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Understanding Economics

Back to Basics

Finance & Development explains some fundamental concepts of economics

The "Back to Basics" feature has been a mainstay of the IMF’s Finance & Development magazine since 2003. It aims to explain basic concepts for the non-specialist. We have revisited the series, updating and revising where needed, and compiling the most relevant Back to Basics stories in one place. The series is ongoing and we will add new “Back to Basics” stories as they appear in the magazine.

The Big Picture

Micro and Macro: The Economic Divide
G. Chris Rodrigo
Economics is split between analysis of how the overall economy works and how single markets function.

Further Reading

Economic Models: Simulations of Reality
Sam Ouliaris
Economists build simplified descriptions to enhance their understanding of how things work.

Econometrics: Making Theory Count
Sam Ouliaris
If economic theory is to be a useful tool for policymaking, it must be quantifiable.

Supply and Demand: Why Markets Tick
Irena Asmundson
Buyers and sellers meet and at the right price all products are sold

Gross Domestic Product: An Economy’s All
Tim Callen
When it is growing, especially if inflation is not a problem, workers and businesses are generally better off than when it is not.

Monetarism: Money Is Where It’s At
Sarwat Jahan and Chris Papageorgiou
Its emphasis on money’s importance gained sway in the 1970s

How Economies Function

The Output Gap: Veering from Potential
Sarwat Jahan and Ahmed Saber Mahmud
Economists look for the difference between what an economy is producing and what it could produce

Structural Policies: Fixing the Fabric of the Economy
Khaled Abdel-Kader
Monetary and fiscal policies deal with short-term economic fluctuations, but an economy’s problems often go deeper

Money: At the Center of Transactions
Irena Asmundson and Ceyda Oner
Without it, modern economies could not function
webcast "What Is Money?"

Price: The language of exchange
Irena Asmundson
A price is the amount of money a buyer gives a seller in exchange for a good or a service. But it can be more than that.

Inflation: Prices on the Rise
Ceyda Oner
Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year

Unemployment: The Curse of Joblessness
Ceyda Oner
The number of people at work is generally closely related to whether an economy is growing at a reasonable rate

Recession: When Bad Times Prevail
Stijn Claessens and M. Ayhan Kose
It is a sustained period when economic output falls and unemployment rises
webcast "What Is a Recession?"

Monetary Policy: Stabilizing Prices and Output
Koshy Mathai
Central banks use tools such as interest rates to adjust the supply of money to keep the economy humming

Fiscal Policy: Taking and Giving Away
Mark Horton and Asmaa El-Ganainy
Governments use spending and taxing powers to promote stable and sustainable growth

Externalities: Prices Do Not Capture All Costs
Thomas Helbling
There are differences between private returns or costs and the costs or returns to society as a whole

International Trade: Commerce among Nations
Brad McDonald
Nations are almost always better off when they buy and sell from one another

Real Exchange Rates: What Money Can Buy
Luis Catão
What is the value of a country’s goods against those of another country, a group of countries, or the rest of the world, at the prevailing exchange rate?

Purchasing Power Parity: Weights Matter
Tim Callen
The rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country.

Capital Accounts: Liberalize or Not?
M. Ayhan Kose and Eswar Prasad
There are both benefits and costs to easing restrictions on capital that flows across a country’s borders

Current Account Deficits: Is There a Problem?
Atish Ghosh and Uma Ramakrishnan
There can be consequences when the amount a country spends abroad is wildly different from what it receives from the outside world

Finance

Shadow Banks: Out of the eyes of regulators
Laura E. Kodres
Many financial institutions that act like banks are not supervised like banks.

LIBOR: World Reference Point
John Kiff
The London interbank rate is used widely as a benchmark but has come under fire

Banks: At the Heart of the Matter
Jeanne Gobat
Institutions that match up savers and borrowers help ensure that economies function smoothly

Macroprudential Policy: Protecting the Whole
Luis I. Jácome and Erlend W. Nier
Keeping individual financial institutions sound is not enough. A broader approach is needed to safeguard the financial system.

Markets: Exchange or Over-the-Counter
Randall Dodd
How securities are traded plays a critical role in price determination and stability

Financial Services: Getting the Goods
Irena Asmundson
How consumers and businesses acquire financial products such as loans and insurance

Economics in Action

Inflation Targeting: Holding the Line
Sarwat Jahan
Central banks use interest rates to steer price increases toward a publicly announced goal

Regressions: An Economist Obsession
Rodney Ramcharan
A basic statistical tool for distinguishing between correlation and causality

Dutch Disease: Wealth Managed Unwisely
Christine Ebrahimzadeh
When countries experience a sudden large increase in income, the consequences can be harmful

Remittances: Funds for the Folks Back Home
Dilip Ratha
For many countries, money transfers from citizens working abroad are a lifeline for development

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