10 questions · Economics
Economics can sound abstract, yet it shapes every trip to the shops. At its heart lies a simple idea: in the market model, prices are set by supply and demand. If something is scarce and wanted, the price rises; if it is plentiful, it falls. The Scottish thinker Adam Smith described this self-regulating market in 'The Wealth of Nations' in 1776, and his image of the 'invisible hand' is still famous today. To measure how large an economy is, economists use Gross Domestic Product, the value of all goods and services a country produces in a year, although critics point out that it ignores environmental damage and quality of life. Another key term is inflation, a general rise in the price level that erodes the purchasing power of money; in the hyperinflation of 1923 German money became worthless almost by the hour. Keeping prices stable in the eurozone is the job of the European Central Bank in Frankfurt, which sets the key interest rate and aims for inflation of 2% over the medium term. Euro cash has existed since 2002, when the new notes (deliberately showing invented bridges and gates rather than real buildings) replaced the mark, franc and lira. Companies and states have their own rules. A share is a unit of ownership in a company: whoever holds one is a co-owner, sharing in gains and losses. The first stock company was probably the Dutch East India Company, and today the New York Stock Exchange on Wall Street is the largest in the world. When a government's spending exceeds revenue, the result is a budget deficit, usually covered by new debt. And how individual firms work (from accounting to marketing) is the subject of business administration, which German students know as 'BWL'.
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Gross Domestic Product
GDP measures the value of all goods and services produced in a country in a year. It is the main figure for the size of an economy.
💡 Did you know? Critics note that GDP captures neither environmental damage nor distribution or quality of life.
rise in the price level
Inflation means prices generally rise and money loses purchasing power. The European Central Bank aims for low inflation of around 2%.
💡 Did you know? In a 'hyperinflation' (like Germany in 1923) money becomes worthless almost by the hour.
unit of ownership in a company
A share is a stake in a company; whoever owns one is a co-owner. If the company's value rises the price can rise: if it falls, losses loom.
💡 Did you know? The first stock company was probably the Dutch East India Company in the 17th century.
European Central Bank
The ECB in Frankfurt is the central bank for the euro and guards price stability in the eurozone. It sets the key rate and issues euro banknotes.
💡 Did you know? Its main goal is an inflation rate of 2% over the medium term.
2002
On 1 January 2002 euro notes and coins entered circulation, replacing the mark, franc, lira and others. As book money the euro had existed since 1999.
💡 Did you know? Euro notes deliberately show no real buildings but invented bridges and gates, so as not to favour any country.
Adam Smith
The Scottish economist is seen as the founder of modern economics. His work 'The Wealth of Nations' (1776) describes how the market regulates itself.
💡 Did you know? His image of the market's 'invisible hand' is still famous today.
supply and demand
In the market model the price forms where supply and demand meet. If something is scarce and wanted, the price rises; if it is plentiful, it falls.
💡 Did you know? This interplay is also called the 'law of supply and demand'.
New York Stock Exchange
The New York Stock Exchange on Wall Street is the largest in the world by the value of listed firms. Many of the best-known corporations trade here.
💡 Did you know? The famous 'opening bell' starts and ends each trading day.
spending exceeds revenue
A budget deficit arises when a state spends more than it takes in. The gap usually has to be covered by new debt.
💡 Did you know? In the EU the guideline is that the annual deficit should not exceed 3% of GDP.
business administration
Business administration studies how individual firms operate: from accounting to marketing to human resources. Economics, by contrast, looks at the whole economy.
💡 Did you know? It is one of the most popular fields of study in Germany.
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