It`s hard to believe that just a few months ago we were completely preoccupied with Brexit. A new prime minister, Boris Johnson, had just been elected with a decisive parliamentary majority and the world economy was growing albeit at a slow but steady pace. How much have things changed!!
At times like this, Economics rightly takes a back seat as our main concern must be saving peoples` lives and resourcing the National Health Service (NHS). Having said that for the majority of people in this country the main impact of Covid 19 will be a significant fall in living standards.
In this blog I will briefly outline the possible short and long run effects of fighting the virus.
The economics of the current crisis can be analysed in a number of ways using macroeconomic models. Perhaps the simplest to understand is the circular flow of income, which breaks the economy up into 4 key sectors:
- Households
- Businesses
- Government
- Foreign sector (trading of exports and imports)
The key concept is National Income. This is a measure of the value of all wages, salaries, rents, profits and interest received by those working, renting out property or other facilities as well as financial returns to savers and entrepreneurs. This is almost identical to Gross Domestic product (GDP) – which is the money value of all goods and services produced by the economy. Income is generated as production takes place. Every time a car is manufactured or a mobile phone is sold or a restaurant meal served the Gross Domestic product of the country is increasing and there is an equivalent income generated to the factory worker, the phone seller and the chef and waiter who delivered the food.
The more income that is generated, the more households will be able to consume by buying more goods and services from businesses. Some of that income will also be used for Savings and also to buy imported goods such as Swiss watches and Basmati rice from India. In addition more income can be generated through Business Investment, such as building new roads or setting up a new company. or by higher exports or by higher Government spending
