Hi, you're a human. You want stuff like food and shelter and a slightly larger TV than your cousin has. But here's the problem.
There's not enough stuff. Not enough food, not enough houses, definitely not enough slightly larger TVs. That's called scarcity.
It's why you can't have everything and neither can anyone else. And it's the fundamental problem of economics. If there were infinite pizza, economics wouldn't exist.
But there isn't. So now we have to choose. Economics is the study of how we make choices when there isn't enough to go around.
So what do we do? We trade. You have 10 apples.
I have five bananas. We both want variety. Trade happens.
Win-win. Unless you're allergic. In that case, still win-win, just with an EpiPen.
So how do we decide who gets what? Enter the idea of opportunity cost. Every choice you make means not doing something else.
Watching this video means not watching cat fails. That's your opportunity cost. Hope this was worth it.
Anyway, back to trade. Why do people trade? Because of comparative advantage.
It's when you're better at doing one thing relative to how bad you are at another. Even if you're worse than everyone at everything, you can still specialize and benefit from trade. That's right.
You might suck at everything, but someone else sucks more proportionally. Congratulations. You're economically useful.
Trade isn't about being the best. It's about being the least worst at the right thing. Okay.
So, we've got scarcity, trade, opportunity cost, and comparative advantage. Let's put that in a box and shake it. Boom.
You just invented a market. A market is where buyers and sellers interact to exchange goods and services. Could be a farmers market, could be Wall Street, could be your cousin selling you Fortnite skins through PayPal.
The one rule that makes markets tick is incentives. People respond to incentives. If pizza is $100, you probably won't buy it.
If it's $1, you'll eat seven. Lower prices incentivize buyers. Higher prices incentivize sellers.
This back and forth creates supply and demand. Demand is how much people want something at a certain price. Supply is how much people are willing to make of that thing also at a certain price.
Where they meet, that's the equilibrium price. It's the magical number where everyone who wants to buy finds someone who wants to sell. Supply goes up, prices go down.
Demand goes up, prices go up. Unless the government steps in and says, "Nope, that's price control. " It's when you try to ignore economics.
It doesn't usually go well, but we'll get to that later. Now, what if someone doesn't like their role in the market? Maybe you make shoes and you want pancakes.
You go get a job. You earn money. Money is just a medium of exchange.
It avoids the whole I'll trade you a goat for some Wi-Fi situation. Money also acts as a unit of account so we can count stuff and a store of value so we can save up to buy slightly larger TVs later. In other words, money is economic lube.
It keeps the gears of trade spinning. And then we invented banks. Banks take deposits and they lend that money out to other people.
They charge interest. That's the cost of borrowing. So where does all this lead?
Markets coordinate people through prices and incentives. But they don't care about fairness or feelings or if you stubbed your toe this morning. They just respond to signals.
And that's what we call the invisible hand. It's not magic. It's just math and desire and desperation working together in silence.
Moving on. Let's say you want toast, but not just any toast. Avocado toast.
To get that, someone has to grow avocados. Someone else makes the bread. Someone else ships both to the cafe.
Someone else puts it together and someone else charges you $14. This is called a supply chain. It's the sequence of steps that turns raw stuff into finished stuff and then moves it around.
It's like a Rube Goldberg machine. But for breakfast, all supply chains start with land, labor, and capital. The factors of production.
Land is natural resources. Avocados, wheat, oil, lithium, air. Kind of.
Labor is people doing stuff, planting, harvesting, driving, selling, pretending to smile. Capital is man-made stuff used to make other stuff. Tractors, factories, computers, espresso machines.
You put these inputs together and you get output. Now, how much output? That depends on productivity.
If your labor and capital are efficient, you get more toast per person per hour. Productivity is everything. It's literally what makes countries rich or poor.
High productivity means more stuff for more people with less effort. Low productivity means waiting 4 hours for one egg and still burning it. Okay, so now we have all this stuff being made and sold.
How do we measure it? We use GDP, gross domestic product. It's the total value of all final goods and services produced in a country in a year.
Final means not intermediate. You don't count the flour and the bread, just the bread. Otherwise, you're double counting.
And that's cheating. There are three ways to calculate GDP. One, production approach.
Add up the value added at each stage of production. Two, income approach. Add all incomes earned.
Wages, profits, rents, interest. Three, expenditure approach. Add up all spending.
GDP equals C plus I plus G plus X - M where C is consumption, you buying stuff. I is investment, businesses buying machines or building stuff. G is government spending on roads, schools, and military parades.
X means exports, stuff we sell to other countries. And M means imports, stuff we buy from them. Exports add to GDP.
Imports subtract. Because GDP is about what's made here, not what's just bought. But don't get too excited about GDP.
doesn't count unpaid labor or black market activity or whether you're happy or if the GDP came from selling weapons to toddlers, which is why some people prefer GDP per capita. GDP divided by population to compare living standards. Still flawed, still useful, like a microwave with no door.
So, what makes GDP go up? Usually more capital, better technology, and higher labor productivity, and sometimes just more people. But growth isn't always good.
If it comes from deforestation or turning every river into a sewage pipe, it's technically growth, just not the fun kind. Also, GDP is sensitive to business cycles. Sometimes the economy grows, that's a boom.
Sometimes it shrinks, that's a recession. And if it shrinks really badly for a really long time, that's a depression. These cycles are partly natural, but also influenced by aggregate demand, aka total demand, and aggregate supply, aka total output capacity.
If demand outpaces supply, prices go up. That's inflation. If supply collapses, but people still want stuff, prices go up anyway.
That's also inflation. But now with misery. If both demand and supply collapse, welcome to stagflation.
It's like depression, but with higher prices and more existential dread. So why does avocado toast cost $14? Maybe there's a supply shock.
Drught in Mexico, fungus in Peru, fuel prices went up. Shipping containers stuck in a canal. Maybe demand went up.
Millennials love brunch. Instagram loves pictures. Prices respond.
Maybe there's just price discrimination. Cafe knows you'll pay it. And maybe, just maybe, it's inflation.
Okay, let's talk money. Not the I want it. The what is it kind?
Money isn't just cash. It's any medium of exchange that people accept in return for goods and services. Historically, money has been rocks, cows, cow-shaped rocks, gold, paper, numbers on a screen, and NFTTS briefly.
What matters is trust. If enough people believe a thing is money, then it is. Money also acts as a unit of account so we can count stuff and a store of value so you can save for later.
When that value disappears, like in hyperinflation, money becomes not money. So, how much money should exist? Good question.
Too little, the economy stalls. Too much, prices go up. That's inflation again, measured by things like the consumer price index, CPI, a weighted basket of goods like bread, rent, eggs, coffee, and probably one USB cable for some reason.
So, why not just print more money? You can. It's called monetary expansion.
But here's the problem. If everyone suddenly has more dollars and the number of goods stays the same, demand goes up, but supply doesn't. So, prices rise because supply and demand.
More money chasing the same stuff equals higher prices. That's inflation. Hyperinflation is when prices rise so fast your wallet catches fire before you even open it.
Example, Zimbabwe 2008. Annual inflation 89. 76illion%.
That's 897 followed by 20 zeros. They had 100 trillion dollar bills. Yet you still couldn't afford lunch.
So who decides how much money to print? Central banks. Every country with its own currency has one.
In the US, that's the Federal Reserve. In Europe, the European Central Bank. In monopoly, it's whoever's cheating the fastest.
Central banks do two big things. One, control the money supply. Two, set interest rates.
Interest rates are the price of borrowing money. High rates make capital more expensive to borrow, so people and businesses borrow less and the economy cools down. Low rates make capital cheaper to borrow, leading to more spending and investment, and the economy heats up.
This is called monetary policy. Tight monetary policy equals fighting inflation. Loose monetary policy equals boosting growth.
And then there's quantitative easing, QE. That's when central banks buy financial assets like government bonds from commercial banks to pump money into the economy. It's like printing money but with extra steps and spreadsheets.
So where does all this money actually come from? Answer: mostly from loans. Commercial banks create money when they give out loans.
Your mortgage, new money. Your car loan, new money. Your impulse purchased kayak, also new money.
They don't loan out physical cash from a vault. They just type numbers into your account. This is called fractional reserve banking.
Banks keep a fraction of deposits in reserve. The rest loaned out. It works until everyone wants their money back at the same time.
That's a bank run. If enough people panic, the bank collapses. That's why deposit insurance exists to prevent panic.
In the US, it's the FDIC. Other countries have similar setups. All right, let's talk taxes.
Governments like to spend money on roads, on schools, on military jets that cost $80 million and crash during test flights, and sometimes on commemorative coins no one asked for. But governments don't sell products. So where do they get the money?
Taxes. Taxes are mandatory payments from people and businesses to the state. If you don't pay them, you get a strongly worded letter and eventually jail.
There are different kinds of taxes. Income tax, a slice of your paycheck. Corporate tax, a slice of your company's profits.
Sales tax/vat, a slice of what you spend. Property tax, a slice of your house. Capital gains tax, a slice of your successful investment.
Wealth tax, a slice of rich people's existence, rare, controversial, difficult to implement. Excise tax, a slice of your bad habits, alcohol, cigarettes, fuel, sugar. Progressive taxes mean higher incomes pay a higher percentage.
Progressive taxes hit low-income earners harder. Flat taxes don't care who you are. Everyone pays the same rate.
Governments use this money to fund public goods. Things that everyone uses but no one would pay for voluntarily, like clean air, national defense, street lights, welfare programs, unemployment benefits, pensions, healthcare, food assistance, infrastructure, bridges, trains, pipes, potholes, mostly potholes, debt payments. More on that in 30 seconds.
So, governments collect money and spend money. That's called a budget. If spending greater than taxes, that's a budget deficit.
If tax is greater than spending, that's a budget surplus. It's rare, like a unicorn or a fully funded public library. To cover the deficit, governments borrow money.
They issue bonds, IUS, that say, "Buy this and we'll pay you back later with interest. " If you've ever bought a government bond, congratulations. You lent money to a government.
Total accumulated deficits over time equals national debt. Most countries have debt. The US over $34 trillion in counting.
Japan over 260% of GDP. Norway basically debtree, but only because they accidentally struck oil. So, is government debt bad?
It depends. Debt is fine if it's used for productive investment like infrastructure. It stays sustainable, doesn't grow faster than GDP.
Interest rates are low. Debt is bad if it's used to fund vote nonsense. It causes runaway inflation.
Investors lose trust and demand higher interest or stop lending altogether. At some point, debt interest becomes a budget item of its own. You borrow money to pay back money you already borrowed.
That's called servicing the debt. In extreme cases, governments can default, stop paying entirely. like Greece in 2012, Sri Lanka in 2022, and Argentina nine times.
But sometimes governments don't have a choice, especially in a crisis, like a war or a global pandemic, or a financial meltdown caused by a housing bubble filled with lies. All right, time to zoom out. Let's say you live in a country.
Congratulations. But your country can't make everything. Maybe it's great at growing coffee, but terrible at building cars, so it exports coffee and imports cars.
That's international trade. Trade lets countries specialize in what they're relatively better at, even if they're worse at everything. This is called comparative advantage.
Again, if Brazil gives up one ton of corn to grow two tons of coffee and Canada gives up two tons of corn to grow two tons of coffee, Brazil has the comparative advantage in coffee. So, Brazil exports coffee. Canada exports corn.
Both win. That's the logic behind free trade. Just goods flying across borders, in containers, in trucks, on planes, on boats, all at once until someone bans one.
Trade increases efficiency, lowers prices, expands variety, and spreads technology. That's globalization. But not everyone wins equally.
Some jobs move offshore. Some industries get crushed. Inequality can rise.
That's called structural adjustment. And people don't usually like being adjusted. So, governments sometimes interfere.
They impose tariffs, taxes on imports, quotas, quantity limits, subsidies, money to help local producers cheat the free market. Embargos, when politics says, "No trade for you. " Protectionism protects domestic industries, but usually raises prices and makes everyone poorer in the long run.
Trade happens in currencies. If Japan sells cars to the US, it wants yen, not dollars. So, dollars get exchanged for yen.
This is the foreign exchange market, aka forex. The exchange rate tells you how much of one currency you get for another. 1 USD equals 150 yen.
Cool. 1 USD equals 1 million Zimbabwe dollars. Less cool.
Currencies can float or be fixed. Floating currencies change based on supply and demand. Most major currencies do this.
Fixed currencies are pegged to something like the US dollar or gold and kept there by force or willpower. Exchange rates move because of interest rates, inflation, trade balances, investor confidence, wars, coups, scandals, and tweets. If your currency depreciates, your exports get cheaper.
Good for trade, but imports get more expensive. Bad for buying stuff. If your currency appreciates, you can buy more foreign stuff, but your exports get more expensive.
Bad for local producers. So, countries try to manage their currencies. Sometimes subtly, sometimes blatantly.
That's called currency manipulation. China has been accused of it. So have others.
The US mostly just complains about it. If a country borrows in a foreign currency like a dollars and its local currency crashes, repaying that debt becomes harder. That's a currency crisis.
Like Mexico 1994, Thailand 1997, and Argentina basically always. Global trade also depends on supply chains. They look efficient until they break.
Like when a single container ship blocked the Suez Canal in 2021, froze 12% of global trade, delayed 400 ships, and cost the world economy roughly $10 billion per day. One boat, one canal. One reminder that globalization is fragile.
Also, chips. No, not the edible kind. Semiconductors made in a few ultra specialized factories, mostly in East Asia.
In 2020, a chip shortage made used cars more expensive than new ones. This is called a supply shock, and it messes with everything. All right, time to invade your personal space.
You wake up, you go to work, you get paid. That's labor economics. Jobs are just a market where the product is human time.
Firms buy it. That's demand. The price is wages.
In theory, more demand equals higher wages. More supply equals lower wages. In reality, not so much.
Workers aren't machines. They value free time. Too much pay and they actually work less.
That's the backward bending supply curve. Firms hire you only if your output is worth more than your wage. That's marginal revenue product.
$100 value per hour. You maybe get $25. The rest is profit for them, not you.
If wages climb, hello, automation. Still, people lose jobs. Can be frictional or between jobs.
Structural cause of wrong skills. cyclical in recession or seasonal like Santa. And if you stop looking, congrats, you're statistically invisible.
Minimum wage helps the poor if set right. Too high and firms cut hours, raise prices, or replace you with a touchscreen kiosk. Research says small hikes are fine.
Huge ones hurt. Okay, let's step back a bit. Why do some people earn way more?
That's called wage gap caused by skills, experience, discrimination, luck, inheritance, and vibes. CEO pay ballooned from 20 times worker pay in the 1960s to 350 times today. Not because CEOs suddenly became superheroes, but because of stock options, weak bargaining, and good old market power.
Unions once pushed back, but outsourcing laws and regulations and corporate we are family emails killed them for good. Bottom line, labor markets are messy because people aren't commodities. Moving on.
So, you earn money, now what? Stash it under your mattress or try to make money from money. That's finance.
The market's trade claims on future money can be stocks, aka company slices, or bonds, aka loans, or derivatives, aka bets on bets, or crypto, aka mathpowered casino chips. Why do they exist? To connect people with cash to people who need cash.
Stocks rise on expectations, not just profits. That's the efficient market hypothesis that says all info is baked in. You can't beat the market unless you're lucky, cheating, or Elon's tweeting.
Bonds are boring, but important. You lend, they pay interest. Safeish until governments default.
Bond prices fall when interest rates rise. That rule alone nukes economies. Words like options, futures, and swaps mean derivatives used to hedge risk or gamble harder.
Very useful until they blow up the planet. And there's crypto, blockchain coins that are decentralized, volatile, and still figuring out why they exist. Depending on who you ask, could be the future of money or Ponzi scheme with extra steps.
Reality, it's mostly a casino disguised as innovation. Moving on. Most people don't invest directly.
Banks, hedge funds, pensions do it for you. Sometimes responsibly, sometimes Lehman Brothers. Safe assets like treasuries earn little.
Risky ones like startups, meme stocks, crypto might pay huge or nothing. That's the risk return trade-off. Lesson, don't put all your eggs in one meme stock.
Diversify. Okay, let's look at the big picture. Why are some countries rich and others stuck eating instant noodles forever?
That's development economics. Textbook says just invest in capital, build factories, trade, and voila, rich. Reality says lol.
No, because history matters. Colonies had resources sucked out and left with broken systems. And geography matters.
Landlocked shipping's expensive. Malaria zone, productivity tanks. Institutions matter, too.
If the legal system is just whoever bribes more wins, investors run away. Also, resource curse. Got oil?
Congratulations, you're rich. Oops, you're poor again, cuz your whole economy is a one-trick pony in a clown costume. Poor countries get trapped.
If you're poor, you can't save, so can't invest. So, can't grow, so you stay poor. It's like trying to climb out of a pit, but the rope is covered in butter.
So, why not just give them money? Foreign aid. sometimes works, sometimes disappears into government Lamborghini fund, microloans helped a few, didn't fix everything.
The real cheat codes seem to be education, property rights, infrastructure, political stability, and not starting a civil war every 6 months. Okay, but even rich countries act dumb. How?
Why? To answer it, let's zoom into the average human brain. Enter behavioral economics.
Traditional economics assumes humans are rational beings. LOL. Again, real humans are chaos merchants.
We discount the future. $5 now feels better than $50 later. That's hyperbolic discounting.
We hate losing. Losing $20 hurts more than winning $20 feels good. That's loss aversion.
We anchor. If I say a phone costs $10,000, suddenly $999 looks like free. We heard.
If everyone panic buys toilet paper, so do you. And we love sunk costs. We'll sit through a terrible Marvel sequel because I already watched the first eight.
So yeah, we're bad at money. That's why governments and apps nudge us with default options, annoying notifications, autosaving, and auto-enrolled retirement accounts. Because left alone, we'd spend our retirement fund on Uber Eats.
Zoom out again. What system is all this happening in? Can be capitalism, private ownership, markets, freedom, pursuit of profit, great at innovation, also great at inequality and monopolies.
Socialism, all about collective ownership and redistribution. Great for equality, not so great for motivation. Communism, aka command, socialism, no private property, full state planning, looks good on paper, looks terrible in bread lines, and usually ends in famine like USSR grain quotas.
And that brings us to mixed economies. the actual reality. Most countries today, including the US, China, India, and Germany, use some combination of free markets and government intervention.
Yes, even the US has subsidies, public schools, social security, and the TSA. And yes, even China has billionaires, and stock exchanges. Flavors include state capitalism in China, democratic socialism in Scandinavia, mild or hot capitalism in USA, depending on the outrage, lobbyists and outrage fueled by lobbyists, or crypto anarchism online, which for now are 82 Twitter bros yelling about decentralization while checking Binance.
But none of these is the full truth. Every system is just a way of answering the same three questions. What do we make?
How do we make it? Who gets it? No one's nailed it perfectly.
So, what have we learned? Scarcity is real. Choices have costs.
Trade makes us better off. Money makes trade easier. Incentives matter.
Governments tax, spend, and sometimes ruin everything. Global trade is efficient and vulnerable. Currencies are weird.
Economic systems reflect trade-offs. And no one agrees on the best one. And that's economics.
All of it. Well, almost all of it explained fast. Okay, this was really hard and took ages to make.
But if you got something out of this video and would like a part two, vote with a thumbs up. If this video gets like 1,000 likes, I'll have to make part two because that's how economics on YouTube works.
