Economics: A Simple Guide for Politics Nerds

Added: 2026-05-15

[00:00:00]If you watch my videos, chances are you are a political nerd, which is great.

[00:00:04]One of the most important parts of politics. One of the key reasons why it matters is because of the massive impact it can have on the economy, which impacts us all. But I sometimes find that politics nerds don't know as much about economics as they probably should.

[00:00:20]And it's not always easy to find the right places to look for information before you get bombarded with formulas, equations, and confusing graphs. I studied economics at university and I love the field. So, I thought I'd try to make a little video guide about economics for political nerds like you and me. I'm going to skip all the stuff that isn't inherently important to politics and focus on the stuff that is, and I'll try my best to keep it simple, straightforward, and tangible. In this video, I'll focus on the basics, primarily economic metrics, which we use in political discourse, and the factors that go into them. I'll also look a little at monetary policy and finally present a couple of key economic figures or movements who influence contemporary political ideology. I'm not going to be using graphs. I've taken the decision that if something is so complicated it needs graphs to explain it. This isn't the video for that. I'm also leaving out formulas and I'm leaving out numbers altogether. This is a bit different from other videos I've done, so I'm interested to see how this video performs. If it does well, I'll make more like it. I could even go more in depth with specific elements of this video if you're interested. So, do let me know in the comments. And if you want to see more like this, make sure that you share this video. And with all that out of the way, I think it's time we just get started. Let's turn to a basic but not straightforward question to begin with. What is economics? In its most basic sense, economics is the study of the allocation of scarce resources.

[00:01:43]This is of course a very broad interpretation broader than what we normally think of when we think of graphs and stock markets and tax rates and all of that. People have been engaging with some form of economics as long as there have been people living in communities. But people often credit the start of the study of it as a scientific field with Adam Smith's Wealth of Nations published in 1776. You sometimes hear people especially of the ideological left complain that the study of economics is inherently ideological.

[00:02:13]capitalist and liberal. There's a lot of truth to that when we look at contemporary mainstream economics where capitalism and a free market are taken as givens. But there's also a whole sphere of alternative economics where this isn't the case. In this video, most of the economic terms and metrics I use are indeed of the mainstream liberal economic family because that's what's important in the liberal primarily mixed or free market countries that I follow and where my subscribers come from. But for a hint of alternative economics, stick around till the end of the video.

[00:02:43]I'm focusing on macroeconomics, the study of the economy as a whole as opposed to microeconomics where you instead study the decision-making of single actors within the broader economy. So with that, let's turn our attention to some of the economic metrics. When you talk about economics in a political context, it's normally with regards to one of the big metrics which we use to describe and reflect on the current state of the economy or which we use to argue for or against certain political interventions in the economy. These political interventions, the government stepping in and executing on some policy in a way to impact the economy is known as fiscal policy. That is as opposed to monetary policy which is conducted by the central bank and which we'll get to later in the video.

[00:03:27]First though, I'm going to cover what I find to be the most discussed metrics.

[00:03:31]I'll tell you what they measure, what they mean for real people and their lives, some of the factors that impact these metrics, and finally, how they relate to other metrics. And with that, let's just get started with in many ways a metric that touches upon many of the other metrics in this video. And that is, of course, gross domestic product.

[00:03:49]Gross domestic product or GDP is in rough terms the value of the production of a country or region or whatever area it is that you're measuring. So how much both in terms of goods and services is produced. This is a way to measure the economic strength of a place. It's important just to note that GDP doesn't include intermediate goods or secondhand sales. It of course also doesn't include the black market. There's a few different ways that countries or organizations measure GDP, but the most common way is as the sum of people's consumption, businesses investment, government spending, and the balance of trade, a metric which we'll get to later. Generally, of course, the higher the GDP, the better. The more a country produces and sells, the more productive the country or area is, the higher the employment rate will be, the higher the living standards will be, the more money and more resources will be available.

[00:04:36]These are all signs of a strong healthy economy. If we instead consider the factors that lead to GDP, well, it's actually everything from the size of the labor market, the degree of employment, the level of productivity, etc., etc., etc. There are also some variant ways of looking at GDP. One of the most interesting is GDP growth. How much does the GDP grow from one period to another?

[00:04:57]This is a great measure to contextualize the GDP and understand which way the economy is moving. If the GDP growth is positive, well, that means that the economy is growing, adding more production. If the rate is negative, the economy is shrinking, losing production.

[00:05:11]And of course, the higher the rate, the quicker the economy is growing. Now, if for a given period of time, the technical definition differs from country to country, the GDP growth is negative, well, then you're in a recession, a period of economic contraction, where unemployment will rise, living standards will fall, and it's generally something that you want to avoid. Another very important variant of GDP is that of GDP per capita. the GDP divided by the population of whatever area you're studying. This metrics gives a clearer image of the health of the economy. A big country will no longer just be on the top of the list because it's a big country. China has one of the highest GDPs in the world, but when you look at GDP per capita, it falls well under many smaller countries. But GDP per capita still does not take into account how wellspread earnings in an economy are. That's a different metric. Another variant of GDP is gross national income or GNI. This used to be called GNP. GNI is measured as the income of a country's citizens.

[00:06:05]So it's effectively just the GDP plus income from foreign investments or remittances minus any money in the country that goes to other countries's investment. As I mentioned though, GDP or GNI don't take into account how spread out money and production is. Not even if we use per capita measurements.

[00:06:21]So let's turn to a metric that does.

[00:06:23]Inequality measurements. Inequality is the degree of imbalance in the distribution of resources or money. The most used metric for measuring this is the Jinny coefficient which will be a number between zero and one. The higher the coefficient, the higher the inequality, the bigger the gap between the rich and the poor and the bigger the imbalance in distribution of resources.

[00:06:43]The calculation for this coefficient is really quite difficult and not super important for the context of this video.

[00:06:48]So why and how is this important? Well, it serves as a really interesting way to add some nuance to a metric like GDP per capita. You can have a really high GDP per capita and still have a lot of people in the economy with very low standards of living if there's a really high imbalance in resources. The United States, for example, has a really high GDP per capita, but also a very high gen coefficient, which explains the often asked question of how there are so many people living in poverty in such a wealthy country. High inequality can be the product of many different factors within the economy and political sphere.

[00:07:21]little economic regulation, economic power discrepancies, or a poor workforce with low productivity or skills. And inequality can have big impacts, especially politically, leading to even greater power discrepancies, to social unrest, to distrust towards the system, and much, much more. Let's now turn to another significant metric, the employment rate. The employment rate is simply just a measure of how much of the labor force is in employment. The labor force is defined as the part of the working age population actively seeking or engaged in work. So a child won't count in this metric. Neither will a pensioner. Neither will someone living comfortably off of old money or winnings in the lottery. Or someone so disenfranchised by the labor market that they've totally given up on finding work. There's effectively two rates. The employment rate, a percentage of the people in the labor market inemployment, and then the unemployment rate, the opposite. And there some should of course be 100%. The rate you hear the most about in the news is of course the unemployment rate though. Unemployment is generally not a great thing for the economy. High rates of it normally is the product of a slow or cold economy perhaps one with negative GDP growth. It means that investors are investing less in the economy that consumers are consuming less and it can work itself into a doom cycle because workers are also consumers. Particularly low rates of unemployment can also be a problem though. It suggests a friction in the economy where you have too much demand for workers and not enough supply of them which will increase prices or wages and salaries perhaps to a problematic degree where it raises prices of goods and services dramatically contributing to inflation which we'll get to later.

[00:08:54]This has led to a term that perhaps sounds a bit strange, the natural rate of unemployment or also sometimes known as the non-acelerating inflation rate of employment which varies from economy to economy and which in the best case scenario primarily includes frictional unemployment essentially people changing careers and jobs quickly and seamlessly as well as structural unemployment a type of unemployment where there's a mismatch between skills and work requirements which can be solved in the medium term. Now, let's look at the government for a bit, specifically government spending. Government spending isn't a metric in and of itself, but there are a few metrics that can describe the spending of the government.

[00:09:31]The first is, of course, the government budget balance. This metric almost speaks for itself, but let's just break it down. A government spends a bunch of money every year on public services, on infrastructure, on defense, and many, many other things. At the same time, to fund this, it collects revenues, primarily taxes. If a government runs a budget surplus, that means that they collect more money in a given year than they spend. If they run a deficit, they're spending more than they're collecting. Now, governments are big beast organizations and in many cases can run deficits for long periods of time without trouble. They just borrow money in the form of what's called government bonds, which they then sell to private investors or to foreign states. This does, of course, come with a degree of interest. The government has to pay these lenders a little more than what they were lent. Like any loans you may take out from the bank, different governments have different interest rates. This specific interest rate is sometimes called the government borrowing cost and serves as an excellent metric for how respected, trusted, and stable a country is.

[00:10:28]Countries with internal conflict have very high borrowing costs because investors worry the government may not be able to pay back their loan and so need to charge a little extra for the additional risk that the lenders are taking on. Borrowing cost is measured by what's called bond yield rates. How much investors charge in interest on bonds.

[00:10:46]Now over a period of time, a government can of course rack up a lot of debt.

[00:10:51]This can be presented in two ways. Just the pure nominal amount that a government owes or as a percentage of GDP. This second measure is used quite a lot when comparing countries. It better explains and contextualizes how much a government owes compared to its size.

[00:11:05]You generally want to avoid having a very high debt to GDP ratio. Wealthier and more stable countries can normally be fine having higher ratios than others. But all countries with a high ratio will inevitably also spend a lot in the future on interest payments. Now let's turn to a similarish metric, the balance of trade. The balance of trade is the difference between exports and imports. Exports being goods and services sold to other countries.

[00:11:30]Imports being goods and services bought from another country. If the balance of trade is negative, this means that a country imports more than it exports. It therefore runs what's called a trade deficit. If the balance of trade is positive, a country exports more than it imports, and it therefore runs a trade surplus. There can be a lot of factors that go into a country's balance of trade, the strength of its currency, the nature of its natural resources, or the nature of the types of sectors it engages with the most. A trade deficit sounds inherently like a bad thing. It doesn't need to be, though. Naturally, you would think a country is bleeding money if it's buying foreign goods and services. But in some cases, it's not a problem if other countries are investing in that same country, which is running a trade deficit. However, if that's not the case, a trade deficit can be a bad thing, especially if it means racking up debt to fund the trade imbalance. But the lay of the land currently is that wealthier countries, especially in the West, are more likely to run trade deficits because of that investment caveat. On the other hand, developing countries, especially ones with large manufacturing industries, run trade surpluses. That's the general pattern.

[00:12:33]Now, let's turn to the last of the macro metrics we're covering in this video, and that is, of course, inflation.

[00:12:40]Inflation is the rate of price increases, normally measured as an annual change. Essentially, it compares the price of goods this time last year to today, and informs us how much prices have changed. This is, in many ways, the metric that inspired me to make this video, because I've run into way too many politics nerds who clearly don't understand what inflation means. So, I'm just going to clarify a few common misconceptions. Inflation is a growth rate. So as long as it's positive, prices have risen, even if the inflation rate has fallen. That just means the prices are rising at a slower rate. Does that make sense? Actually, prices on standard goods, oil being excluded, rarely decrease, but will increase at slower rates. That's because prices are sticky. It costs money to change price tags and menu cards. And if consumers are already now used to new, higher prices, why would a company want to lower them? Inflation is also not inherently a bad thing. Actually, most countries aim for a rate between 1.5% and 2% annual inflation. Why is that?

[00:13:36]Well, because some degree of inflation is actually just a product of a healthy economy. To understand this, we need to understand what leads to inflation. It's in simplest terms a friction between supply and demand. If there's more demand for something than there is supply, this will inherently raise the price to the point where demand and supply reach an equilibrium. So, what can lead to this friction? Well, in a strong economy where people are earning well, feeling comfortable, well, consumers will want to buy more. And because it takes time for producers to increase output, there will be short-term friction. That's fine. That's that 2% or so of inflation we kind of want. But if there are larger structural problems, maybe because of supply chains being broken down, maybe because there's too much money in circulation, we'll get to who prints money in a moment. Well, then prices will increase at unhealthy rates. And this can quickly become a self-inforcing cycle. If the value of money or buying power decreases due to inflation, the labor force will demand higher wages, which makes it more expensive to produce goods and services and prices will increase further, this starting a whole cycle. And what's wrong with that, though? If everyone's earning more, then price increases shouldn't matter. Well, it's very rare that everyone gets to keep up, and savings depreciate in value under high inflation. And it's almost always lowincome households that are the most negatively impacted by high inflation.

[00:14:52]So, what can be done to fight inflation?

[00:14:53]Well, from the government side, it's normally something like austerity measures. The less a government spends, the less money and demand is in circulation from their side, which in many, especially western countries makes up quite a significant part of GDP. But there's also another and arguably more significant thing that can be done.

[00:15:09]Something which in most western countries is outside the control of the government. And I am of course talking about interest rates, specifically the bank rate, which is controlled by central banks. So let's now turn our attention away from the metrics and towards monetary policy. Monetary policy is the set of levers that the central bank can use to impact the economy. In many western countries, the central bank is independent of the government with specific measures in place to prevent the government from overstepping into monetary policy. For American watchers, by the way, the central bank in America is the Federal Reserve, which I'm sure you've heard about. But maybe we should start there. Why have this almost inherently undemocratic institution control important policy? Well, it's because monetary policy can and has historically been abused before elections. An easy way to gain short-term victories for the incumbent government at the cost of long-term economic stability. Keep this argument in mind as we look at the powers of central banks. First of all, the central bank is responsible for printing money.

[00:16:06]Getting it into circulation can be a bit more tricky, but normally involves buying government bonds from banks or from private investors. But that's actually not the most exciting thing which the central bank does. I'd say the most exciting thing is setting the bank rate which is the interest rate that banks have to pay the central bank when they borrow money from it which they do regularly especially overnight. These bank rates then in turn influence the interest rates that banks set on consumers and businesses. But what does this do? Well, interest rates have a massive impact on the economy. To understand the impact, we need to remember interest rates work twofold.

[00:16:40]Just think of your bank account. If you've got money in your account, chances are that every month you get some probably small amount of interest paid to you, some percentage of the money which you're holding in that bank, that's to incentivize you to hold money in the bank because your bank uses that money, whether you like it or not, to give out loans, whether it's big loans to businesses or small car loans to some guy or anything in between. Now, the people who took out that loan also pay an interest. They don't just pay the money back, but they also have to give the bank a little extra something for the risk that the bank has taken on. So, if interest rates increase, you become more likely to save money in your account because you know you'll be rewarded for it. But if you're someone considering taking a loan, you might also reconsider because you know you'll be paying extra for taking that loan at this time. And that's the effect of a higher interest rate. It cools the economy down. More saving, less spending, less borrowing. The inverse, of course, is that if you lower the interest rate, there's less reason for people to save. There's more reason to spend and borrow money and to invest.

[00:17:39]And generally this all heats up the economy. But why would you ever then want to not heat up the economy? Don't we want economic growth? We talked at the start about how you want that GDP growth. So low interest rates help grow the economy. And so shouldn't that be the standard all the time? Well, the answer is inflation. If inflation is super high, the central bank can lower demand in the broader economy by giving people incentive to save and discourage spending. This in turn should ideally lower that demand which in turn can lower inflation. So the central bank exists in that sphere where they need to balance economic growth with inflation.

[00:18:11]Now they do have other responsibilities too, but these are maybe more technical and lend themselves to a less introductory video. So I think instead we'll just turn to a couple of key thinkers and then we'll wrap this up. So let's turn to economic thinkers. There's a long storyried history of economic thinkers. I mentioned Adam Smith at the start. There were a bunch of other interesting early figures, too. But for the sake of this video, I'll boil it down into three ideas. That's a massive oversimplification of the field, I know.

[00:18:39]But like I said, if you enjoy this video, I can make more. Also, just be aware I'm only focusing on these thinkers in terms of ideology. Every single one of them has also contributed with genuine theory and methodological advancements. That's not what I'm focusing on here, though. But let's start in Austria with the Austrian School of Economics. This is a movement of economists who generally advocate against central planning and government intervention. This is the school of thought that's inspired many contemporary libertarian and neoliberal types as well as leaders such as Margaret Thatcher and Ronald Reagan. The crux of this view is that markets are inherently dynamic subject to a boom and bust cycle which brings innovation and development and which cannot be tamed by a central government. They also emphasized the complexity of the economy as a series of decisions taken by heterogeneous actors which cannot be carefully studied with data or formulas which also serves as part of the argument for why government intervention cannot be effective. If we take this as one side of the argument, then let's hop over to the other end and look at Karl Marx and communism. Markx instead viewed capitalism and the free market as exploitative of workers who he argued were the real value creators. Instead, the system ends up leading to the burgeois sea owning the means of production and profiting off of the added value that workers contribute with. That speaks to a different way of looking at economics from the Austrians.

[00:20:00]Markx saw economics as a class struggle, not individual decision-making. He argued that there was an inevitable flaw in capitalism that to compete, capitalists would constantly need to invest in new technology with only marginal returns, meaning a downwards trend of profiting. This as well as economic inequality makes inevitable the capitalist collapse which will be replaced by communism. A system where private ownership would be abolished and would be replaced by collective ownership. These two ideological economic interpretations feel like two extremes. So what exists in that middle?

[00:20:33]After all across the west we're pretty far from communism and also pretty far from total lzifair economics. Well actually the vast majority of theories exist in the middle. But I want to turn to one guy who I'd argue is probably the most influential in the 20th century.

[00:20:48]John Maynard Kanes. Kanes looked at the total free market approach of something like the Austrian school and thought that surely there could be a role that governments could play during the boom and bust cycle. Yes, it would all maybe sort itself out in the long term, but in the long term, we're all dead. Instead, he argued that during periods of recession, a government could stimulate the economy by increasing its borrowing and spending. This in turn would help to keep economic activity going which would lead to more employment, more consumer spending and therefore combat the recession actively. Keynes was seen by many as a bit of a moderate response to growing interest in communism at the start of the 20th century and was adopted by many countries as economic ideology with leaders like Franklin Roosevelt and Clement Atley taking much inspiration from it. And that ladies and gentlemen is the basics of economics which you should know as a politics nerd. Of course there's so much more in the field. We haven't looked at currency. We haven't looked at financial crisis. We haven't looked at alternative monetary theory or literally hundreds of other interesting things. So, if you like this video, make sure to share it and if it performs well, I'll make a second part. Also, remember to give this video a little thumbs up and subscribe to my channel. I really, really appreciate it. Thank you so much for watching and goodbye.