The Brick Wall Economic Theory

In the previous post , we looked at what inflation is and how they calculate it. In today's post, we are going to, as always, look at inflation with a practical example called The Brick Wall Theory example. Don't know what that is? Read about it here . If you don't want to read about what inflation is and just want to see an example that is also fine. I will tell you in short what inflation is to make sure that you will be able to understand the example. Inflation is the process of a sustained, significant rise in the general price level over a period of time. Basically, inflation is the process where money loses its value over time. Your groceries might cost you $50 today, but in ten years time, the same amount of groceries is going to cost you $65. This post isn't going to explain all the things we already covered here with an example, rather we are going to look at the causes of inflation and then we are going to look at what the effects on the brick wall co

What is leakages and injections? Leakages refer to money leaving the economy while injections refer to money entering the economy. The four roleplayers in the economy have a direct impact on leakages and injections in the economy.  Leakages Leakages occur when money gets removed from the flow of the economy. This can happen in three ways: Savings (S) Taxes (T) Imports (M) When people or businesses in the economy choose to keep some of their available income in the form of savings , they withhold that money from entering the economies flow. This is then seen as a leakage because that money gets taken out of the flow and essentially causes that there is less money in the economy. Governments collect money from businesses and consumers in the form of taxes. When they do that they take the money which could have been used to do something else with and continue the flow of the money in the economy. This is seen as a leakage because the taxes that get collected are taken ou

What is inflation? Inflation is the process of a sustained, significant rise in the general price level over a period of time. Inflation thus lowers the purchasing power of money which means that the real value of the money decreases. For example, something will cost you $10 today but in 10 years, that same product would cost you $13. Inflation There are a wide variety of definitions that can be used to describe the process of inflation. I prefer the definition mentioned above for 3 reasons: 1. The definition is neutral. This definition is formulated on the basic symptom of inflation, price increases. This makes the definition neutral to the things that can potentially cause the price increases. For instance, there is said that one of the causes of inflation is that there is an increase in the amount of money. This some definitions state that inflation is "too much money with too little goods." With that definition, policies that was not created for inflation

In the previous post , we looked at what the business cycle is and what the different phases of the business cycle are. In today's post, we are going to analyze the different phases of the business cycle by using the Brick Wall Economic Theory as an example. If you want to learn more about the theory behind the Business Cycle you can go read about it here as this post will be a practical analysis of the different phases of the business cycle. On that post, we covered that the business cycle consists of two main phases called the contraction phase and the expansion phase. The contraction phase can then be further broken down into the recession phase and the depression phase where the expansion phase can also be broken down into the recovery phase and the prosperity phase. The different phases of the business cycle coincide with certain human behaviours. Contraction: The contraction phase is where the economy slows down and the total production is less than a time before. I

What is the Business Cycle in economics? The business cycle can be described as successive periods of rising and falling economic activities. It can also be called the economic cycle or the trade cycle. A business cycle is measured by the upward and downward movement of the gross domestic product (GDP) and fluctuates constantly. The fluctuations are sometimes bigger than others and vary in length. Business Cycle with trendline The changes in the business cycle is repetitious but not periodic like the phases of the moon. What this means is that after a period where the business cycle moves down it will always be followed by a period that makes the cycle move up. But, the periods at which the cycle moves up or down always differ. A business cycle's length is measured by looking at the distance between a peak and a peak, and a trough and a trough. When the next peaks/troughs are higher than the ones before it, an upward trend can be seen. The same is applied for when th

The circular flow of the economy refers to how goods and services, as well as money, flows through the economy. Think of it this way. When you buy something, you exchange that product for money. The money you gave don't just stop right there, that money then gets used by the person you bought it from to buy something else. If this sounds a bit confusing to you don't worry because luckily my brick wall economic theory can be used to explain a lot of things related to the economy. (If you don't know what the brick wall theory is, you can read all about it in my first post by clicking here .) The modern circular flow of the economy usually has four major roleplayers: The households(consumers, ordinary people). The businesses(they sell you products and services). The government(they provide government services). The foreign markets(the place where import and exports go) Circular flow of the economy ( Monetary -money- flow illustrated in blue and real flow il