2. Introduction for absolute beginners
Understanding the economy as a whole
Our lives are extremely dependent on how well the economic system works
and distributes its fruits to the member of the society. In an international
perspective, the world economy is a complex structure linking nations
and peoples in an ever-changing environment. How the economy works
is a decisive question for understanding nations' physiology and pathology,
first essential step to diagnosis and sanation.
Economic newspapers, official bodies' announcements, academic
reflections describe processes, suggest interpretations, support policies
and remedies. There you can find a burgeoning source of ideas in order
to develop your own point of view.
Questions may be:
how can growth be triggered when everything goes wrong?
what will be the effects of rising prices?
how will booming exports impact the households?
Well, in the newspapers you find a lot of suggested answers. But it is
helpful to develop a coherent and tested framework to keep all
relations together and as well as to learn the lessons from the past and
from other nations' experience.
In this vein, economist have developed many schemes of the physiology
of the national and international economy. One of the most basic schemes
is the IS-LM model.
to a basic macroeconomic framework: the IS-LM model
The IS-LM model gather
the most important variables of the economy and link them in a
straightforward way. Among others, the model comprehends:
imports from abroad;
exports to the international markets;
the gross national product (GNP), basic measure of economic level
of a nation;
the interest rates banks requires for giving a loan to firms and
If you extensively
read economic newspapers, you shall find a lot of common ideas.
Those variables are
defined within the model and formally treated in formulas
and relationships. Our version of the model, however, does not
use math formulas, just intuitive ideas of "growth" and "fall"
in variables values.
Basically, the model relate the variables to each other, to enquire
what changes will be induces by an initial shock in one or more variables.
The use of the model allows you to see the far-reaching consequences
of events and policies, basing on the relations proposed by the model.
This gives you a hint for forecasting possible developments of
economic climate. Conversely, a critical comparison with the real situation
of your country in past and current values of variables will help you
to judge the realism of the same model and its suggestions.