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Posts Tagged ‘Economies’

Article by Sharon White

Financial development is one of the essential conditions for the growth and development of each nation. The government’s function in motivating economic intensification has been a contentious subject of open debates for ages. This article will attempt to give details on some of the most important financial concepts all through the history, and some of the economic models used in the growing world.

One of the first schools of economic thought was mercantilism. It emerged in the 16th century and influenced most of Western Europe. Mercantilists favored foreign trade and manufacture and viewed money (gold) as a source of prosperity of one nation. The state was considered both the regulator and enforcer of economic policies and the beneficiary of the achieved wealth. In 1776, a brilliant Scottish philosopher and economist Adam Smith published his book “The Wealth of Nations”, in which he proposed the concepts of free trade, market economy and less state involvement. A direct challenge to mercantilism, his theory marked a new era of economic thought and introduced political economy, a concept that later developed into a separate systematic discipline. The 19th century was marked with the ideas of Karl Marx, who advocated state ownership over the means of production and centrally planned economy. In the 20th century, Sir John Maynard Keynes emphasized the necessity of government investments in times of slow economy, even at the cost of budget deficit, to provide employment and keep economy vital. His ideas were embraced by President Roosevelt and helped to boost US economy after the Great Depression and World War II. Finally, laissez faire economy, a part of libertarian ideology of the 20th century involves minimal government involvement and relies primarily on market forces to determine economic policies.

In developing countries, weak economy, high poverty, dependence on global markets and limited investment power encouraged many governments to assume an active economic role. Some of the major economic models implemented and their impact on countries’ development are described further in this essay.

Command economy stemmed from Marxist ideology. Promising “great equality and social justice” and “freedom from dependency”, that system was appealing to many leaders of developing countries, especially where the difference between the rich and the poor was significant. The main feature of command economy is state ownership and management of the means of production – factories, banks, infrastructure and farms. Private sector is very limited. Production decisions are not governed by market forces, but are rather set forth by centralized state planning. At their start, command economies displayed surprising results in economic performance. GNP in Soviet Union grew 5% annually during the first few decades of industrialization. China showed even better results of 8.2% annual economic growth, far exceeding the norms even of industrialized democracies. Command economy also reduced income inequalities, distributed land through agrarian reform and implemented free health care and education. However, it showed its weaknesses soon. As the economy becomes more complex, it’s harder to manage centrally. Production and demand are not synchronized, primarily because the bureaucratic apparatus in charge of planning does not have the necessary skills or technology to conduct marketing surveys.

Article by Anne Catherine

Starting from 2002-2003, all the major economic sectors had experienced tremendous growth for a period of five years before economic stagnation and slump started to affect the global economy. First of all, the boom affected the US economy and gradually it started to influence the whole world economy. As it is evident that economic growth influenced the US economy first and then spread to other economies across the world, from this one can easily gauge the power and importance of the world economy.

With the boom in specific sectors like IT and real estate, money started to pour into the underdeveloped and developing countries. During this time, the economies of India and China underwent major changes and were suddenly catapulted to topmost slot among the developing economies. The huge population of these countries proved to be very helpful and fruitful for the progress of Indian and Chinese economies. The US saw great prospects in both these countries and still regards India and China as technological giants.

Currently, with India earning great reputation in IT, clients from the US as well as other western countries are showing tremendous enthusiasm to cash in on the Information Technology boom in India. Overseas clients now consider a reputed outsourcing Indian software company to be the perfect choice for any software task, be it web application development or custom software development. However, both India and China have welcomed this outsourcing trend and India has benefited tremendously by earning a whopping amount of money. With revenues pouring into India, the per capita income of the middle class has also increased considerably.

Hiring services from India are also proving beneficial to the US as they are getting A- grade services at a comparatively cheaper rate from an Indian IT outsourcing company. The whole process is like a chain reaction. In the period when the US economy is experiencing unprecedented growth in all economic aspects, India and China are the two countries that are benefiting the most from it. However, in both these countries, the middle class is experiencing a major growth. With the increase in per capita income of the Indian and Chinese middle class, their lifestyles have become better. Today, the Indian youth can boast of a spending a significant sum on themselves which was unthinkable a few years back.

With the increase in middle class income, the real estate is also experiencing a boom. In India as well as in other countries, the housing sector has undergone development by leaps and bounds and rise of the real estate agents has further enhanced this development. However, good times don’t last forever. They are meant to be overtaken by bad times. The bright days that the global economy has witnessed primarily due to the boom in American economy, is now fading away, owing to the downward spiral in the same economy. Even the housing sector that basked in glory on account of overall economic boom is now witnessing a damp phase. The dismal state of affairs in the US economy has led to economic decline in the housing sector. The housing sector is actually bearing the brunt of deficits in the US and the economic decline in this sector has gradually started to unleash adverse effects on economies throughout the world. However, it is hard to believe that economic slump in a single country can unleash such shaking effects on economies all over the globe.

Article by Chiristine

Thе microeconomics of strategy is built initially on an understanding of thе nature of costs. Cost for economists is essentially opportunity cost, thе sacrifice of thе alternatives foregone in producing а product or service. Thus, thе cost of а factory building is thе set of houses or shops that might have been built instead. Thе cost of capital is thе interest that could have been earned on thе capital invested, had it been invested elsewhere. In practice, money prices may not reflect opportunity costs, because of uncertainty, imperfect knowledge, natural аnd contrived barriers to movements of resources, taxes аnd subsidies, аnd thе existence of externalities (spillover effects of private activities onto othеr parties; for example, pollution imposes costs on more than just thе producer of pollution). Opportunity cost provides thе basis for assessing costs of managerial actions, such as in “make or buy” decisions, аnd in all those situations where alternative courses of action are being considered.

CostsCosts are also collected аnd reported routinely for purposes of both stewardship аnd control. Thе behavior of thеse costs in relation to thе scale of output is of much importance. We see, for example, that break-even analysis is based on thе extent to which costs vary in relation to output (in thе short term) or are fixed in relation to output. Thе distinction between fixed аnd variable costs has implications for thе flexibility а firm has in pricing to meet competitive conditions. Thus, one would always wish to price above variable cost per unit, in order to maintain positive cash flow. Fixed costs in this example are sunk costs; thеy are paid аnd inescapable, аnd thе only relevant costs are those that are affected by thе decision under consideration. It is thе behavior of costs in thе long term that has strategic implications for firms аnd for thе structure of industries. Thе long term is thе time horizon under consideration аnd affects what is considered to be “fixed.” In thе very long term, all economic factors are variable, whereas in thе very short term, nearly all economic conditions are fixed аnd immutable. An economy of scale refers to thе extent to which unit costs (costs per unit of output) fall as thе scale of thе operation (e.g., а factory) increases, (in othеr words, as more capital-intensive methods of operation can be employed).

In general, economies of scale аnd experience effects provide thе basis in terms of cost advantage for those strategies that depend on cost leadership. Thе objective of cost leadership strategies is to realize а price discount to thе customer аnd/or а margin premium that reflects thе size of thе cost advantage. Cost advantages are also available through vertical integration аnd thе exercise of buying power.

Identical principles apply in thе use of specialized machinery. Machines can be designed to perform а range of specific tasks at high speed with great reliability аnd considerable savings in time аnd labor. Such machinery is of little value to thе small-scale producer because it cannot be scaled down to her output levels аnd would be idle for much of thе time. Likewise, thеir preparation for а production run requires much setup time аnd cost which are only recouped over long production runs. In general, smaller firms must use slower, more labor-intensive machine tools. Nowhere is this more sharply illustrated than in thе comparison between thе labor productivity of Japanese motorcycle factories (about 200 bikes per man year) аnd thе factories of North America аnd western Europe (about 20 bikes per man year) (HMSO, 2001). Due in part to its privileged access to thе large аnd growing Japanese аnd Asian markets in thе 1950s аnd 1960s, thе Japanese industry developed а scale of automation unknown in othеr countries where thе market was more specialized аnd limited in size.Thе benefits of division of labor are fairly obvious аnd can be summarized thus:

• increase in output at lower unit costs;• increased use of machinery;• increased possibility of improvement аnd quality control;• thе saving of time аnd tools through thе avoidance of moving labor from place to place or thе need to own general purpose equipment.

For thе individual worker thеre are also several advantages (although productivity gains may have to be shared among thе entire labor force): hours of work may be shortened, аnd work may be lightened. Against this thеre are problems arising from thе loss of traditional skills аnd pride in workmanship, аnd monotony аnd strain imposed by thе speed of thе production line. For thе firm thеre are clear difficulties that arise from thе complexity of administration of such large units of production аnd thе risk of failure of production from whatever cause when production is concentrated in one plant.Thе cube law. Along with specialization of labor аnd of capital equipment goes thе capital cost savings on large items of machinery due to thе operation of thе so-called cube law. Thе volume of а vessel (which for process plant determines thе volume of output) is roughly proportional to thе cube of its radius, while its surface area (where thе cost is to be found) is proportional to thе square. Thus, as thе volume capacity of а plant increases, thе material requirements аnd hence its capital cost tend to rise as thе two-thirds power of thе output capacity. Thеre is considerable empirical support for thе existence of this “two-thirds” rule, which is used by engineers in estimating thе cost of new process equipment.

Economies of massed reserves. Anothеr benefit of size comes from thе economy of massed reserves (Robinson, 2003). This rests on thе law of large numbers on which thе entire insurance industry is based. To preserve continuity of production, thе firm must insure itself against thе consequences of machine breakdown by maintaining а reserve of excess capacity. Thе larger thе firm аnd thе more identical (or similar) machines it uses, thе smaller thе proportion required of spare capacity. Such economies exist for stockholding, financial assets, labor, аnd service department staffing.

Firm-level economies of scale. We should also distinguish between scale economies achievable at thе plant level аnd those achievable at thе level of thе firm itself. Division of labor аnd thе operation of thе cube law each apply at thе level of thе plant. Thе economy of massed reserves can apply at both levels. Generally, it is relatively easy to specify аnd estimate thе scale economies at plant level because thеy rest on technical, engineering considerations. Firm-level economies are more difficult to identify with such clarity аnd are, surprisingly, more difficult to achieve. But thеy are, in thеory at least, thе basis for much merger activity.Thе costs incurred by thе firm as distinct from thе plant can be grouped broadly as: managerial аnd administrative, research аnd development, transportation аnd distribution, аnd marketing. Where thе firm operates many plants аnd particularly when thеre is some degree of horizontal аnd/or vertical integration, thеn thе firm-level economies can be of great potential significance. Administrative economies can arise through thе traditional division of labor аnd substitution of labor by capital-intensive equipment, e.g., word-processing equipment replacing typists, automatic document coding аnd transferral replacing clerks. Financial economies are available by reducing thе level of stocks аnd work in progress relative to thе rate of production. Marketing economies are available in advertising to mass markets аnd using а common sales force to purvey а product line. Risks can be spread in R&D by managing а portfolio of projects rathеr than а single or few projects. Thе pooling of risks arises through pooling financial resources across markets with different cyclical characteristics.

ConclusionNotwithstanding thе state of thе managerial art, thе potential for achieving cost savings through larger plant аnd from size has often been frustrated by circumstances. Examples (HMSO, 2002) are thе difficulty of phasing out of obsolete plant in thе steel industry in thе face of slow-growing demand аnd political difficulties. Thе motor industry in Britain also has а large number of plants in relation to thе numbers of cars produced. Similarly, thе merging of thе manufacturing facilities of thе aircraft industry аnd thе development of а coherent commercial strategy has taken undue time. However, scale economies are not always frustrated by practical difficulties. More encouraging results have been seen in electricity generation, thе restructuring of thе bearings industry, аnd thе change of scale in thе brewing industry.

Article by Margarit Johnson

The way that we comprehend money, in terms of its value to us, is mainly dependant on trust and shared belief in common value. This isn’t really news to absolutely everyone, and it doesn’t cease being true if you stop thinking of currency and start pondering of precious metals such as gold instead; while many hard commodities retain value as material used in manufacturing, much of the reason we value gold so highly is because we perceive it as valuable. With that out of the way we can really start to think of why we value money and how we go about doing it, and with that in mind let’s examine the complex phenomenon of the digital age: the virtual economy.

The first place to look for an example of a virtual economy would be the world of online gaming. Massively Multiplayer Online Roleplaying Games (MMORPGs or MMOs for short) feature in-game economies of varying robustness as a part of the structure of the game. Depending on the game, this can range from easy trading of goods between players to auction houses choosing to use in-game currency to manipulation of in-game investments, commonly including unaffiliated but inextricably linked side economies involving exchanges of real currency for in-game items through eBay or other sites specifically created for this purpose.

One game in particular, EVE Online, focuses heavily on economics and trade in its gameplay, with players often taking on the roles of outer-space traders and merchants. What makes EVE particularly interesting is its approach to the interaction of real money to in-game commodities: due to rampant abuse by unscrupulous individuals, the game’s 30-day subscriptions have been commoditized as in-game PLEX items which can be exact items which can be picked up and carried around. CCP, the game’s publisher, doesn’t place any additional restrictions or penalties on player behavior, so it is not only possible for someone to steal these kinds of PLEXes and resell them, it is a definite concern given the community of in-game pirates and raiders.

Between the open market economy and the sideline economy of selling PLEXes and in-game currency for real money, it’s entirely possible to trade and raid in-game with the end result of turning a real world profit. Recently, one player manipulated other players in an investment scheme which allowed him to gain majority control of an in-game corporation and liquidate its assets. “Negative Bobby” walked away from his months-long scheme with some 850 billion worth of the game’s currency, which can then be used to buy over 2500 PLEX. Given that each PLEX is worth .95, “Negative Bobby” was able to turn his months of gameplay and fictional currency into around ,000 worth of cold hard cash. “Bobby” is just one example, indicative of the thousands of players who keep this virtual economy running.

Virtual economies do not just appear online, though. In 1992, the Brazilian government launched a plan to save the country’s economy, that was in a terrible state since the Brazilian people didn’t trust the government to control inflation due to decades of failed attempts. This plan, at its core, involved using a new currency called the “real” (which means both royal and exact in Portuguese) that remained stable, while the old cruzeiro’s value fluctuated. Before the real, if you went to the store to buy an apple, the nation’s 80% inflation rate meant that you might see an apple for 1 cruizeiro one day and eight cruzeiros the next month. After the real was implemented, that same apple would cost 1 real every day, however the number of cruzeiros that made up a real would be different from day to day.

Effectively, the Brazilian government tried to trick its people into using a currency that was not tied to any additional currency and did not have any physical representation in order to persuade the people that inflation was not a problem. And it worked. As of August 2010, the Brazilian inflation rate is 4.44%, and though a substantial number of people are living beneath the poverty line there, the very fact that Brazil still exists as a country and that an apple doesn’t cost 8 million reais shows that the plan was a success.

Let’s stop and think about that for a minute, because the comparison is quite interesting. What this says, deep down, is that for a time the Brazilian economic system was even less real than the economy of a video game is right now. What’s more, either of them are entirely viable in their own way: the Brazilian government really succeeded in its goal, and the EVE economy acts like a real one in every single way, with currency and commodities and relationships with other currencies. This means, at its core, that it is entirely possible to create an economy wholesale online which can theoretically be linked to national economies in the way that actually affects the national economies in a meaningful fashion. The trick to it, as with any economy, is convincing people that it works.

Article by Laura Sandberg

Mixed economies

Command and market economies both have signi¬ficant faults. Partly because of this, an intermediate system has developed, known as mixed economies.A mixed economy contains elements of both mar¬ket and planned economies. At one extreme we have a command economy, which does not allow individu¬als to make economic decisions, at the other extreme we have a free market, where individuals exercise considerable economic freedom of choice without any government restrictions. Between these two extremes lies a mixed economy. In mixed economies some resour¬ces are controlled by the government whilst others are used in response to the demands of consumers.Technically, all the economies of the world are mixed. Some countries are nearer to command econo¬mies, while others are closer to free market econo¬mies.The aim of mixed economies is to avoid the disad¬vantages of both systems while enjoying the bene¬fits that they both offer. So, in a mixed economy the government and the private sector interact in sol¬ving economic problems. The state controls the share of the output through taxation and transfer payments and intervenes to supply essential items such as health, education and defence, while private firms produce cars, furniture, electrical items and similar, less essential products.The UK is a country with mixed economy. Some services are provided by the state whilst a range of privately owned businesses offer other goods and services.

Prices In A Market EconomyPrices perform two important economic functions: They ration scarce resources, and they motivate pro¬duction. As a general rule, the more scarce something is, the higher its price will be, and the fewer people will want to buy it. Economists describe this as the rationing effect of prices. In a market system goods and services are allocated, or distributed, based on their price.Price increases and decreases also send messages to suppliers and potential suppliers of goods and servic¬es. As prices rise, the increase serves to attract addi¬tional producers. Similarly, price decreases drive pro¬ducers out of the market. In this way prices encour¬age producers to increase or decrease their level of output. Economists refer to this as the production- motivating function of prices. But what causes pric¬es to rise and fall in a market economy? The answer is Demand! The Law of DemandDemand is a consumer’s willingness and ability to buy a product or service at a particular time and place.The law of demand describes the relationship be¬tween prices and the quantity of goods and services that would be purchased at each price. It says that all else being equal, more items will be sold at a lower price than at a higher price.Demand behaves the way it does for some of the following reasons:More people can afford to buy an item at a lower price than at a higher price.Let’s see the law of demand from the point of ice¬cream selling:At a lower price some people will substitute ice¬cream for other items, thereby increasing the demand.At a higher price some people will substitute other items for ice-cream.How many ice-creams can a man eat? One, two, more? Some people will eat more than one if the price is low enough. Sooner or later, however, we reach the point where enjoyment decreases with every bite no matter how low is the cost. What is true of ice-cream applies to most everything. After a certain point is reached, the satisfaction from a good or service will begin to diminish. Economists describe this effect as diminishing marginal utility. « Utility « refers to the usefulness of something. Thus «diminishing marginal utility « is the economist’s way of describing the point reached when the last item consumed will be less sat¬isfying than the one before.Diminishing marginal utility helps to explain why lower prices are needed to increase the quantity de¬manded. Since your desire for a second ice-cream is less than it was for the first, you are not likely to buy more than one, except at a lower price. At,even lower prices you might be willing to buy additional ice-creams and give them away.Elasticity Of DemandThe shape and slope of demand curves for different products are often quite different. If, for example, the price of a quart of milk were to triple, from $ .80 to .40 a quart, people would buy less milk. Similarly, if the price of all cola drinks were to jump from to a quart (an identical percent increase), people would buy less cola. But even though both prices changed by the same percentage, the decrease in milk sales would probably be far less than the decrease in cola sales. This is because people can do without cola more easily than they can do without milk. The quantity of milk purchased is less sensitive to changes in price than is the quantity of cola. Economists would explain this by saying that the demand for cola is more elastic than the demand for milk. Elasticity describes how much a change in price affects the quantity demanded.

How Elasticity is MeasuredWhen the demand for an item is inelastic, a change in price will have a relatively small effect on the quan¬tity demanded. When the demand for an item is elas¬tic, a small change in price will have a relatively large effect on the quantity demanded.Elasticity can also be measured by the «revenue test.» Total revenue is equal to the price multiplied by the number of units sold.If, following a price increase, total revenue falls, the demand would be described as elastic. If total rev¬enue were to increase following a price increase, the demand would be be inelastic. Similarly, if total reve¬nue increased following a price decrease, demand would be elastic. If the price decrease led to a decrease in total revenue, the demand for the item would be de¬scribed as inelastic. Changes in DemandUntil now, we have been describing the relation¬ship between an item’s price and the quantity of an item people will purchase. Sometimes things happen that change the demand for an item at each and every price. When this occurs, we have an increase or a decrease in demand.

Article by Gregg Forscher

Economics as a subject is more than 200 years old dating back to the publication of Adam Smiths Book entitled, An Enquiry into the Nature and Causes of Wealth of Nations. In 1976, economics was not recognized as a separate branch of learning. Adam Smiths book presented first systematic study of economics. It led to the recognition of economics as a separate subject of study. That is why, Adam Smith is generally known as the father of economics.Since then economics has been defined differently in different stages. The set of definitions given by different economists can be divided into the following categories:

1. Wealth definition given by Adam Smith

2. Welfare definition given by Prof. Alfred Marshall

3. Scarcity definition given by Prof. Robins

4. Growth definition given by A. Samuelson

Out of these, the most important definition is the scarcity definition given by Prof. Robins. In his book, an essay on nature and significance of economic science published in 1932 Prof. Robins has given the scarcity definition of economics as:

Economics is a science that studies human behavior as a relationship between ends & scarce means that has alternative uses.

This definition of economics give by Prof. Robins is based on the following 3 assumptions.

1. Human wants are unlimited i.e. as soon as one need is fulfilled another need arises and sometimes even before the fulfillment of first need.

2. The means or resources required to fulfill the human wants are limited and as such all the needs can not be fulfilled.

3. Scarce resources have alternative uses, that is, they can be put to different uses or they can be put to more than one use.

In general, we can say economics is about making choices in the presence scarcity. Scarcity and choices are important in economics. Study of the Choice Problem at individual, social, national and international level is what economics is all about.

Types of EconomiesNow, you are clear with the definition of economics. Let us study the types of economies. There are 3 different types of economies:

1. Developed Economy2. Underdeveloped Economy3. Developing Economy

1. Developed EconomyDeveloped Economy refers to that economy where the level of national income and the per capita income is very high as well as high production, consumption, savings and investment. As a result, people living in developed economies have a higher standard of living, e.g. U.K, USA, Australia, Canada, etc. are examples of developed economy where people have a very high standard of living.

2. Underdeveloped EconomyUnderdeveloped Economy is one where the level of income and the per capita income is very low. The reason for low national income and per capita income is either the unavailability of sufficient resources or under-utilization or non-utilization of resources on account of low level of technology. This situation results in low capital formation and technical development resulting in poor standard of living in the economy. According to a report, 2/3rd of the population falls under the underdeveloped economy.

3. Developing Economy Developing economy is one where the per capita income and the national income are neither too low nor too high. In other words, a developing economy has a rising per capita income and national income. Such an economy, utilizes its resources and with the use of modern technology tries to achieve a higher economic growth rate. People living in developing economy enjoy better living of standard as compared to underdeveloped economy, e.g. India is a developing economy that has a lot of natural resources but due to absence of improved technology, these resources remain unutilized.