Growth and economic development Lecturer: Alberto Romero Ania Growth and economic development Prof....

Growth and economic development

Lecturer: Alberto Romero Ania

Growth and economic development Prof. PhD. Alberto Romero Ania



1. History of Economy

2. Basic Terms and Concepts

What does “Economics” mean?


It is a social science that studies the efficient allocation of scarce resources which is used to produce goods and

services that satisfy consumers' unlimited wants and needs.

Key points in the study of economics:


• Social Science: Economics uses the scientific method to explain and study our society.

• Allocation: Economics studies allocation decisions about distributing resources, goods and services.

• Scarce Resources: The economy's resources are limited and related to their use.

• Production: We transform available resources into goods and services. That's production.

An understanding of economics also involves:


• Scarcity. We have limited resources, but unlimited wants and needs.

• The study of economics is essentially the study of scarcity and Opportunity Cost.

• Using resources for one alternative prevents using them for another. Opportunity cost is the highest valued alternative.

• Economics is an analytical discipline:– Answers 'What if...?' questions.

Economics:


• The basic definition of economics is the scientific study of scarcity and how society uses resources.

• Economics is also the study of how resources are used to produce goods and services, which are used to satisfy consumers' wants and needs.

• The three questions of allocation: What? How? Why?

• “Why ?” is related to motivation and incentives

The study of economics involves:


• Positive economics, which uses the scientific method to uncover the basic mechanism of the economy. – It seeks to describe the way this world is.

• Normative economics, which is the policy side of economics.– It seeks to prescribe the way the world SHOULD BE.

The two broadest fields in Economics


• Macroeconomics is the study of the aggregate economy, the entire pie, the whole forest. – Macroeconomics is interested in things like gross production,

unemployment, inflation, and recession.

• Microeconomics is the study of parts of the economy, the slices of the pie, the trees of the forest. – Microeconomics is interested in topics like market prices, consumer

behavior, production costs, and competition.

“History of Economy: Classical Trade Theory”


• Classical authors were ambivalent regarding cross border trade.

• Mainly based on non-economic arguments

• “Nothing is produced by trade”

“History of Economy: Classical Trade Theory”


• It was said that the total amount of goods of the two parties at the end of the exchange is the same as it was before

• If one country gains from a swap, the other will necessarily have to lose

• Improve its own welfare only by harming others

• Trade does not increase the physical quantities of the goods available, but…

Trade improves the allocation of goods and services

“History of Economy: Reasons for trade”


• Every country lacks resources that it can get only by trading with others

• Each country´s climate, labor force and other “factor endowments” make it a relative efficient producer of some goods and an inefficient producer of other goods, due to natural factors



• Specialization permits countries to acquire productivity gains (become more efficient in the production) through improving the work organization and through improving the skills or by clusters, like in Silicon Valley

Trade is about exploiting

resources, differences and economies of scale

through specialization



• Adam Smith (The Wealth of Nations, 1776):

“One country is said to have an absolute advantage over another in the production of a particular good if it can produce that good using smaller quantities of resources (with less factor input) than can the other country.”

“History of Economy: Mercantilism (Kameralismus)”


• The mercantilism movement dominated the 16th-18th century

• National interest are best served by increasing exports and reducing imports

• Create works for peasants and craftsmen

• They finance army and nobility via the trade surplus and tariffs

“History of Economy: Mercantilism (Kameralismus)”


• Trade policy: Colonies provide raw materials and trade monopolies

• The problem of mercantilism, inflation, was pointed out by David Hume (Price-specie-flow Mercantilism, 1752)

– What will happen if every country follows a Mercantilism trade policy?

INFLATION:

• In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

• Inflation rates around the world in 2007:


http://en.wikipedia.org/wiki/File:World_Inflation_rate_2007.PNG

“History of Economy: Main Authors”


• Opportunity cost is a concept created by Adam Smith

• This concept is the fundamental principle of all thinking on economy and international trade.

One question…

What is the cost of studying at IMC?

Price, value and cost are different concepts.

“History of Economy: Main Authors”


• The “law of comparative advantage” (David Ricardo, The principles of political economy and taxation)

• One country is said to have a comparative advantage over another in the production of a particular good relative to other goods if it produces, in comparison with the other country, that good more efficiently or less inefficiently”

• The miracle of trade: when every country does what it can do best, all countries can benefit because more of every commodity can be produced without increasing the amounts of labor and other factor input used.

“History of Economy: Who wins, who loses?”


• Who wins, who loses from trade?

• Answer by Mercantilists: The exporting country wins and the importing one loses.

“History of Economy: Who wins, who lose?”


• Answer by Physiocrats: Both countries win, – If they exploit an absolute (A. Smith) – Or a comparative advantage (D.Ricardo)

• David Ricardo demonstrated that

free trade increases welfare for everybody

ABSOLUTE ADVANTAGE:


• The general ability to produce more goods using fewer resources than other people or countries.

• This idea of absolute advantage is important for trading, which occurs between both: people and nations.

• A nation can get an absolute advantage from: an advanced level of technology or higher quality resources.

• For a person, an absolute advantage can result from natural abilities or the acquisition of human capital (education, training, or experience). (Lawyer/attorney and secretary)

COMPARATIVE ADVANTAGE:


• The ability to produce one good at a relatively lower opportunity cost than other goods.

• While economists developed this idea for nations, it's extremely important applied to people !!!

• A comparative advantage means that no matter how good (or bad) you are at producing stuff, there's always something you can do best (or worst).

COMPARATIVE ADVANTAGE:


• Moreover, because you can produce this one thing by giving up less than others give up, you can sell it to them.

• This idea of comparative advantage means that people and nations can benefit by specialization and exchange.

• You do what you can do best, then sell to someone else for what he/she can do best.

– Both sides in this trade get more and are thus better off afterwards than before.

SPECIALIZATION:


• The condition in which resources are primarily devoted to specific tasks.

• This is one of the most important and most fundamental terms in the study of economics.

• A long tome ago civilized human beings have recognized that limited resources can be used more effectively in the production of goods and services that satisfy unlimited wants and needs if those resources specialize.

SPECIALIZATION:


• For example, “Krems ice cream parlor”:

– three ice cream parlor workers, can be, in total, more productive if one runs the cash register, another scoops the ice cream, and a third adds the topping.

• By devoting their energies to learning how to do their respective tasks really, really well, these three workers can produce more ice creams than if each performed all required tasks.

“History of Economy: 20th century trade theory”


• Neoclassical school of economics

• Concept: “Factor substitution” (Eli Heckscher, 1919)

– “Factor substitution asserts that different production methods allow to produce a good with different factor combinations”

– Not all factors can be substituted, especially in the short.

“The fails of the traditional trade theories”


– “ Trade depends on natural causes”, but 90% occurs among developed countries.

– “ Trade based on comparative advantages remain constant over time”. But Switzerland was the biggest exporter of watches until Japan overtook in the 70´, and in the 90´ by HK, Taiwan and Korea.

– “ Trade will lead to inter-industry specialisation where one country specialises in”. But many times countries import and export the same good, within the intra-industry trade. Germay, biggest car importer-exporter.

History of Economy: New Trade Theory

• Edmund Helpman and Paul Krugman studied the “Market Structure and Foreign Trade” in 1985.

• Their conclusion: The benefits of free trade were even bigger than assumed traditionally because of the dynamic effects of trade on market structures.

– The market structure determines the classification of markets according to the number of participants and the power they can exert:

• Perfect competition• Imperfect competiton (Monipolistic or Oligopolistic)



• The law of mass-production and the marginal cost:

– Companies have an incentive to specialize in order to reduce costs– International trade as a way of gaining the advantages of large-scale

production.– Markets are not perfect, as assumed by the classical and neo-

classical economists.

• Comparative innovation advantages



• Product Life Circle Theory (Raymond Vernon)


http://samueljscott.files.wordpress.com/2007/09/product-life-cycle.png

BASIC TERMS AND CONCEPTS

ECONOMY:

“The system of production, distribution, and consumption of goods and services that a society uses to address the

problem of scarcity”


Basic Terms and Concepts:

• The essential task of an economy is to transform resources into useful goods and services (the act of production) and then distribute or allocate these products to useful ends (the act of consumption).

• Virtually all economies accomplish this task through a combination of decisions made through voluntary market exchanges and involuntary government rules and regulations.”


What is an Economic Theory?


• “One can compare an economic theory with a map over of a piece of land.

• A map gives an idea of what a certain piece of land looks like, even though nature is too complex to be completely described by it.

• While a map can help us understand an unknown terrain, economic theories help us to understand economic interactions between individuals or countries. – For example, why individuals or countries trade with each other and

why trade may benefit the parties involved.”

1.- INTERNATIONAL ECONOMICS:

• “A branch of economics that studies economic interactions among different countries, including foreign trade (exports and imports), foreign exchange (trading currency), balance of payments, and balance of trade.

• While much of the interaction among countries is largely an extension of basic economic principles, complications do arise because nations are distinct political entities, with different laws and cultures, and with little or no overall governmental oversight.


1.- INTERNATIONAL ECONOMICS:

• The guiding principle in the study of international economics is comparative advantage, which indicates that every country, no matter their level of development, can find something that it can - in comparison with other countries - produce more efficiently or less inefficiently.

The study of international economics focuses on

two related areas:

international trade and international finance”


2.- INTERNATIONAL TRADE:

• “The economic interaction among different nations involving the exchange of goods and services which is exports and imports.

• The guiding principle of international trade is the comparative advantage, which indicates that every country, no matter their level of development, can find something that it can produce cheaper than another country.

• International finance, the study of payments between nations, is a related area of international economics. A summary of international trade undertaken by a particular nation is given with the balance of trade.”


3.- INTERNATIONAL FINANCE:

• “The economic interaction among different nations involving the monetary payments and the exchange of currency.

• The cornerstone of international finance is foreign exchange, including foreign exchange markets and exchange rates.

• International trade, the study of trade between nations, is a related area of international economics.

• A summary of international finance undertaken by a particular nation is given with the balance of payments.”


4.- BALANCE OF TRADE:

• “The difference between funds received by a country when exporting merchandise and the funds paid for importing merchandise.

The balance of trade is a major part of the current accounts portion of the balance of payments.

• A balance of trade surplus results if exports exceed imports, commonly termed a favorable balance of trade. A balance of trade deficit exists if imports exceed exports, and it is termed an unfavorable balance of trade.


4.- BALANCE OF TRADE:

The "favorable" and "unfavorable" normative connotations attached to the balance of trade rest on the presumption that a nation is "better off" when it exports more than it imports,

which is not necessarily true.”


5.- FOREIGN TRADE:

• “Exchange of goods and services between countries.

• The inclination for one country to trade with another is based in large part on the idea of comparative advantage, which says that any country, no matter how technologically disadvantaged it might be, can always find some sort of good that will let it enter the game of foreign trade.

• In this sense, foreign trade is just an extension of the production, exchange, and consumption that's a fundamental part of life. The only difference with foreign trade is that producers and consumers reside in separate countries.”


6.- BALANCE OF PAYMENTS:

• “The difference between the funds received by a country and those paid by a country for all international transactions.

• International transactions include the exchange of merchandise (exports and imports), which is commonly summarized as the balance of trade, plus the exchange of services, summarized as the balance of services, as well as any gifts or transfer payments that do not involve the exchange of goods and services.


6.- BALANCE OF PAYMENTS:

• The balance of payments, in effect, indicates the difference between the currency coming into a country and that one flowing out of the country.

• The balance of payments is divided into two accounts:– Current account (which includes payments for imports, exports,

services, and transfers) – Capital account (which includes payments for physical and financial

assets).”


7.- FOREIGN EXCHANGE MARKET:

• “A market that trades foreign exchange currencies of the advanced nations, and many of the lesser developed ones, which are at the top of what's traded in this market.

• The price at which one currency is traded for another in this market is the exchange rate.

• Like many "markets" this one is not located in any particular place, but includes transactions around the globe. As you might expect, banks handle a lot of these transactions.”


8.- MARKET:

• “The organized exchange of commodities (goods, services, or resources) between buyers and sellers within a specific geographic area and during a given period of time.

• Markets are the exchange between buyers who want a good, the demand-side of the market, and the sellers who have it, the supply-side of the market.

• In essence, a buyer gives up money and gets a good, while a seller gives up a good and gets money.


9.- GOODS:

• “Goods, when used without an adjective modifier (like "final" goods or "intermediate" goods), this generically means physical, tangible products used to satisfy people's wants and needs.

• This term “good” should be contrasted with the term “services”, which captures the intangible satisfaction of wants and needs.

• As such, you will frequently see the plural combination of these two phrases together "goods and services" to indicate the wide assortment of economic goods produced using the economy's scarce resources.


10.- SERVICES:

• “Activities that provide direct satisfaction of wants and needs without the production of tangible products or goods.

• Examples include information, entertainment, and education. The term “service” should be contrasted with the term “good”, which involves the satisfaction of wants and needs with tangible items.

• You're likely to see the plural combination of these two into a single phrase, "goods and services," to indicate the wide assortment of economic production from the economy's scarce resources.”


11.- SCARCITY:

• “A pervasive condition of human existence that exists because society has unlimited wants and needs, but limited resources are used for their satisfaction.

• In other words, while we all want a bunch of stuff, we can't have everything that we want. In slightly different words, this scarcity problem means: – (1) that there's never enough resources to produce everything that

everyone would like to be produced; – (2) that some people will have to do without some of the stuff that they

want or need;– (3) that doing one thing, producing one good, performing one activity,

forces society to give up something else; – (4) that the same resources can not be used to produce two different

goods at the same time..”


11.- SCARCITY:

We live in a world of scarcity. This world of scarcity is what the study of economics is all about. That's why we usually subtitle

scarcity as:

THE ECONOMIC PROBLEM.”


12.- RESOURCE ALLOCATION:

• “The process of dividing up and distributing available, limited resources to competing, alternative uses that satisfy unlimited wants and needs.

• Given that world is rampant with scarcity (unlimited wants and needs, but limited resources), every want and need cannot be satisfied with available resources.

• Choices have to be made. Some wants and needs are satisfied, some are not. These choices, these decisions are the resource allocation process.


12.- RESOURCE ALLOCATION:

• An efficient resource allocation exists if society has achieved the highest possible level of satisfaction of wants and needs from the available resources.

• Resources can not be allocated differently to achieve any greater satisfaction.”


13.- DEMAND:

• “The willingness and ability to buy a range of quantities of a good at a range of prices, during a given time period.

• Demand is one half of the market exchange process; the other is supply.

• This demand side of the market draws inspiration from the unlimited wants and needs dimension of the scarcity problem.

• People desire the goods and services that satisfy our wants and needs. This is the ultimate source of demand.”


14.- SUPPLY:

• “The willingness and ability to sell a range of quantities of a good at a range of prices, during a given time period.

• Supply is one half of the market exchange process; the other is demand.

• This supply side of the market is directly connected to the limited resources dimension of the scarcity problem.


14.- SUPPLY:

• Folks who have ownership and control over resources (labor, capital, land, and entrepreneurship) use them to produce the goods and services that satisfy other's wants and needs.

• Ownership and control of resources is the ultimate source of supply.”


15.- EQUILIBRIUM:

• “The status that exists when opposing forces exactly offset each other and there is no inherent tendency for change.

• Once achieved, an equilibrium persists unless or until it is disrupted by an outside force.”


16.- CAPITALISM:

• “A type of economy based on:

– (1) private ownership of most resources, goods, and other stuff (private property)

– (2) freedom to generally use the privately-owned resources, goods, and other stuff to get the most wages, rent, interest, and profit possible

– (3) a system of relatively competitive markets. While government establishes the legal "rules of the game" for capitalism and provides assorted public goods, like national defense, education, and infrastructure, but most production, consumption, and resource allocation decisions are left up to individual businesses and consumers.


16.- CAPITALISM:

The term capitalism is derived from the notion that capital goods are under private, rather than government, ownership

(compare communism and socialism)


17.- MARKET-ORIENTED ECONOMY:

• “A mixed economy that relies heavily on markets to answer the three basic questions of allocation, but with a modest amount of government involvement.

• While it is commonly termed capitalism, market-oriented economy is much more descriptive of how the economy is structured.”


18.- DEMAND SHOCK:

• “A disruption of market equilibrium (that is, a market adjustment) caused by a change in a demand and a shift of the demand curve.

• A demand shock can take one of two forms: – Demand Increase – Demand Decrease.


18.- DEMAND SHOCK:

• An increase in demand is seen as a rightward shift of the demand curve and results in an increase in equilibrium quantity and an increase in equilibrium price.

• A decrease in demand is a leftward shift of the demand curve and results in a decrease in equilibrium quantity and a decrease in equilibrium price.”


19.- SUPPLY SHOCK:

• “A disruption of market equilibrium (that is, a market adjustment) caused by a change in a supply determinant and a shift of the supply curve.

• A supply shock can take one of two forms:– Supply increase– Supply decrease.


19.- SUPPLY SHOCK:

• An increase in supply is illustrated by a rightward shift of the supply curve and results in an increase in equilibrium quantity and a decrease in equilibrium price.

• A decrease in supply is illustrated by a leftward shift of the supply curve and results in a decrease in equilibrium quantity and an increase in equilibrium price.”


20.- COMPETITIVE MARKET:

• “A market with a large number of buyers and a large number of sellers, such that no single buyer or seller is able to influence the price or any other aspect of the market (no one has any market control).

• A competitive market achieves efficiency in the use of our scarce resources if there are no market failures present.”


21.- EQUILIBRIUM PRICE:

• “The price that exists when a market is in equilibrium. In particular, the equilibrium price is the price that equates the quantity demanded and quantity supplied, which is termed the equilibrium quantity.

• Moreover, the equilibrium price is simultaneously equal to both the demand price and supply price. In a market graph, the equilibrium price is found at the intersection of the demand curve and the supply curve.

• The equilibrium price is also commonly referred to as the market-clearing price.”


22.- EQUILIBRIUM QUANTITY:

• “The quantity exchanged between buyers and sellers when a market is in equilibrium. The equilibrium quantity is simultaneously equal to both the quantity demanded and quantity supplied, which means that there is neither a shortage nor a surplus in the market.

• Equilibrium:

If buyers are able to buy all of the good they're willing and able to buy (no shortage) and sellers are able to sell all of the good they're willing and able to sell (no surplus), then

no side of the market is inclined to change the existing terms of trade..”


MARKET FAILURE:

• “A condition in which a market does not efficiently allocate resources to achieve the greatest possible consumer satisfaction.

• The four main market failures are:– (1) public good, – (2) market control, – (3) externality, – (4) imperfect information.

In each case, a market acting without any government imposed direction, does not direct an efficient amount of our resources into the

production, distribution, or consumption of the good.”


CONSUMER BEHAVIOR:

• Actions (that is, behavior) undertaken by people (that is, consumers) that involve the satisfaction of wants and needs.

• Such actions often, but not always, involve the acquisition (that is purchase) of goods and services through markets.

• The study of consumer behavior is fundamental to the understanding of the demand-side of the market.


CONSUMER BEHAVIOR:

• The decision making process is influenced by various attitudes, motives, and social influences on the purchaser.

• Buyers tend to behave in certain ways including habits, brand loyalty, and post purchase behavior.”



Lecturer: Alberto Romero Ania


Growth and economic development Lecturer: Alberto Romero Ania Growth and economic development Prof....

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