cause a decrease in the value of money as your £1 won’t be able to buy you as much if prices keep going up.  

Scenario: You have £1. You go to the Spar and purchase a bottle of Ribena which is 75p and a banana which is 25p. Next time you return the banana still costs 25p, but now the Ribena costs 80p. You still have the same £1 in your hand, you want the same items, but now your money can’t buy you what you want as the value of your money has decreased. That is inflation! 

If inflation keeps going, and wages stay the same, the cost of living will become unfeasible - which causes a domino effect on the rest of the economy. Oop! 

 

Stocks/Shares 

Note: Stocks and Shares are used interchangeably  

Stocks are little pieces of companies that you can purchase! Usually, you will buy them at a low price and then sell them when the business is well established, and your stock is worth more. Essentially, the more successful the business, the more expensive the share. If you keep buying stocks at a low price and selling them at a high price, then you make money! Fun! 

When you buy a stock, you invest in that company (and buy a tiny bit of ownership of it). Some companies may have shareholder (individuals who own the stocks) meetings and events where you can vote on the future of the company. Also, sometimes companies pay dividends to their shareholders, so you can make money whilst holding the stock. 

 

The Stock Market/Exchange 

The stock market isn’t like the funky markets you go to on your holidays in Spain. This market is used for the trading and purchases of shares of companies. If you want to purchase a share of Apple, you will do so on the stock market/exchange. 

Unfortunately, there are no stalls or haggling mothers. It works kind of like an auction; people bid for a share of a company and will typically find a middle ground between their bidding price and the asking price of the company. The big screen with all of the funky numbers is just showing if a company is selling stocks well, and if stock owners are losing or gaining money with their purchases.  

Typically, the stock market refers to trading, and the stock exchange is where the buying and selling is done, but they are used interchangeably. 

 

Wall Street 

Wall Street is the financial district of NYC where the two largest stock exchanges in the world are. It’s literally just the location. 

 

Recession  

A recession is essentially a business cycle where there is a decline in economic activity. They typically appear when there is a drop in spending and, as such, less money is going into the economy. This decline in economic activity could be due to multiple reasons - most topically, a pandemic (which we are blissfully experiencing right now). 

Example: If a small cafe closes, then their employees will be made unemployed. These workers will then be putting less money into the economy (as they are spending less due to having no wage), placing their local flower shop and dog groomers at risk of closing because they are not getting sales. If the flower shop closes, then their employees will be in the same position, putting the businesses that they frequent at risk. Then comes the recession! 

 

Depression 

A depression occurs when multiple economies go into a sustained recession for a long period of time. They typically last much longer than recessions and feature issues such as deflation (the opposite of inflation) and stock market crashes (people panic selling their stocks so that they are worth much less). 

 

Cryptocurrency 

This is basically a digital currency. What makes cryptocurrencies unique is that they aren’t issued by a government so there’s no regulation or management from banks, nor can they be converted into real currencies. This makes them more secure than typically government-regulated currencies, hence the appeal. 

Bitcoin is probably the best-known cryptocurrency as it was the only one until 2011. Now, there are thousands of them. You can receive a cryptocurrency debit card with which you can spend your money in online shops where that currency is accepted. Typically, people use cryptocurrency as an investment (much like the stock market), buying small amounts in the hope they will be worth more in the future to sell (this is why you heard of people making millions off of Bitcoin recently - they bought some years ago to find it was worth a lot of money now).  

 

Financial Crises 

Financial crises typically occur when a significant financial asset will lose a substantial amount of value (oil, stocks, and housing are good examples). As a result, businesses and consumers are unable to pay their debts causing cash shortages for banks which has a domino effect on the rest of the economy. 

The 2008 financial crisis was caused by a massive uptake in mortgage lending in the U.S., so that banks had a shortage of cash and individuals could not pay off their debts as a result. We think anyways. 

 

Let’s face it, nobody really knows what the economy is because it’s really dumb. Half of these silly procedures wouldn’t even exist if the ultra-rich didn’t hoard all of their money. In short, trade with Heinz spaghetti hoops.  

 

Idiot NOT approved