Book Review: The Little Book of Economics by Greg IP

As the name indicates this book is actually a little book of economics. Greg IP discusses about different macro-economic aspects in simple terms with 15 little chapters. One will not be an expert by studying this book but will get surface level idea on various issues of economics. He discusses about economic growth, economic cycle, inflation, unemployment, central banks, fiscal and monetary policies etc. This book is written in the US perspective but basic concept is applicable for every economy.

Long run growth of an economy depends on two factors i.e. population and productivity of an economy. Population determines the supply of workers and the growth of population is subjected to longevity of people, number of women in child-bearing age, number of babies per women, and migration of people from other countries. 

Another factor of economic growth is productivity which means how much each worker earns and it rests on capital and ideas. Capital increases productivity though increased investments for buildings and machinery where ideas through innovating new business process and new products. When an economy is riding on the growth curve it also requires nurturing the growth through development of human capital, ensuring rule of law, and letting the market mechanism to work freely.

Every economy faces ups and downs on the way to long-run growth. Theses generally result from the expectations of different economic entities about the economy. Among 4 engines of economy i.e. consumer, business, government, and exports, GDP gets more volatile for the changes in spending in housing, business inventories, and big ticket consumer purchase.  

In understating the heath of an economy, job growth and unemployment are important consideration. In economic up-turn, there would be satisfactory level of growth and normal unemployment rate but reverse would be seen in down-turn. Another most talked about issue of an economy is inflation. Generally, in the marketplace, price signals about the surplus and shortage of particular products and based on that the businesses determine the supply level but inflation contaminates this system. Inflation acts as a hidden tax and arbitrarily punishes some people and rewards others. This inflation also shares an inverse relationship with unemployment.

Federal Reserve System (FED), central bank of the US, acts as the lender of last resort for the banks and financial institutions and prepares monetary policy which determines the interest rate in an economy based on the output gap, current inflation position and future outlook of inflation and output gap. Fiscal policy also plays a crucial role in shaping the economy. It includes the federal government spending as interest on debts, discretionary spending, and mandatory spending, and the sources of financing these spending. Federal government finances the spending mainly with tax revenue and debt. But high debt to GDP (highly leveraged situation) is alarming and an economy needs to escape this through economic growth, spending cuts or increasing tax, bailout, inflation, or defaults. High leverage situation along with a bubble, mismatches of expectations, spreading of panic (contagion) and elections may cause a financial crisis also.