Basics in Economy (I)

Recently I have been watching some tv programs where they seem to not have a clue about how economy works, and so they keep repeating and spreading confusing concepts without explaining things with a bit more simplicity. So here some basics, some of which I was taught quite late in my business and economy studies, and some were never taught to me... but as the reader will realise... it´s more about common sense than about economic concepts.

- Economy combines a macro and a micro view.  The micro view is more hands on and more plausible. It´s about companies, revenue and costs, margins, profits, salaries, investments and debt. The normal business of making money.  The macro view, the economy of a whole country, is certainly more complex and more difficult to "manage", because it´s actually not really "managed", since it´s the addition of many actors (enterprises, government, private individuals, central banks, foreign elements, etc). However, some of the rules that apply to the micro economy, apply to the macro, such as... "you cannot spend above income indefinitely".

- Capital in today´s world is very free and it´s very easy to move it very quickly from market to market, from country to country.

 - GDP is a very common indicator of the economy (macro)... which can be simplified as: GDP = C+I+G+(X-M) where:
C = value of all goods and services consumed by the private sector
I = value of investments
G = value of all goods and services consumed by the public sector
X = value of exported goods and services
M = value of imported goods and services

Typically, we all want to grow GDP, since it´s an indicator that our welfare is growing. The distribution of that wealth is another topic.

 - Basic rules apply to all levels of decision. Investing in a silly project is a bad decision, whether the project involves 1 Euro or a billion Euros.

 - Growth in value can come from new markets (innovation, new applications, or same products/services in different areas) or current markets (reduced costs or more volume).

 - A market is no other thing than a place where goods and services are exchanged for a price.
Whether the exchanged goods are physical goods, or financial products... it´s the same logic. Whether the market is virtual or physical... in the end it all comes down to two agents agreeing on exchanging a product/service for a price. Not always all the conditions are negotiable.

 - The agents may or may not know the REAL value of the items exchanged. The value of things is measured in a price, which is just a convenient measure for all the agents. A buyer can be willing to pay more than other if he sees more value than the other... because the value is not fixed. It´subjective. A fair price is the one where the 2 agents agree to the exchange. Based on the above... It´s enough to have 1 stupid agent to have a trade that could be meaningless. I can sell air to someone if he is willing to buy it. It´s his responsibility to learn about what he is buying... and assess whether the deal makes sense. In any other trade... it´s exactly the same. If we were stupid enough to buy things we didn´t understand... primarily because they were sold to us by entities that we trusted... it´s really our fault. If they KNEW those were faulty products, then there is some sort of fraud. Here it is where justice courts come to play, too. But typically, late and not necessarily effectively.

- A perfect market implies that information is transparent and universal... meaning that all the agents know the price of the products or services traded and the objective value of it (or have an idea). As we know... stock markets don´t work but with the ups and downs of information that is not always accessible to everybody. This is important... VERY important... and here it comes also the need that in a market the agents are aware of the rules, and the information related to products and agents. 

In the Public Sector, we have 3 basic agents: the State, the citizens and the companies that produce goods or services that could be of public use (eg: contractors, construction or services companies, etc). In a State-driven economy, no need for companies... the State manages all. The idea is that taxpayers (the citizens) pay the State in order to have some basics (Security, Ruling, Infrastructures, Justice Courts...). These basics may be provided by the companies (not always). The information related to this transaction should be public and publicised... and, for it to be considered a market, there should be the option to buy or not buy... even if we cannot always change the agent or the price.
The important thing here is that no inteligent decision can be taken without information. Do you know what are your taxes used for? If not... how can you complain or influence any decision if you don´t even know what decisions are taken or how do they affect you?