Learn why your general understanding of the overall economy and your understanding of your personal economy is critical as you build wealth…
In this discussion TheWealthIncreaseer.com will try to explain what is often difficult for many to interpret (Macro & Micro Economic Theory) and how a meaningful interpretation that makes sense to you can help you in your wealth building efforts (Micro Economics) and allow you to act in a more appropriate manner as a result of your understanding–as you build wealth.
Although this discussion is somewhat technical in nature, your comprehension and awareness of the following paragraphs can put you well ahead of those in the general population when it comes to understanding the overall economy and making your personal economy work better for you and your family regardless of market conditions.
TheWealthIncreaseer.com will begin by defining general concepts that are needed to help further your understanding of macro and micro economic theory and follow with a discussion on how you can use your newly acquired knowledge to move forward financially at the various points in your life as you deal with the larger economy and your personal finances.
MACRO Discussion
Definitions:
Macro—“Macroeconomics” a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. It is the part of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.
Contrast with:
Micro—“ Microeconomics” the study of individuals, households and firms’ behavior in decision making and allocation of resources. It generally applies to markets of goods and services and deals with individual and economic issues.
GDP (Gross Domestic Product)–Written out, the equation for calculating GDP is:
GDP = private consumption + gross investment + government investment + government spending + (exports – imports).
For the gross domestic product, “gross” means that the GDP measures production regardless of the various uses to which the product can be put. Real GDP growth is the value of all goods produced in a given year; nominal GDP is value of all the goods taking price changes into account, therefore prepare your mind for the context in which GDP is written or spoken in and interpret properly.
Although you will hear a lot about GDP and it is often used as a political football, you can go to the following page to get documented results from 1990 up until 2017.
https://www.statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/
Examples of GDP in selected years:
2000—just over 4%
2004—over 2%
2008—negative GDP
2012—just over 2%
2016—less than 2%
2017—over 2%
2018—not available
*Note: In 2008 and 2009 there was negative GDP and from 2010 to the present there has been an up and down movement in GDP, with an upward trend.
National Debt–Government debt (also known as public interest, public debt, national debt and sovereign debt) is the debt owed by a government overall. The United States has continuously had a debt since the 1830’s, however the debt is now at an all time high.
The Fiscal Year 2018 U.S. budget deficit is $833 billion.
The deficit hit a record of $1.4 trillion in the fiscal year 2009 following the years 2007-2009 (great recession era).
See chart at the following link to learn more:
https://www.statista.com/statistics/187867/public-debt-of-the-united-states-since-1990/
By contrast, the annual “government deficit” refers to the difference between government receipts and spending in a single year (discussed below).
https://www.statista.com/statistics/200410/surplus-or-deficit-of-the-us-governments-budget-since-2000/
Annual Budget Deficit—the U.S. budget deficit by year is how much more the federal government spends than it receives in revenue annually.
Prior to the 9/11/2001 time frame there was a government surplus on an ANNUAL basis (see chart), however since that time the government has continuously operated at a deficit on an ANNUAL basis and the national debt has increased yearly!
Go to the following TreasuryDirect.gov link to learn more about the National Debt over a number of years:
https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm
Examples of National debt for selected years:
2000–$5.674 trillion.
2004–$7.390 trillion
2008–$10.02 trillion
2012–$16.3 trillion
2016–$19.57 trillion
2017–$20.24 trillion
Current—over $21.48 trillion (click here to see real time debt clock)
Economic Indicators–An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future performance. One of the most important uses and application of economic indicators is the study of business cycles.
There are three types of economic indicators: Leading, Lagging and Coincident:
1) Leading. Leading indicators help to predict what the economy will do in the future…
2) Lagging. Lagging indicators confirm what leading indicators predict…
3) Coincident. Coincident indicators move with the economy…
Popular leading indicators include average weekly hours worked in manufacturing, new orders for capital goods by manufacturers, and applications for unemployment insurance.
Lagging indicators include things like employment rates and consumer confidence. The business cycle always have highs and lows.
Coincident indicators include things like your personal income.
In summary, leading indicators move ahead of the economic cycle, coincident indicators move with the economy, and lagging indicators trail behind the economic cycle.
Examples:
LEADING: Signal future events
- Bond Yields (leading)
- Housing Starts (leading)
- M2 (Money Supply–leading)
- Consumer Confidence Survey (leading)
LAGGING: Follows an event
- Unemployment Rate (Current Employment Statistics (CES) lagging) see chart—note downward trend in unemployment since the great recession
COINCIDENT: Occur at the same time as conditions they signify
- Real GDP (Gross Domestic Product—coincident)
- Personal income (coincident)
- Market Index Movement
It is important to know the role that GDP, Annual Debt, National Debt and other Economic Indicators play as that knowledge can help you plan better for your future.
Additional market indicators include the Dow 30, S&P 500 and other market indices and there performance throughout various countries and regions–as well as the globe.
Interest rate movement, the cost to borrow, inflation, stock market movement and other macroeconomic indicators can all help you determine the right moves to make in your life from a micro economic perspective.
MICRO Discussion
Definitions:
Micro—“Microeconomics” the study of individuals, households and firms’ behavior in decision making and allocation of resources. It generally applies to markets of goods and services and deals with individual and economic issues, including that of family’s.
Contrast with:
Macro—“Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. It is the part of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.
Budget or Cash Flow Statement—A personal budget or “home budget” is a finance plan that allocates future personal income towards expenses, savings and debt repayment. Past spending and personal debt are considered when creating a personal budget.
A personal cash flow statement measures your “cash inflows and outflows” in order to show you your “net cash flow“ for a specific period of time. Cash inflows generally include the following: Salaries. Interest from savings accounts. Dividends from investments. Cash outflows generally include: Mortgage payments. Auto payments. Utility payments.
Inflows minus outflows will determine if you have discretionary income or whether your monthly outflows exceed (you would be in the negative) your cash inflows.
Net Worth—Net worth is the value of all assets, minus the total of all liabilities. Put another way, net worth is what you own minus what you owe.
It is important to know your net worth and and it is important to grow your net worth over time.
Discretionary Income—the money you have after paying for necessary expenses like rent, utilities, and food. It’s what you use to buy non-essentials (goods and services that you have discretion over) throughout the month.
Disposable Income—also known as disposable personal income (DPI), is the amount of money that households have available for spending and saving after income taxes have been accounted for.
Personal Credit—Consumer credit is a debt that a person incurs when purchasing a good or service. Consumer credit includes purchases obtained with credit cards, lines of credit and some loans. Consumer credit is also known as consumer debt. The most common form of consumer credit is a credit card.
Emergency Fund—an account for funds set aside in case of the event of a personal financial dilemma, such as the loss of a job, a debilitating illness or a major repair to your home.
In the microeconomic area of your life you must have an effective system that allows you to address the following areas in the most beneficial manner as possible:
Insurance
Investments
Taxes
Education Planning
Estate Planning/Wills
Retirement Planning
By creating a budget, knowing your net worth, effectively managing your credit, properly establishing an emergency fund and managing all areas of your finances at a level that is the best that is within you—you are now on a real path to making your dreams come true.
By looking down at the overall economy from a high altitude you now have a better view—and that view also allows you to see your own overall management of your own finances with more clarity and you are now in position to achieve major success throughout your lifetime.
Conclusion
Your understanding of the larger economy that you live in as well as your understanding of how you can manage your finances more efficiently will serve your and your family’s greater financial interests in a major way from this day forward.
Always realize that there are a number of sources for receiving economic indicator data and one site or source may vary from the other but they will in many cases be going in the same direction but may require in-depth analysis.
TheWealthIncreaser.com believes that you no longer have to be confused about financial jargon and how it relates to your wealth building future. You now have a better understanding of macroeconomics and microeconomics and you can now move forward with confidence as you build wealth.
You can put together an effective plan to direct your future in areas that you have control over and make chess type moves in areas that you may not have control over. You can now direct your future more effectively and control your future outcomes. You are now in position to act—not react–after the fact–and achieve more with less effort.
As you build wealth—you now know how to operate with more precision because you have a meaningful understanding of the Macro Economy in your Country or Region—as well as the Micro Economy that you manage in your own household.
You must be aware of wage stagnation and inflation in your nation–and you must know how to integrate your knowledge of the market indicators into an understandable format within your mind.
You must understand that a “growing national debt” that is caused by tax cuts, increased government spending and rising interest rates will ultimately lead to the interest on the national debt increasing in ways that may not only be good for your country–but may also be a drain on your personal economy as well.
Some market forecasters predict that the interest on the debt will double from 2017 to 2019 and balloon even further after that–therefore, it is important to have some idea of what effect that may have on your personal economy.
Always remember that there are 3 things in your life that are constant:
- Things that you could possibly control but you won’t
- Things that you can control and you can choose to do so or choose not to
The microeconomic area of your life provides you the ability to choose option 3 in the affirmative.
In the macroeconomic world you will often find yourself with option 1 and/or option 2.
By determining at this time that you will manage your finances better—and put together a serious plan of action you are on a path to making life much more enjoyable for yourself and your family in the current economy—or any economy.
All the best toward your economic success…
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