BACK TO 
  BASICS
  Economic concepts explained
             BACK TO 
             BASICS
             Economic concepts explained
                       © 2017 International Monetary Fund 
                               
                               
                       Commissioning editor: James L.  Rowe
                       Managing editor: Marina Primorac 
                         Production editor: Lijun Li
                         Copy editor: Lucy Morales
                       Cover design: IMF Multimedia Services
          Back to Basics: Economic concepts explained
          v    Foreword                                                   16  Monetarism: Money Is Where It’s At
               Maurice Obstfeld                                                 Its emphasis on money’s importance gained sway in the 
                                                                                1970s
                                                                                Sarwat Jahan and Chris Papageorgiou
          I. THE BIG PICTURE                                              II. HOW ECONOMIES FUNCTION
          2    What Is Capitalism?                                        20  What Is Direct Investment?
               Free markets may not be perfect but they are probably            Investors often seek profits from a long-term stake in a 
               the best way to organize an economy                              foreign operation
               Sarwat Jahan and Ahmed Saber Mahmud                              Tadeusz Galeza and James Chan
          4    What Is Keynesian Economics?                               22  The Output Gap: Veering from Potential
               The central tenet of this school of thought is that              Economists look for the difference between what an 
               government intervention can stabilize the economy                economy is producing and what it could produce
               Sarwat Jahan, Ahmed Saber Mahmud, and Chris                      Sarwat Jahan and Ahmed Saber Mahmud
               Papageorgiou                                               24  Structural Policies: Fixing the Fabric of  
          6    Micro and Macro: The Economic Divide                             the Economy
               Economics is split into two realms: the overall economy          Monetary and fiscal policies deal with short-term 
               and individual markets                                           economic fluctuations, but an economy’s problems 
               G. Chris Rodrigo                                                 often go deeper
          8    Economic Models: Simulations of Reality                          Khaled Abdel-Kader
               Economists build simplified descriptions to enhance        26  Money: At the Center of Transactions
               their understanding of how things work                           Without it, modern economies could not function
               Sam Ouliaris                                                     Irena Asmundson and Ceyda Oner
          10  Econometrics: Making Theory Count                           28  Price: The Language of Exchange
               For economic theory to be a useful tool for                      A price is the amount of money a buyer gives a seller 
               policymaking, it must be quantifiable                            in exchange for a good or a service. But it can be more 
               Sam Ouliaris                                                     than that
          12  Supply and Demand: Why Markets Tick                               Irena Asmundson
               Buyers and sellers meet and at the right price all         30  Inflation: Prices on the Rise
               products are sold                                                Inflation measures how much more expensive a set of 
               Irena Asmundson                                                  goods and services has become over a certain period, 
          14  Gross Domestic Product: An Economy’s                              usually a year
               All                                                              Ceyda Oner
               When it is growing, especially if inflation is not a       32  Unemployment: The Curse of Joblessness
               problem, workers and businesses are generally better off         The number of people at work is generally closely 
               than when it is not.                                             related to whether an economy is growing at a 
               Tim Callen                                                       reasonable rate
                                                                                Ceyda Oner
                                                                         Economics Concepts Explained  |  FINANCE & DEVELOPMENT     iii