Good grasp of finance & basic economics is a very important component of every individual's financial education.
Most business people nowadays have excellent understanding of financial intricacies of how a business is run including cash-flow, budgeting, forecasting, profitability etc. but in the same time a solid foundation on macro-economic principals.
We operate in a globalised environment today & such levels of knowledge are a prerequisite for a well rounded individual given the external economic factors are likely to impact both businesses as well as individual's finance.
Take a relationship between interest rates, un-employment rate & inflation for example.
It's generally understood that higher inflation pushes up the interest rates - why ? Well, the governments typically set target inflation bands. For US, Australia… they are typically between 2% & 3% p/a. In case that inflation figures go above the range, government will pull the levers it has under control to bring in into line - such as increase interest rates. Basically higher interest rates mean that people have less money to spend as their mortgages costs increase so the prices of other goods recede and inflation thus reduces.
Now to complicate things a bit add un-employment rate to this. Again it's well understood that lower un-employment rate is better - more people have work, families have food on the table and people are happy. However on the downside low unemployment creates upward pressure on the items such as wages - there are less people available to work so you have to pay the ones who are working a bit more. This in turn now gives more money to people who then spend it again so the inflation goes up.
Sounds complicated - well it is a bit, as getting the right balance is fairly hard. You could argue that to fix above scenario you could increase interest rates even further but that can create pressure on business profitability and potentially bring forward a recession.
We'll leave that as a topic for another article. For now to get you going in your quest of financial IQ improvement, I'd recommend two classical texts of economy:
- The Wealth of Nations by Adam Smith An Inquiry into the Nature and Causes of the Wealth of Nations is the magnum opus of the Scottish economist Adam Smith, published on March 9, 1776 during the Scottish Enlightenment. It is a clearly written account of political economy at the dawn of the Industrial Revolution, and is widely considered to be the first modern work in the field of economics. The work is also the first comprehensive defence of free market policies. It is broken down into five books between two volumes.
- The General Theory of Employment, Interest and Money by John Maynard Keynes The General Theory of Employment, Interest, and Money is generally considered to be the masterwork of the English economist John Maynard Keynes. To a great extent it created the terminology of modern macro-economics. It was published in February 1936. The book ushered in a revolution, commonly referred to as the "Keynesian Revolution", in the way economists thought, and especially in terms of the feasibility and wisdom of public sector management of the aggregate level of demand in the economy.
You can get them both for free on:
www.parcusgroup.com
To learn more about this author, visit Igor Glavanic's Website.
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