Most of us don’t think much about the economy when things are going well. Then grocery prices rise, interest rates move or unemployment starts appearing in the news, and we’re expected to understand what GDP, inflation, supply and demand and economic growth actually mean.
So, what is the economy? And how does it actually work?
In this episode of the Get Rich Slow Club, Ana sits down with economist and Mind Over Money author Evan Lucas to go back to basics. It’s the first episode in a four-part series designed to unpack the economy without assuming you already know the jargon.
Rather than treating the economy as something abstract, Evan explains how it is shaped by everyday decisions made by households, businesses and governments. What we buy, what we delay, how confident we feel and what we expect to happen next can all influence the wider economy.
Read the synopsis below or scroll to the end for the podcast version.
The economy is about more than money
Evan explains that economics isn’t simply about making money or increasing profits. At its core, it’s to do with the betterment of society: how resources are used, how people participate and whether living standards improve over time.
That makes the economy broader than the sharemarket or the latest interest rate decision. It includes employment, wages, housing, business investment, government spending, production and consumption.
These parts are connected. If interest rates rise, some households may have less money available after mortgage repayments. They might reduce spending or delay a major purchase. Businesses may notice weaker demand and become more cautious about hiring or investing.
The reverse can happen when people feel confident about their jobs and finances. More spending can support business revenue, employment and wages, although strong demand can also push prices higher if supply can’t keep up.
The economy isn’t a machine with one simple lever, but a system of connected decisions.
Why economic growth isn’t as simple as it sounds
Economic growth is often presented as an obvious good thing. But Evan explains that growth needs to be sustainable and broad enough to support society.
An economy growing too quickly can put pressure on housing and infrastructure, create labour shortages and push prices higher. Growing too slowly can weaken business confidence, reduce household spending and lead to softer employment.
This is why economists sometimes talk about a “Goldilocks” economy: one growing, but not so quickly that it creates excessive inflation or instability.
Finding that balance is difficult because consumer behaviour, business conditions, government policy, interest rates and global events are constantly changing.
GDP: a measure of economic activity
GDP, or gross domestic product, measures the value of goods and services produced within an economy over a particular period. It provides a broad estimate of economic activity.
GDP is useful, but it doesn’t tell us everything about inequality, quality of life, unpaid work, environmental damage or how evenly economic gains are shared.
In Australia, household consumption makes up around 60-70% of GDP. Everyday spending on groceries, childcare, restaurants, holidays and other services contributes to economic activity. Businesses receive revenue, workers receive wages and suppliers are paid, creating further spending elsewhere.
This is why economists pay close attention to consumer spending and confidence. What households do collectively can significantly affect the direction of the economy.
Why consumer confidence matters
Consumer confidence reflects how optimistic or pessimistic people feel about their finances and the economy.
If people feel secure in their jobs, they may be more willing to spend. If they’re worried about mortgage repayments, job security or rising prices, they may postpone a holiday, choose cheaper products or delay a major purchase.
If enough people reduce spending, businesses may experience weaker sales and respond by reducing hiring, investment or opening hours. That can affect household incomes and confidence, creating a difficult cycle.
The reverse can happen when confidence improves. More spending can support business activity, although strong demand may also contribute to higher prices if supply can’t increase quickly enough.
Supply and demand, explained by The Wiggles
Ana and Evan use The Wiggles to make supply and demand more relatable.
Imagine thousands of people wanting tickets, but only a limited number of seats available. Demand is high and supply is restricted, so ticket prices are likely to rise. If more shows are added, supply increases and price pressure may ease.
The same relationship appears across the economy. When demand rises faster than businesses can supply something, prices may increase. When supply expands or demand falls, price pressures may ease.
Evan also points to Nvidia and the demand for computer chips during the growth of AI. When supply can’t immediately keep up with demand, prices and company valuations can be affected.
Supply and demand don’t explain everything, but they provide a useful starting point for understanding why prices change.
What stagflation can teach us about supply shocks
Stagflation is a particularly difficult situation where inflation is high while economic growth is weak and unemployment may be rising.
The oil crisis of the 1970s is a classic example: higher oil prices increased the cost of transporting goods and running businesses, contributing to higher prices across the economy.
At the same time, businesses faced weaker conditions. If costs rise while customers spend less, businesses may reduce production, delay investment or cut jobs.
That can create a difficult cycle:
- An important input becomes more expensive
- Businesses face higher operating costs
- Prices increase
- Households reduce spending
- Businesses experience weaker demand
- Unemployment rises
- The economy slows
Stagflation is challenging because raising interest rates may reduce inflation by weakening demand, but can also worsen the slowdown.
Economic data doesn’t always tell us what’s happening today
Economic data often describes the past rather than the present. For instance, Australian GDP figures arrive around 65 days after the end of the quarter. By then, households and businesses may already be experiencing different conditions.
Economists therefore also look at indicators such as:
- Job advertisements
- Consumer confidence
- Retail spending
- Credit card activity
- Business surveys
- Building approvals
- Housing activity
- Employment data
No single indicator provides a perfect answer, but together they can offer a more current view.
This is why economic headlines can seem contradictory. Different data sets capture different parts of a large and uneven economy.
Expectations can change the outcome
Evan uses the example of farmers stockpiling diesel because they expected fuel prices to rise.
Their expectations changed their behaviour. Buying more diesel in advance increased demand, which could contribute to higher prices and make the expected rise more likely.
The same idea applies elsewhere. If households expect prices to rise, they may bring forward purchases. If businesses expect demand to weaken, they may reduce investment or hiring. If investors expect interest rates to fall, they may change how they allocate money.
People respond to what they believe will happen, and their collective behaviour can influence what actually happens.
People aren’t perfectly rational, but they are often reasonable
Evan’s broader point is that economics isn’t really about perfectly rational people making perfectly rational decisions. People make choices based on limited information, personal circumstances, emotions, habits and expectations.
They also make trade-offs. Someone might skip an overseas holiday but continue buying coffee from their local cafe. Another person might delay replacing their car but keep paying for sport or meals out.
These decisions may not look perfectly rational from the outside, but they can be reasonable given someone’s priorities and circumstances.
When money is tight, people don’t necessarily stop spending altogether. They change what they spend on, where they shop and how often they make larger purchases. When millions of people make similar adjustments, those choices become visible in economic data.
The economy is a circle, and we’re all part of it
The central theme of the episode is that the economy isn’t some abstract force happening somewhere else. It is a circle, and we’re all part of it.
Households provide labour and receive income, which they use to buy goods and services. Businesses use revenue to pay workers and suppliers. Governments collect taxes and spend money on services and infrastructure. These activities are constantly influencing one another.
Understanding the economy doesn’t require memorising every definition or predicting exactly what will happen next. Instead, it starts with recognising the connections between everyday behaviour and broader economic outcomes.
When the next headline mentions GDP, inflation, employment or consumer confidence, ask:
- What is changing?
- Who is affected?
- Is this a supply problem, a demand problem or both?
- Is the data describing the present or the past?
- How might households and businesses respond?
- Could those responses make the problem better or worse?
Those questions are often more useful than searching for one explanation for everything.
If you’re keen to listen to this episode, you can do so here. You can also follow us at @getrichslowclub, and send your topic suggestions to @tashinvests and @anakresina on Instagram.
Happy investing!
Tash and Ana
