Fundamental economic notions
Economics studies how various resources are best allocated to produce the highest standard of living and quality of life. The resources that go into creation of goods and services are called the factors of production. They include natural resources, human resourcesand capital. Each factor of production has a place in the economic system and each has a particular function.
Our country is rich in natural resources that include land, water, mineral resources and climate. The price paid for the use of land is called rent. Rent becomes income to the owner of the land.
Physical and mental efforts that people put into creation of goods and services are called labour orhuman resources. The price paid for the use of labour is called wages or salary. Closely associated with labour is the concept of entrepreneurship, meaning the managerial or organizational skills used by firms to produce goods and services. The reward to entrepreneurs for the risks, innovative ideas and efforts that they have put into the business are profits. Profit is whatever remains after the owners of land, labour and capital received their payments.
Capital is something created by people to produce goods and services. A factory, tools and equipment are capital resources. The term ‘capital’ is often used by business people to refer to money they can use to buy factories, machinery and other productive resources. Payment for the use of someone else’s money or capital is called interest.
Human wants are unlimited while resources needed to satisfy these wants are scarce or limited. Thus every society has to address the main economic problems: What goods and services to produce? How to produce them? Whom to produce them for? The way in which a society deals with these problems is known as its economic system.
UNIT 3. Economic systems
An economic system is the way in which a society uses its available scarce resources (natural resources, labour resources and capital resources) to satisfy the demands of its citizens for goods and services. The more goods and services are produced from the country’s limited resources the higher the standard of living of its citizens. Economists distinguish between three main economic systems: planned, market and mixed.
Planned economy is sometimes called ‘command’ economy because the state (government) commands the use of resources that go into the production of goods and services as it owns factories, land and natural resources. Planned economy involves central planning and direction, when the government takes all decisions concerning production and consumption.
Market economy is the system based on private enterprise with private ownership of the means of production and private supplies of capital. The government plays no role in the management of the economy. In a market economy it is the consumers who decide what is to be produced. A cornerstone of the market economy is quick response to changing demands. Private entrepreneurs accept the risks of introducing new products and new production processes. Thus innovation is the engine of long-term growth of living standards. In practice most countries have what is called a mixed economic system – a combination of free markets plus government allocation of resources. Mixed economy contains elements of both market and planned economies. In a mixed economy the government and the private sector interact in solving economic problems. The state controls the output through taxation and intervenes to supply essential goods and services such as health, education and defense, while private businesses provide consumers with a wide range of different products and services.
UNIT 4. WHAT IS BUSINESS?
Business is a word that is commonly used in many different languages Today this broad term can be applied to different kinds of human activity and many kinds of enterprise.
All activities traditionally related to business can be grouped under three headings: production, distribution and sales. The first group of activities, production, concerns the changing of materials into products or the creation of services. Some businesses produce what is called tangible goods, such as cars, clothes, foodstuffs. Others produce intangible goods or services, which are activities that people perform for other people. Such activities as insurance, banking operations or health protection are referred to as services.
The second group of activities is known as distribution. Distributionis the process of getting goods from the producer to the consumer in the quickest and most efficient way
Third is the sale of goods and services. Sale is the exchange of a good or service for money. Money that a company receives from the sale of its products is called revenues. If the company is a success its revenues not only cover its expenses, but also contain some surplus. This surplus is commonly defined as profit or the difference between the company’s revenues and expenses. Thus, creating an economic surplus is the primary goal of any business activity.
Just as important as profits are social and ethical responsibilities that companies bear in their dealing with employees, consumers, suppliers, competitors, government and the society. Business, then, can be defined as all profit-seeking activities and enterprises that provide the means through which the society’s standard of living improves.
UNIT 11 INTERNATIONAL TRADE
International trade
The history of trade is largely the history of civilization. First it was what we call barter, a simple exchange of goods. International trade has now developed into an intricate mechanism of transactions. Today trade is not confined to visible exports and imports of goods but also includes invisible items like services, transportation, insurance, expenditure by tourists, etc.
Countries usually specialize in certain products and commercial activities. This specialization depends on such factors as differences in climate, natural resources, labour force skills and technology. These special conditions give one country an advantage over others in producing certain goods or services.
A country has absolute advantage if it produces the goods that no other nation is able to produce. A country has a comparative advantage in a certain product if it is produced more efficiently and at lower cost. Nations usually specialize in those goods and services in which they have the greatest comparative advantage and exchange their surplus for things they need and want but do not produce themselves.
When countries engage in international trade they express their agreement to specialize in order to produce more of certain goods or services. Countries that trade can together produce more goods and services than they could in the absence of trade.
The balance of trade indicates the difference between the total value of a country’s imports and exports of visible items (goods). The balance of trade is an important part of the balance of payments, which also includes invisible items and capital transfers from one country to another. If the total value of the goods imported (visibles) is higher than that of the goods exported, the balance of trade is bad (adverse or unfavourable), that is to say it shows a deficit. If the reverse case is true, the balance of trade is good or favourable and it shows a surplus. Invisible items can cover the deficit of the balance of trade and as a result the country will have a favourable balance of payments.
What a country can achieve in international trade is shown by the terms of trade. The terms of trade are the rate at which a country’s exports are exchanged for its imports. Terms are said to be good or favourable to a country when the prices of its exports are high in relation to the prices of its imports, and a bad or unfavourable when the reverse is the case. On a global scale imports must equal exports, since everygood exported by one country must be imported by another.
