How to Understand An Economy of a Country?

“Economy is the method by which we prepare today to afford the improvements of  tomorrow.”                       – Calvin Coolidge


A beautiful quote on Economy by 30th President of America – Mr. Calvin Coolidge (1872-1933).

But an important question is how to understand an Economy, so we will try to understand in simple terms.

At first instance when we study an economy of any country we usually see the GDP figure of that particular country, yes this is quite a correct indicator.

Gross Domestic Product (GDP) shows a country’s standard of living. I won’t go in detail to explain what GDP is? But yes this is the first and foremost indicator of an Economy.

But is GDP figure enough obviously No. We have to study in depth so we will move towards the next step i.e.  “Type of Economy”.

To know the actual position like Production & Consumption Pattern we need to understand which kind or type of Economy is – whether a Capitalistic or Socialistic or Mixed.

Every country has its own history so the economy has also undergone many changes as per the history and progress of every nation. In this century alone there were many changes specially after the two World Wars, the global economy has evolved.

Types of Economy

“Economic System is the system of Production, Distribution & Consumption.”

In this way Economy is divided into three categories:

1)      Capitalistic (Free Market, Open Competition, Profit Motive & Private Ownership)

2)      Socialistic (Planned Economy, Social ownership to meet Human needs and not to create Profit)

3)      Mixed (Capitalistic + Socialistic)

Whenever we try to find the original picture of any country then it is very important to understand the Means of Production – Control and Ownership, Distribution of Wealth.

Important Note: Recently on 12th November 2013 in China there was a large gathering of almost 400 people in which Government Officials, Top Beaurocrats and Businessmen collectively & unanimously discussed and created a growth model for China for the upcoming Decade. Same kind of previous meeting held in China in 1993 and we all can see where the China is – right from 1993 to 2013.

This is why History of any Nation helps to understand its Economy.

Which Country is following Which Economy

Capitalistic – USA, Switzerland, Canda, Australia, South Africa

Socialistic – North Korea, China, Russia

Mixed – India, England, Germany, Sweden, Italy, Hungary, Mexico

After understanding the Type of Economy now What Next?

Now I want to highlight those indicators which show some statistics that help in deriving the real picture of an Economy. I am not going as per any Textbook method but this is the way I follow to get into the depth of any country’s economy.

Let’s figure out some Important Indicators and I am highlighting them as per the categories.

1) Population

  • Total Population
  • Demography & Density by Region
  • Elderly Population & Young Population
  • Immigrants & Migration

2) Productivity

  • Size of GDP (I already mentioned this indicator)
  • Investment Rate

3) Household Income

  • Per Capita Income
  • Household Savings

4) Global Share

  • International Trade
  • Trading Partners
  • Foreign Direct Investment
  • Balance of Payments

5) Prices

  • Inflation (CPI-Consumer Price Inflation)
  • Producer Price Index
  • Long Term Interest Rates
  • Exchange Rate

6) Energy

  • Energy Generation & Supply
  • Renewable Energy
  • Oil Production & Prices

7) Labour

  • Labour Cost
  • Employment Rate
  • Unemployment Rate (Jobless Rate)

8) Government

  • Budget
  • Debt
  • Total Expenditures & Income
  • Total Tax Revenue
  • Current Account & Trade Account (Surplus or Deficit)
  • Government Subsidies
  • Debt to GDP Ratio

Above mentioned are broad parameters to understand the economic system of any country. All major fund houses thoroughly analyse the situation and economic conditions of any country before big investments. This is the kind of analysis which must have been followed for all the Emerging Economies then only they have been chosen as top Investment Destinations. I follow this simple process and I hope it is helpful in ascertaining the true picture of any economy of any country.



You might also like