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The economy, as many of you will have noticed recently, has not been in perfect shape. The reasons behind this are actually fairly simple when looked at from a macroeconomic perspective, and I aim to explain simply why the problems that the eUK is currently having have arisen.

Price Rises
As the laws of supply and demand state, as there is a greater demand for a resource, the price for that resource will rise. Prices will also rise in the event that that resource becomes scarce, or if there are fears over that resource becoming scarce. In the eUK, prices have been consistently rising, with the price rises that have affected most people coming in the food markets. So why is this?

Firstly, raw materials have been in ever greater demand, with the companies producing Raw materials being put under ever greater pressure to produce more and more raw materials in order to feed and, in recent times, arm the masses. The eUK, however, is not placed to meet such demand. Risk averse investors have not been willing to explore for new raw materials, preferring instead to start up companies in regions where raw materials were already present. This presents a major issue for the eUK, as most regions have only got grain, with the productivity of that resource being medium. Only some regions have raw materials other than these, meaning that most raw materials have to be imported.

There has been even more pressure on Raw Materials companies, however. As their workers became more skilled, they expected greater salaries. With workers not being as productive as they would be if the company was better situated, these companies had to put their prices up in order to make any profit. This in turn affected the companies who needed these raw materials in order to produce their own goods. These companies were now being severely squeezed. They had to buy the increasingly expensive raw materials in order to produce goods whilst their workers demanded ever higher salaries whilst demand for their products went up. Prices had to go up in order to make the company profitable. In fact, the price rises were also unconciously an attempt to slow the demand, although this was not actually a priority at the time. Gradually, the price rises slowed, with the higher quality industries slowing first, followed by the lower quality industries, where demand was highest.

Each individual industry was affected in a different way, however, by both government and individuals, up until the war was declared. It is important to look at the specifics of each industry and why it is in the shape it is currently in. It is important to remember, however, that only the industries with the greatest demand will be hit by supply and demand.

Food is the industry hit hardest by price rises. The sectors hit hardest by inflationary pressures were Q1 and Q2. The eUK's population had been growing at a very fast rate for a long time, and this had created a lot of demand amongst new players for cheap, low quality food, whilst more members matured and began buying up the slightly more expensive Q2 food. The combination of high demand, high raw materials prices and higher wage bills forced companies to put up their prices. The prices remained relatively stable for a while as the companies began to be capable of buying up raw materials once again.

That was how it remained, until the eUK declared war on France. It was then that price rises began to take serious effect. The reason for this is simple - fear. However irrational it was, the war brought about fear that the supply of raw materials. That forced up prices. Q1 food prices soared to twice their pre-war levels the day after war was declared. The realisation that war was not going to destroy the raw materials industry then took hold, causing prices to, albeit gradually, go back down again. Despite this, prices still haven't recovered to their pre-war levels.

The war caused more than just food prices to rocket. Weapons, which had not previously been needed, soared in price too. Understandably, perhaps, given that they were in far greater demand due to the war. But it was more than just this. Here, too, was the fear of a shortage of raw materials, perhaps more understandably due to the eUK having to import almost all of its iron. Prices rose not just because of the laws of supply and demand, they rose in response to them. Prices were again unconciously being used as a way of taming the demand for weapons. This was an attempt at applying peacetime economics to a time of war. This was not intentionally profiteering, but profiteering was still what it was.

In the gift industry, the government inadvertantley aided inflationary pressures. As the NHS began to buy up more and more gifts to meet the demands placed upon them, the laws of supply and demand came into force. As more and more gifts were bought, prices increased. The demand that was placed on companies meant that they had to buy yet more raw materials, in this case diamonds. Once again, inflation took hold, forcing up prices of both diamonds and the gifts themselves.

Housing fared much the same as the other industries, however it did not fare so badly. The reason for this was simple - whilst demand for food was always going to be high, and the demand for weapons was boosted by conflict, the demand for housing less intense. Houses were a one time buy. They were only bought once, and new members often didnt buy their own houses, and they were not required to the same extent as food. The laws of supply and demand applied to the housing sector, however not to the same extent.

Other sectors of the economy were not so wracked by fear or by inflation. Hospitals and Defense Systems, as just one example, were more specialised. They required government investment to purchase them, so the laws of supply and demand did not apply to these sectors.

In my next article I will explain how a lack of confidence has wracked to money market, combining with inflation to cause chaos amongst the monetary markets, forcing down the GBP and making gold more expensive.