The basic principles of economics

With the tariff war, the world economy is in turmoil, and it is hard to understand what is happening without knowing the basic principles of economics. I will try to describe them as simply as possible, along with a short economic glossary. A better understanding also helps you make the best decisions for your assets.

Principles of economics: the mechanisms

• The law of supply and demand : the higher the demand for a product or service, the higher the price. The price will be set at the point of equilibrium between supply and demand.
• Rarity: everything that’s rare is expensive.
• Interest rate : the interest rate is influenced by the central bank, which sets the key rate at which other banks can borrow from it. The higher the rate, the less consumers borrow to buy, and the more prices fall. When inflation is too high, the central bank raises the rate. Conversely, when growth is weak or nil, the central bank lowers its interest rate to make borrowing, and therefore buying, easier, and thus revive the economy.
• Government budget : it is a tool that complements the interest rate for controlling the economy. A deficit budget distributes money to consumers, who buy and therefore revive the economy, but with the risk of pushing prices up. Money spent is not lost: it goes into someone else’s pocket. A government budget deficit is financed by debt or by printing money. A conservative policy prefers a balanced budget or a surplus, as a family would, so as not to push debt into the future. Others, on the contrary, believe that a state can run a deficit and that economic growth will reduce the relative weight of the debt from that deficit in the future.
• Public debt is the result of deficits. One school of thought advocates paying off debt as quickly as possible to avoid paying interest and mortgaging the future. The other school advocates paying it off as late as possible, because despite the interest rate, the economy will grow faster than the debt, and the latter will see its relative weight diminish over the years.
• The trade balance is the difference between imports and exports of goods. A large trade surplus lets a country build up large currency reserves, but it can also contribute to domestic inflation, since most of the production is consumed abroad.
• The balance of payments is an accounting statement, always balanced, that represents all exchanges of goods and services with other countries.
• Currency reserves are linked to a country’s trade surplus. Large currency reserves indicate a country that exports a lot of goods or raw materials; they can also point to a country that, like Russia in September 2022, has difficulty buying what it wants abroad because of economic sanctions.
• Treasury bonds are issued by governments to finance government borrowing, and therefore the debt if there is one. They are fixed-rate, long-term securities of 2, 5 or even 10 years. The investment is safer than stocks, because they are guaranteed by the government. Their interest rate is low when everyone wants them, and high to stimulate demand when there are more sellers than buyers.
• The April 2025 stock market crisis in the United States was linked to the tariffs imposed by Donald Trump. One of the hypotheses put forward by economists involves Treasury bond interest rates. U.S. Treasury bonds were sold off on the market for three reasons: the Chinese wanted to punish the Americans, investors wanted to recover their stock market losses by selling gold and Treasury bonds, and the market lost confidence in the U.S. economy and got rid of its securities. To finance its borrowing and the debt, the U.S. Treasury therefore had to raise its interest rates to make its bonds attractive. But the rate increase considerably increased the debt, and Donald Trump had to back down in the face of the danger of uncontrolled debt growth.
• The stock market rises in times of certainty and falls in times of uncertainty. Many neophytes are surprised to see it fall following the announcement of good news, the reason being that the markets have anticipated this news and some fund holders are starting to sell when they believe the market is at its peak.
• Gold is a safe-haven asset that generally rises when the stock market falls, and vice versa.
• Free trade, or the free movement of goods, was theorized by David Ricardo in the 18th century. It is considered the best economic system for the economies of all the countries that practise it. However, in the event of war, a country may find itself strategically dependent for certain goods and services. Most countries therefore make a few tariff exceptions to protect their strategic sectors, but this has a cost.
• Protectionism is the opposite of free trade and consists of imposing customs duties on imported goods. Several countries have successfully used protectionism to develop their economy, sheltered from competition, for a set period. However, it creates inflation, and their economies later developed thanks to free trade. Protectionism requires a minimum of self-sufficiency, which can lead to wars. Outside periods of industrial protection or international tension, protectionism is generally defended by unions and the left to protect workers, while the right and businesses tend to prefer economic liberalism, which is more profitable.
• Self-sufficiency (autarky) is a country’s ability to provide for itself without depending on other countries. Self-sufficiency is only truly relevant in a war without allies, that is, against all other countries. It often requires an imperialist policy of seizing territory by force in order to obtain the resources needed for total independence.
• Import barriers take several forms: import duties, export taxes, import or export quotas, standards and red tape.
• Full employment is considered reached with an irreducible unemployment rate of 3 to 5%. Full employment is good because it maximizes production capacity, but if unemployment is too low, growth is limited by the labour shortage.
• Fiscalists believe that the state must intervene in the economy and that the most effective way to do so is through budget spending, which controls the money supply in circulation. This view currently corresponds to a left-wing policy; its theorist is the English economist John Maynard Keynes.
• Monetarists prefer to limit state intervention to controlling interest rates in order to slow down or boost growth. This is the school of the American economist Milton Friedman.
• The modern market economy rejects theories of state control of the economy and prefers the fiscalists’ view.
• Reaganomics describes Ronald Reagan’s economic policy and is considered a textbook case of economic success. According to Milton Friedman, Reaganomics rests on four pillars: less government spending, lower taxes, less inflation and less regulation.
• Crises are inevitable and cyclical. If you want to be well protected, you shouldn’t put all your eggs in one basket: equities for the good times, gold for protection, real estate, because in the long term it always goes up, and cash to take advantage of buying opportunities during the crisis. The secret? All the specialists will tell you: buy when it’s cheap and sell when it’s expensive!

Structural solutions for the economy

A state can, of course, play on the various monetary and budgetary mechanisms described above, but the safest course is to build a solid economy by optimizing business efficiency.

• Les stratégies de domination de marché sont divisées en trois
  • China’s current strategy is cost domination, which enables it to offer very low, competitive prices, thanks to a very cheap labor force and virtually no social protection.
  • Quality dominance through quality improvement and problem-solving programs, as in Germany and Japan in the automotive and electronics sectors.
  • Dominance through marketing, as the Americans know so well how to do throughout the world
• There are many ways of implementing these strategies, but it’s all down to people, their skills and their training. Countries like Germany, Japan and the United States invest heavily in employee training to make a difference.

Dictionnaire économique

• Actions
  • Securities representing a portion of a company’s capital that can be bought or sold, and which entitle the holder to a vote at a shareholders’ meeting. Owning shares allows you to earn a share of the company’s profits, but also to pay for any losses.
• Amortization
  • Assessment of the loss in value of an asset over a period of time.
• Self-financing
  • Self-financing for an individual, a company or an association, without having to ask for money from a bank or outside parties. Self-financing means not depending on other entities
• Comparative advantage
  • Each country has its own advantages when it comes to producing certain products, demonstrating that international trade is good for everyone.
• Competitive advantage
  • It’s the difference that enables companies to increase their sales thanks to the advantages they offer over the competition.
• Balance of trade
  • C’est la différence entre les importations et les exportations. Quand on exporte plus qu’on importe, la balance est excédentaire, déficitaire dans le cas contraire. Si la balance est largement excédentaire sur plusieurs années les pays vont se constituer des réserves monétaires, dans le cas contraire le pays va s’endetter.
• Balance of payments
  • Est un document comptable qui représente tous les flux de produits, services et financiers avec l’étranger.
• Bank
  • Entreprise qui fait le commerce de l’argent et qui est contrôlée par la banque centrale et une législation permettant d’éviter que les clients ne se fassent pas léser comme cela a été le cas par le passé
• Central bank
  • The state bank controls the other banks, organizes refinancing between banks and sets interest rates.
• Profit
  • It’s the money a company earns after deducting expenses, otherwise it’s a loss.
• Bons du Trésor
  • Sont des titres à taux fixe et à long terme émis par les gouvernements pour financer les emprunts de l’état et donc la dette s’il y en a une. Plus leur taux d’intérêt est important, plus l’état va voir sa dette augmenter
• Stock exchange
  • The place where buyers and sellers exchange goods, shares and services. Supply and demand determine the price.
• Budget
  • A country’s budget is the sum total of its expenditure and revenue. When revenue exceeds expenditure, the country has a surplus; when it doesn’t, it has a deficit.
• Speculative bubble
  • Sharp rise in the price of shares or certain goods and services linked to strong demand and not to the real value of these goods. There’s a limit to everything: when the rise stops, some start selling, others follow, the bubble bursts and prices collapse.
• Unemployment
  • The unemployment rate is the percentage of the working population not in employment. Unemployment that’s too high (above 7%) is bad, because part of the population is working to pay the unemployment benefits of others. Unemployment that’s too low is also bad, because companies find it hard to hire. The incompressible unemployment rate is 3 or 4%, due to illness and job changes.
• Cartel
  • A limited number of companies agree to artificially raise prices. Most countries ban them.
• Sales figures
  • A company’s sales are its total sales of goods and services, less taxes. A company generally tries to increase its sales and thus its profits.
• Competition
  • In a market economy, companies compete to sell their goods and services, which helps to improve quality and lower prices. This is the opposite of monopolies or trusts, where a few companies collude to artificially raise prices. Liberal economies fight against trusts and monopolies that are unfavorable to consumers.
• Pure and perfect competition
  • Pure and perfect competition only occurs when products are absolutely identical and sold under the same conditions. This is rare, but it can happen with raw materials such as oil, minerals and certain food products.
• Consumption
  • Consumption of goods and services by households and businesses is the engine of growth. This consumption is linked to confidence in the future, which is often measured by consumer and business surveys.
• Economic crisis
  • An economic crisis can be seen in a number of ways, all of which can be combined: halted growth, inflation, lack of confidence in the future, halted investment, rising interest rates.
• Growth
  • A country’s growth is measured by the increase in the Gross Domestic Product of goods and services. Growth is driven by increased consumption, investment in production assets and modernization.
• Budget deficit
  • A budget deficit occurs when the state spends more than it earns. The deficit is financed by borrowing to create new money.
• Deflation
  • Prices are falling because demand is falling, which is a short-term benefit for consumers, but the incomes of producers and retailers are also falling, which is negative and causes consumers to lose confidence.
• Sustainable development
  • Development that respects resources and people, present and future generations. But the notion is limited: what is sustainable?
• Request
  • Corresponds to overall demand for products and services. Confronted with supply, it will give the equilibrium price.
• Public debt
  • All state debt
• Dow Jones
  • Index of the thirty largest stocks on the New York Stock Exchange. We prefer the S&P 500 (top 500 companies)
• Market economy
  • An economy based on the laws of exchange both within the country and internationally, as opposed to the now outmoded communist economy.
• Savings
  • The part of income not used for consumption. A minimum cushion of savings is necessary to get through the ups and downs of life, but saving too much without consuming is not good for the economy.
• Welfare state
  • Is a state that collects taxes to pay out to citizens in the form of social aid, unemployment insurance and a minimum income for all. A state that redistributes nothing doesn’t help individuals in times of hardship, but a state that redistributes too much to everyone doesn’t encourage people to work.
• Export
  • Sont les ventes de produits et de services à l’extérieur du pays. Elles montrent l’attractivité des produits du pays à l’extérieur. Il y a 3 façons de s’imposer pour augmenter les ventes à l’étranger: les prix (ex : Chine), la qualité (ex : Allemagne) le marketing (ex : É.-U.). Mais il faut surtout que le directeur export soit parfaitement formé aux techniques de vente à l’exportation.
• Géopolitique
  • Méthode d’étude des effets de la géographie sur la politique internationale afin de comprendre ou de prédire le comportement des pays. La géopolitique inclut les données démographiques, topographiques, ressources naturelles, climatiques pouvant amener certains pays à désirer s’emparer d’un territoire. Au niveau économique la géopolitique doit être prise en compte par les pays qui désirent réaliser une politique isolationniste ou vivre en autarcie, c’est à dire se suffire à eux-mêmes sans avoir besoin d’autres pays.
• Human Development Index (HDI)
  • Created by the United Nations to provide a finer measure of people’s well-being, it incorporates not only GDP, but also life expectancy and literacy rates.
• Inflation
  • This is the rate of price increase, calculated using an index covering a number of consumer goods.
• Investment
  • The money we spend to create the means that will provide us with income: means of production, apartments, land, etc. Investment drives growth.
• John Maynard Keynes
  • Économiste anglais qui préconise l’intervention de l’état dans l’économie par le budget. C’est une école très contestée par les partisans du libéralisme économique et les monétaristes de Milton Friedman.
• Economic liberalism
  • An economy based on the laws of the market, with as little interference as possible from the state. The state often has laudable objectives in intervening, but in the long term this only makes things worse. For example, the state invests in the creation of social housing, but that’s not its role and a company would do it better. The state must therefore play a minimum economic role, looking after the police, the army and providing a minimum social safety net.
• Free trade
  • Marché sans barrière douanière ou réglementaire entre les pays permettant une libre concurrence. Il se crée généralement des zones de libre-échange, c’est préférable au développement global de l’économie de la zone, mais ne permettent pas à certains pays de protéger certains secteurs économiques,  sauf s’il y a des exceptions tarifaires pour protéger certaines industries momentanément.
• Money supply
  • This is the mass of money in circulation in its various guises: currency, banknotes, deposits, accounts and foreign exchange.
• Households
  • The number of people per family is currently declining, but the number of households is increasing in most countries. The household unit is ideal for economic studies.
• Milton Friedman
  • Économiste américain préconisant de minimiser le contrôle de l’état par le gouvernement et limiter l’intervention à la définition des taux d’intérêt, c’est ce que l’on voit aujourd’hui appliqué dans les économies libérales.
• Capital loss
  • This is when there’s a negative difference between the purchase price and the selling price, so you’ve sold at a loss.
• Globalization
  • Most goods are now traded internationally, whereas in the past they were limited to a single village or country. In Roman and Greek times, international trade already existed, but now it’s much easier thanks to new means of communication.
• Monopoly
  • When an organization is the only one selling a product or service. This is the opposite of a competitive situation, and contributes to higher prices for the consumer.
• Tax niche
  • A limited economic sector in which there has been an oversight in the law that allows an individual or company to reduce or not pay taxes at all.
• Obligation
  • This is a loan, usually medium- or long-term, whose value does not fluctuate positively or negatively like equities.
• Offer
  • All the products and services offered in a country. When demand is lower, prices tend to fall; when demand is higher, prices rise.
• Oligopole
  • Few companies sell identical products to the general public. There is no cartel, but the lack of competition contributes to higher prices.
• Plein emploi
  • Au début on considérait qu’il était atteint avec 0% de taux de chômage, maintenant on estime qu’il existe un taux incompressible de 3 à 5% de personnes non employées à cause de plusieurs raisons : maladie, changement professionnel, etc.
• Added value
  • This is the positive difference between the purchase price and the selling price. The capital gain is only realized after the sale, otherwise it is potential.
• Workforce
  • Population working or of working age, between 15 and 64
• Productivity
  • Production efficiency is measured by comparing the value of goods produced with the value of the means of production.
• Gross domestic product (GDP)
  • Le PIB (GDP en anglais) représente toute la création de richesse dans le pays. Il est égal au montant de toutes les valeurs de biens et services produits par les entreprises nationales, étrangères, et administrations, situées dans le pays. Il ne prend pas en compte le bien-être de la population, le travail le travail au noir, les trafics interdits. Le PIB permet de mesurer la croissance interne de l’économie.
  • GDP = Final consumption expenditure + Gross capital formation + Exports − Imports
  • Example: in the first quarter of 2025, U.S. GDP fell by 0.3%, not because domestic production had dropped, but because fear of Donald Trump’s import tariffs led businesses to buy massively abroad before the duties came into force; these unusual imports therefore contributed to the drop in GDP.
• Produit National Brut (PNB)
  • PNB = PIB + revenus des entreprises en provenance de l’extérieur − paiements versés à l’extérieur.
  • It is widely used by the United States, which has many subsidiaries abroad. It is very relevant, because the subsidiaries contribute to the wealth of the United States.
• Profit
  • C’est l’écart positif entre les revenus d’une entreprise et toutes ses charges et impôts. Le bénéfice sert à rémunérer le capital. Les entreprises ont trois moyens pour augmenter leurs profits: diminuer les coûts, augmenter les prix, développer leurs ventes. La négociation fait aussi partie des compétences clés pour augmenter le profit dans une organisation.
• Protectionism
  • A state’s policy of protecting its industries through tariff and regulatory barriers.
• Recession
  • It’s the opposite of growth: the economy is shrinking. Recession is measured by GDP.
• Stagflation
  • Combinaison de décroissance ou stagnation du produit national brut et d’inflation.
• Savings rate
  • This is the ratio of total household savings to the country’s total income.
• Inflation rate
  • An increase in the price of goods and services over a given period, it is calculated on the basis of an index covering a number of basic countries. There are often discussions about which products and services should be included.
• Interest rates
  • Measures the cost of borrowed capital, and therefore remunerates the capital lent. The higher it is, the more expensive it will be to borrow, and the greater the drag on growth.
• Growth rates.
  • It measures the growth of a country’s economy by means of GDP, which is evaluated in volume terms to exclude inflation.
• Added value
  • This is value creation, calculated as the difference between the total value of a company’s production minus the value of the intermediate products required for this production.

Note that these definitions can vary from one economist to another, over time and depending on the economic situation of the moment.

Jean-Pierre Mercier

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