New on FinoLib · Volume I: Global Economy
I have just published a new article on FinoLib, my free finance education library: Inflation, Interest Rates and the Business Cycle Explained. It is part of Volume I: Global Economy. Below is a summary of the topic in plain, expert language, so you can follow the idea even before you open the full article.
1.9 Interest Rates — The Price of Borrowing Money
The idea in plain words
An interest rate is the price of borrowing. A policy decision reaches the economy in steps: first the federal funds rate, then short-term rates within days, then long-term rates and asset prices, and finally spending and inflation. Long-term rates follow expectations, so a mortgage rate can move the wrong way after a cut.
Key points
■One percentage point on a $300,000, 30-year mortgage costs $197.26 a month, or about $71,012 over the life of the loan.
■After the Fed cut by half a point on September 18, 2024, the 10-year yield rose from 3.70% to 4.79% by January 13, 2025, and the average 30-year mortgage rate from 6.09% to 7.04%.
A closer look
An interest rate is the cost of borrowing money, expressed as a percentage of the amount borrowed per year. If you borrow $10,000 at 8% annual interest, you owe 10,000 × 0.08 = $800 in interest after one year. Interest rates are among the most powerful levers in all of economics — they ripple into almost every financial decision made by households, businesses, and governments.
A worked example
Worked Example: What One Percentage Point Does to a Mortgage
A $300,000, 30-year fixed-rate mortgage is repaid in equal monthly payments: payment = P × i ÷ (1 − (1 + i)^−n), where P is the loan, i the annual rate ÷ 12 and n = 360 months. Rate Substitution Monthly payment 6% 300,000 × 0.005 ÷ (1 − 1.005^−360) $1,798.65 7% 300,000 × 0.0058333 ÷ (1 − 1.0058333^−360) $1,995.91 One percentage point costs $1,995.91 − $1,798.65 = $197.26 a month, or $197.26 × 360 = about $71,012 over the life of the loan. The same formula produces an Indian EMI.
1.10 Economic Cycles — Why Economies Move in Waves
The idea in plain words
Economies move through expansion, peak, recession and trough. Credit drives these short cycles, a slower debt cycle sits above them, and only productivity raises living standards permanently. The rules of thumb in this part hold most of the time but bend in documented cases.
Key points
■By NBER’s count, US expansions since 1945 have averaged about 64 months and recessions about 10.
■The expansion from June 2009 to February 2020, at 128 months, is the longest on record.
A closer look
Economies do not grow in a straight line. They move in repeating patterns called the business cycle: periods of expansion (growth) followed by peaks, recessions (contraction), and troughs, before expansion begins again. These cycles are normal — no economy in history has grown continuously without interruption. By NBER’s count, US expansions since 1945 have averaged about 64 months and recessions about 10; the expansion from June 2009 to February 2020, at 128 months, is the longest on record.
1.11 Globalization, Supply Chains, and International Institutions
The idea in plain words
Globalization is the growing connection of the world’s economies through trade, investment, technology, migration and communications. A single smartphone shows how far it goes: designed in one country, built from parts made in several others, assembled somewhere else and sold around the world.
Key points
■A modern smartphone might be designed in the United States, contain chips made in Taiwan and screens made in South Korea, be assembled in China and be sold in India.
■A supply chain is the complete sequence of steps, companies and countries involved in producing and delivering a product.
A closer look
Globalization is the increasing interconnection of the world’s economies through trade, investment, technology, migration, and communications. A supply chain is the complete sequence of steps, companies, and countries involved in producing and delivering a product. A modern smartphone might be designed in the United States, contain chips manufactured in Taiwan, with screens made in South Korea, assembled in China, distributed through a logistics network spanning multiple continents, and sold in India. That single device is a product of globalization.
A worked example
Worked Example — Gross Exports Against Value Added (Illustrative)
A phone sells for $800. It is assembled in one country from $780 of imported parts, and the assembler adds $20 of labor and profit. Measure Calculation Result Gross exports recorded The assembler ships a finished $800 phone $800 Value the assembler adds $800 − $780 of imported parts $20 Domestic share of the export $20 ÷ $800 2.5% Result: the exporter’s trade surplus on this phone looks like $800 but its income from it is $20; the economies that made the $780 of parts earn the rest. This is why economists measure trade in value added.
What the full article covers
In the full article I take you through these sections:
■1.9 Interest Rates — The Price of Borrowing Money
■1.10 Economic Cycles — Why Economies Move in Waves
■1.11 Globalization, Supply Chains, and International Institutions
It includes worked examples, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume I: Global Economy
Read the full article on FinoLib
The complete article, Inflation, Interest Rates and the Business Cycle Explained, with every worked example, diagram, quiz and source, is free to read in Volume I, Global Economy on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance