This blog post calmly examines how these three economic actors—households, businesses, and government—make choices from their respective positions, how they clash and cooperate to complete the single work that is the economy, and also organizes perspectives for reading the news.
The Work Created by Three Protagonists: The Economy
Individuals or groups participating in economic activity are called economic agents. An economy’s agents are broadly divided into three: households, businesses, and government. In modern society, living inextricably intertwined with the international economy in some form is inevitable, so sometimes the agent ‘foreign countries’ is added to the explanation.
A nation’s economy can be viewed as a single work of art created collaboratively by its three protagonists: households, businesses, and government. All three are protagonists because if any one were relegated to a supporting role, a truly complete work could not be produced. The economy only becomes a masterpiece when these three protagonists faithfully perform their respective roles—their economic actions—and smoothly exchange their lines with each other.
When foreign entities enter the picture, the story becomes somewhat more complex. Therefore, we will examine foreign factors in detail later. For now, let’s first clarify the relationships among these three most crucial protagonists. The roles and actions performed by these three entities within the economy can be understood as the plot elements forming the backbone of the work.
Understanding the Perspectives of the Three Economic Entities
While the terms “firm” and “government” are relatively familiar, the expression ‘household’ may feel somewhat unfamiliar. Sometimes, this term “household” can even hinder understanding of the economy, as it might sound like a story unrelated to oneself. Unless you’re an economist or journalist, it’s perfectly fine to understand the term ‘household’ as ‘me’, ‘my family’, or ‘people’.
Once you grasp this concept, the meaning of commonly presented diagrams or charts becomes much clearer. It’s appropriate for me or my family to think primarily from the perspective of ‘the spender’, that is, the consumer. Thinking, “If they run their business like that, that owner or company will go under…” might seem noble in its own way, but it’s not necessarily an attitude worth encouraging. Most people manage to get by in their own ways. The point we should focus on is the question: “How can I spend my money better?”
Conversely, a company, or a business, is better thought of from the perspective of the ‘earner’, that is, the seller. The question a company must grapple with is, “How can I maximize profits?” It must weigh whether selling large volumes at low prices is advantageous, or if selling fewer items at higher prices yields greater profit.
Meanwhile, the government is the entity that judges ‘what is fair’. If the sole goal becomes money, the likelihood of consumers and producers trying to deceive each other increases. The government’s role is to prevent this. It acts as the referee of economic activity, declaring, “In this case, it is right for you to yield.” However, if the government overemphasizes fairness alone, it can dampen the motivation of economic actors who must pursue economic gain. Therefore, another crucial task for the government is to consider, “How can we ensure economic actors maintain a sustained interest in economic activity?”
For this reason, the government sets standards that allow economic actors to pursue profit without facing moral or legal condemnation. Only then can it encourage people to actively participate in economic activities. Questions like “Why can’t we live like scholars?” are matters for humanities scholars to explore. Viewing the economy solely through a humanities lens cannot fully explain reality. The desire for money must also be addressed in an appropriate manner.
Words that must be interpreted differently depending on perspective
Among the terms frequently appearing in economic articles, some words are perceived entirely differently depending on the perspective of the economic actor reading them, even though they are the same words. Let’s understand these terms from the perspectives of different economic actors. Only then can we avoid losing our bearings when reading long and complex economic articles.
First, consider salary.
What level of salary is desirable? If you think, “The higher, the better!”, you are likely in the position of receiving wages. Conversely, if you feel, “Why is the minimum wage so high?”, you are probably in the position of a company paying wages. For wage laborers, or salaried workers, wages are income, so higher is better. Conversely, for companies, wages are a cost, so as wages rise, the burden inevitably increases. The reason debates over the minimum wage persist is precisely because each party’s position and perspective differ.
Price is another term that looks entirely different depending on one’s standpoint. Should prices be low, or should they be high? From the consumer’s perspective, the natural answer is “Cheaper is better.” From the producer’s perspective, the response is “Prices need to be raised.” Here, it’s important to note the difference in phrasing. Consumers, as the payers, say “the price is cheap” or “the price is expensive.” Conversely, producers, as the recipients of payment, often use expressions like “the price is low” or “the price is high.”
The term “inflation” primarily appears in government-led articles. This is because the government is the entity managing inflation rates. In consumer-focused articles, expressions like “perceived inflation” or “basket of goods prices” are generally used, and sentences containing these terms often conclude with complaints like “it’s so high it’s killing me.” In discussions about prices, companies often appear as the villains.
Consider the term “jobs.” Regarding this issue, households—meaning me or my family—focus on employment. In contrast, companies show little interest in employment itself, focusing only on hiring. The government uses employment and hiring interchangeably. For example, it pressures companies to increase hiring to boost youth employment rates.
When interest rates are discussed, households and companies often find common ground. Interest rates become problematic mainly when loan rates rise, increasing the interest owed. Of course, those with substantial savings feel satisfaction when rates rise, as their interest income increases. Nevertheless, news coverage during rate hikes usually focuses on the burden on borrowers.
You don’t need to memorize everything discussed so far. Just remember that the three main economic actors are interconnected, sometimes aligning and sometimes opposing each other. In economic matters, there is no such thing as an ‘absolute villain’. Even within the same situation, different positions and circumstances coexist. Keep this in mind and interpret the economy according to your own position. Then, based on your position, decide for yourself how to act going forward and put it into practice.
To understand the economy, get familiar with ‘indices’ instead of relying on ‘feelings’
People often apply highly personal criteria when discussing whether the economy is good or bad. To back up statements like “The economy is really bad these days,” they cite reasons like no customers, business being slow, the mood being down, the company entering emergency management mode, or being told to cut costs. These explanations are mostly ‘feelings’ rather than ‘evidence’.
It’s somewhat better when people mention concrete performance metrics, like “because the exchange rate rose,” “exports plummeted,” or “stock prices skyrocketed.”
The government doesn’t diagnose the economy or respond to problems based on feelings. Some news outlets directly quote expressions used by ordinary people to vividly convey the atmosphere on the ground. However, far more news explains things based on data, excluding emotion, and this approach is more rational.
An index is precisely what aggregates various data, converts it into numerical values according to specific criteria, and makes the meaning of those numbers immediately comprehensible. Typically, an index at a specific point in time is set to 100, and subsequent values are evaluated relative to this baseline. Generally, values above 100 are interpreted as positive trends, while those below 100 indicate negative trends.
One of the key indices prioritized by the South Korean government is the Composite Economic Index. Compiled and published by Statistics Korea, this widely used policy indicator is broadly divided into leading, coincident, and lagging indices. The leading index, as the name suggests, is the ‘number that moves first’. It consists of indicators that can predict future conditions, such as the job openings-to-job seekers ratio. An increase in this ratio means fewer employers are seeking workers while more people are looking for jobs. This suggests the economy is gradually worsening. Therefore, leading indicators, including the job openings-to-job seekers ratio, can gauge the future direction of the economy.
The coincident index is a ‘number that moves with the present’. For example, the retail sales index, which shows how much is being sold in the market, is an important benchmark for judging the current economic situation.
The lagging index is used to look back and confirm the economic conditions that have already passed. Household consumption expenditure is an indicator showing how much households have spent, reflecting the results of economic activities that have already been completed. If the household consumption expenditure index has decreased compared to before, it can be interpreted that the economy was not doing well during that period.
In actual news, indices related to prices or the stock market appear much more frequently than the composite economic index. We’ll look into that later; for now, just remember that to understand the economy, you need to become familiar with these indices. There’s no need to strain to grasp the meaning of every index at once. Start by learning the most frequently seen ones one by one, and as you repeatedly mull over their significance, the flow of the economy will naturally begin to emerge. Of course, even if you thoroughly understand every index, you cannot predict economic changes with 100% accuracy. Let’s not forget we are not gods.
