An Introduction: The Ten Principles (Part Two)

Now let’s move onto the second category; how the economy works. Though I’m sure you are fascinated by the story of my iTouch and are dying to hear more, I will appeal to broader models to discuss and clarify the following principles that concern the expansive economy as a whole. The fifth rule states that trade can make everyone better off. When I read this and came across the word trade, my mind immediately went to the traditional concept of bartering and the simple exchange of goods of similar value. Yet to understand the generality of this statement, we must think of trade as any form of payment for a good or service including trade in the form of an employee’s salary. In this sense, we understand that Mankiw’s fifth principle is one of the founding and persisting standards of today’s economy, as people specialize in individual professions to maximize efficiency. Next, the sixth principle affirms that markets are usually a good way to organize economic activity. All this means is that consumers and producers interact to increase trade efficiency and better allocate goods. This ideal forms the core of capitalism and has been central to the United States economy (with the exception of dire times such as the ongoing recession). Mankiw’s claim is further validated by the repeated failures of communist regimes in the past which represent the opposite of this system by allowing government interference in fiscal activity. The seventh stipulation offers that governments can sometimes improve market outcomes. This offers an exception to rule six in times of dire circumstance, as we have seen in the ongoing recession as numerous government “bailouts” have interrupted market flow by fueling money into failing corporations and suffering consumers.

Finally, let’s look at the way we interact. Eighth, a country’s standard of living depends on its ability to produce goods and services. As the rule suggests, countries with high productivity where people can produce more goods or services per person, have a higher standard of living. Several of these principles indicate cause and effect and likewise eight goes hand in hand with rule five for trade increases productivity which in turn increases standard of living. The ninth law dictates that prices rise when the government prints too much money. I’m sure many of you have heard this concept before as inflation primarily as the values of currencies fluctuate. The United States for example is currently experiencing minor inflation as a growing debt slowly increases the amount necessary to get one euro or pound… The final principle states that society faces a short-run tradeoff between inflation and unemployment. In other words reducing inflation causes a temporary hike in unemployment. Though I understand what is being stated, I find myself at a loss for explaining it. To get a better grasp, I referred to my dad’s MBA textbook Macroeconomics 5^th ed. and found the subject at hand on page 358 but was once again was lost in the advanced concepts.

I guess the lesson is that I’ve got a lot, as in a lot, to learn but I’m definitely off to a great start.