Pathology of the Crisis

Abstract

Economies are large and complex organizational structures comprising three basic institutions, viz., households, businesses and corporates, and governments, which are the building blocks of all economic activities. They are all involved in economic activities such as production, consumption, saving, and investment. These four basic economic parameters that determine the behavior of any economy and its dynamics generate income and expenditure. Imports and exports are basically constituents of these parameters. All economies are targeted toward production and its growth. Economic growth measured in annual increase in gross domestic product (GDP) is the goal all economies aspire to attain. All economies are targeted and oriented toward achieving higher GDP growth. The emerging economies like China and India are aspiring to achieve 10% annual growth, while mature economies like the USA, Europe, and Japan are struggling to keep out of negative growth territory and targeting to achieve growth in the range of 2–4%. Although economic policies of every nation are aimed toward higher production, the end of all economic activity is consumption. It is this economic parameter, the consumption that drives production. The other crucial parameter that drives economic growth is investment. In an open economy where foreign trade is relatively important segment of the economy, exports also trigger and sustain growth. The classic example of this growth was in Japan and Germany, which are both export-driven economies, in the postwar period until the 1980s. In China and other smaller Asian Tigers, both exports and foreign investments fuelled economic miracle since the late 1980s.