Research, Technology

What is happening to the economy: inflation, default and devaluation

Knowledge has always been the main human resource– it is thanks to them that we were able to build a modern civilization. In our quest to explain what drives human behavior, decisions, and reactions when faced with difficulty or success, we have, among other things, created the economy. Human science, if you will, no more, no less. The fact is that economics combines sociology, politics, psychology and history. And when we study economics, we get a set of skills, attitudes and ways of thinking that we can apply to a wide range of problems. Today, economics is one of the central disciplines underlying the study of business, management, and public policy. All currently accepted definitions of economics can be traced in an article written by Lionel Robbins back in 1932 entitled "An Essay on the Nature and Significance of Economics". Robinson's definition reads: "The science which studies human behavior as the relationship between ends and limited means with alternative uses is called economics."

Economics is a social science that allows you to predict future events

Essentially, economics is a broad discipline thathelps to understand historical trends, interpret events and make forecasts for the coming years, which is perhaps the most important thing today. But when it comes into play too many variables, it becomes more difficult to make forecasts, and often economists themselves shrug.

But if so, what can we say about non-specialists?How to understand what is the best way to spend available resources? What decisions should be made during the economic crisis? After all, the wild rise in prices, inflation and a possible default, alas, are not just words. This is our daily life.

Useful tool

The basis of economic science is demand andsentence. Supply refers to the quantity of something available for sale, while demand refers to the willingness to purchase that item. When supply exceeds demand, the market is out of balance and costs go down. The reverse is true if demand exceeds supply, as the item sought is more difficult to obtain. As a useful tool, economics is often crucial as it teaches us how to make good choices. In general, it is impossible to overestimate the importance of economics, and its basic understanding develops thinking.

Interestingly, most of our daily,monthly or life decisions have nothing to do with money, but are still the subject of economics. Its purpose is to explain the economic behavior that occurs in the exchange of resources. Thus, the scientific method allows you to build theories that explain the behavior of individuals, groups, organizations and entire states. You have probably heard more than once that economists disagree on many issues. In fact, the reason for the divergence of opinions is politics, and studying the relationship between politics and economics is part of the entertainment.

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Like all scientists, economists develophypotheses explaining the causes of a particular economic behavior. They then build models to test these hypotheses: for example, assuming that excess demand is the cause of price increases, and then building a new model to explain the impact of demand on price increases. Ultimately, the developed models of supply and demand, along with mathematical analysis, help scientists explain and illustrate many economic processes. Similar models in the future can be improved or completely revised if necessary.

Financial economics is an area of ​​theoretical and applied knowledge about the laws of functioning of financial flows and relations between all subjects of the economic system.

The ultimate value of the economic modelis that it can accurately predict the onset and consequences of economic events. The better the model, the more useful it is. Economists also assume that economic events and phenomena do not occur by chance, but are determined by a number of reasons.

Production and employment, investment andsavings, health care, money and banking, government tax and spending policies, international trade, urbanization, environmental issues, and legal issues are just some of the problems that underlie economics. Researchers distinguish two main economic areas - microeconomics and macroeconomics. The first deals with human behavior, such as incentives and prices. The second looks at the world globally, looking at interest rates and gross domestic product (GDP). As a rule, we read about this in the newspapers, along with inflation and economic forecasts.

Read even more interesting articles about the latest scientific discoveries on our channel in Yandex.Zen - articles that are not on the site are regularly published there

Types of inflation

From used cars to the real estate marketinflation has always played an important role for both consumers and investors. Over time, prices rise and the purchasing power of the currency decreases. For example, when everyday goods become more expensive (clothing, food, transport, equipment, etc.), inflation sets in. When the economic system of a country is normal, inflation is about 2% per year. Under normal financial circumstances, this means that your money is worth less every year, unless the interest rate on it is greater than or equal to inflation.

Inflation is a steady increase in the general price level of goods and services in an economy.

According to the researchers, in general, inflationhas a rather negative impact on the economy. Enterprises are afraid to invest heavily, which prevents them from making clear choices, which can lead to unemployment and changes in foreign exchange rates, etc. as a result. This means that each country must control its economy in order to avoid high inflation rates. Control is exercised either by the government (by fixing wages and pricing) or by the Central Bank. Since inflation is different, scientists classify it as follows:

  • Deflation is negative inflation in whichprices do not rise, but fall, which hinders the development of the economy. Deflation occurs when people are in no hurry to buy goods in the hope that they will become even cheaper, which is why companies stop production.
  • Low inflation. When annual inflation does not exceed 6% (ideally 4%), this allows the economy to develop while remaining comfortable for consumers and entrepreneurs.
  • Moderate inflation, ranging from 6 to 10% per year, is indicative of market instability. Its main danger is getting out of control and rising prices by tens of percent a year.
  • Hyperinflation occurs when prices rise by hundreds or thousands of percent. In the case of hyperinflation, people refuse money and switch to barter.

But inflation is not the only problem.Thus, the crisis in Ukraine and the economic sanctions imposed against Russia are structurally changing the country's economy, while causing significant damage to the global economy. According to some researchers, the current crisis may become the largest for the Russian economy in the 21st century. According to Elina Rybakova, Deputy Chief Economist at the Institute of International Finance (IIF), Russian GDP could shrink by 15% in 2022.

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In academic circles, scientists continue to argueabout the optimistic and pessimistic consequences of the imposed sanctions. For this reason, it is necessary to speak with caution about further forecasts. And given the complexity of economics, creating an absolutely accurate forecast for at least six months or a year is impossible. As well as taking into account all possible options for the development of events. Such uncertainty deprives us of the opportunity to plan future actions, which is especially important not only for business, but also for the health of millions of Russians. The consequences of the imposed sanctions, alas, will remain for a long time.

Soaring prices contribute to serious economic problems

If measured at today's exchange rate,the Russian economy would be the 22nd largest in the world, with a gross domestic product (GDP) slightly larger than that of Ohio, says Eric Wepper of Simon Fraser University (USA)

Foreign sanctions, as we know, have already led toa sharp fall in the Russian ruble, starting the process of hyperinflation. A sharp rise in prices is fraught with denomination - a change in the face value of financial instruments. This means that the number of zeros on banknotes decreases, resulting in the exchange of old banknotes for new ones. But in our case we are not talking about denomination. At least for now.

Interesting fact
In 1922, the government of the USSR for the first time replaced ten-thousandth banknotes with ruble ones. Over the past hundred years, the Russian economy has faced denomination six times.

Devaluation default and denomination

Devaluation is the fall in the value of one currency againstto others. It is the devaluation that the inhabitants of Russia observe in stores throughout the month. If earlier office paper could be purchased for 360 rubles, now its cost is about two thousand. The Russian currency is estimated to have fallen by about 30% against the dollar. Just last week, the ruble was worth less than one cent of the US currency. Such a weakening of the ruble is fraught with an increase in inflation and tension in the entire financial system of Russia.

According to economists and analysts, the sharpthe devaluation of the ruble will mean a drop in the standard of living of a Russian. We are also losing a lot of imported goods, the prices of which skyrocket. Traveling abroad will become more expensive as less foreign currency can be bought with rubles. Economists believe that deeper economic shocks will occur in the coming weeks, and supply chain problems will lead to plant closures due to lower demand. The rapid depreciation of the ruble could also hurt Russian companies that need to issue debt to raise capital.

The Russian currency is going through hard times

But that's not all.Hyperinflation, along with devaluation, threatens our economy with default - that is, the inability of the debtor to repay the debt to the creditor. Many Western economists are predicting its imminent onset, while other analysts do not foresee serious concerns. It is noteworthy that Russia already experienced a default in 1998. Then the authorities declared a default on the ruble debt, the cause of which was the fall in oil prices. Today's situation is different, as economic problems are caused primarily by political events.

This is interesting: What determines the price of oil and how does it affect people's lives?

But despite the increased risk of default, fearit is not worth it, since almost all negative market events have already occurred. The domestic currency has weakened significantly, and the incomes of Russians are no longer becoming. At the same time, Russia does not owe much to Western creditors, and the government is taking the necessary measures to support the national currency. Today, we all must realize that no one will return to their former life. For the past two years, the world has literally been suffocated by a pandemic that has not contributed to the development of the global economy.

Russia is rich in many natural resources

It turns out that the economy is in a stateuncertainty, and making reliable forecasts is almost impossible - too many factors change almost every day. This uncertainty is frightening, but understanding economic processes helps to cope with panic and learn to live in a new reality. In the end, we don't have another one. Take care of yourself and loved ones and remember to take care of your health and mental well-being. You can read about how to do this here.