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Unit 6:
Basic Economics

1. The Concept of Economy

 

Economy is the discipline that studies the production and distribution of goods and services necessary to satisfy human needs. An economic activity is one in which goods or services are produced, sold, or purchased.

A good is a physical product that is produced to be enjoyed by the consumer (final good) or to manufacture another product (intermediate good). For example, a fruit is a final good when it is sold for the consumer to eat, but it would be an intermediate good when sold to a factory to make jam.

A service is an action that is offered to meet a need: a doctor performing surgery, a police officer arresting a thief, or a teacher giving a lesson are examples of services.

The economic process has three main phases:

  1. Production: the manufacturing of the product.

  2. Commercialization: the distribution and sale of the product.

  3. Consumption: the enjoyment of the product by the final consumer.

On the other hand, there is a set of economic agents. The main ones are three:

  1. Individuals, who are the final recipients of the product.

  2. Businesses, which manufacture goods or provide services.

  3. The public sector, which offers services for everyone. This ensures that those who cannot afford certain services or simply prefer public over private services are also taken care of. Examples include public schools and high schools, public hospitals, public transportation, fire and police services, the military, the judicial system, etc.

Finally, the factors of the economy are:

  1. Natural resources and raw materials: Natural resources can include water, minerals (copper, coal...), oil, wind energy, solar energy, etc. Raw materials are products obtained from nature to manufacture a finished product: wood for furniture, iron for machinery, etc.

  2. Human resources: that is, workers.

  3. Knowledge and technology.

  4. Capital: money, factories, land, machinery, stocks, etc.

2. The Sectors of the Economy

 

  • Primary sector: includes all activities related to agriculture, livestock farming, fishing, forestry, and mining.

  • Secondary sector: includes industry and construction.

  • Tertiary sector: includes all services and is by far the largest sector. Workers in transportation, hospitals, schools, security forces, and many others belong to the tertiary sector. This sector also includes workers in scientific, pharmaceutical, computing, and financial services, although some classify these last ones into a hypothetical quaternary sector.

Currently, in developed countries, the tertiary sector predominates, accompanied by a relatively strong secondary sector. Economies that rely too heavily on the primary sector belong to the group of underdeveloped countries.

There are two important indicators to determine the weight of the sectors in a country's economy and to assess the wealth level of its inhabitants: GDP and GDP per capita.

GDP (Gross Domestic Product) is the total value of all goods and services produced by a country within a year.

GDP per capita (per person) is the average wealth generated by each inhabitant in a year. It is calculated by dividing the GDP by the population of a country.

3. Trends in a Country's Economy

 

Economic trends can be of three types:

  • Expansive: The economy of a country grows, attracting investors who, by investing, generate more jobs and wealth.

  • Recessive: The economy of a country shrinks. There is a lack of investors, or they do not dare to risk their money. Jobs and goods become scarce. Inflation may occur.

  • Stationary: The economy of a country remains the same as in previous years. It is considered a negative trend if neighboring countries are growing.

Additionally, there are economic indicators that show us which trend a specific country's economy is following:

  • GDP

  • The number of registered vehicles

  • The activity rate: To calculate it, we must consider that the working-age population includes those between 16 and 64 years old. The formula is: 

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  • The unemployment rate: Taking into account the previous definition of the working-age population, the formula is:

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  • The balance of payments or trade balance: This is the difference between exports and imports. In a healthy economy, more is exported than imported.

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4. Economic Systems

Although there have been many different systems and many countries have tried to innovate in their economic organization to improve people's lives, they all belong to one of these three groups:

 

​1. Communist or Planned Economy System: This system is now rare in the modern world but was used by the USSR and other countries in its sphere, such as Romania, East Germany (GDR), and Hungary. China also has a "socialism with Chinese characteristics" following Marxist principles. In this system, the state took control of all means of production: agricultural land, livestock, factories, machinery, etc., and the population worked for the state. Production was meant to be distributed equally among citizens.

Its advantages were clear: there were no exploiters or exploited workers, no unemployment (since the state provided jobs for everyone), and no extreme poverty, as basic needs were covered by the all-powerful state. However, the disadvantages were also evident: people were not allowed to start their own businesses freely, as everything was controlled by the state. The lack of competition sometimes slowed technological progress. Additionally, while the model aimed for a classless society, the government accumulated all the power. In this system, advertising and the stock market did not exist because they were unnecessary.

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2. Capitalist or Free Market System

In its purest form, this system is also rare today. It assumes that supply and demand are natural and perfect laws, meaning that the government should not interfere in the economy, as it would regulate itself. Anyone would be free to start a business without state intervention, and its success would depend on whether the product sold well or not (supply and demand). People would also have the freedom to invest in the stock market if they wished.

Property would be privately owned, as each person should progress independently, and businesses would compete for customers. The supposed advantages of this system include that the state does not control the economy, offering more individual freedom to buy, sell, invest, or save. Because the government would have fewer responsibilities, it would be smaller and easier to maintain, leading to lower taxes. The state's main functions would be to protect private property and facilitate the flow of goods and capital. Public investment would focus on security forces, the military, and efficient communication networks.

However, the disadvantages of capitalism include that while it promises prosperity, it creates more inequality than other systems. The dominant class holds power over the working classes, who cannot access the same goods and services as the wealthy. Additionally, capital tends to concentrate in a few hands, leading to monopolies, which contradict the principles of a free market.

 

3. Mixed Systems

This is the system used by most countries in the world. There is a free market, meaning anyone can start a business, but the state intervenes to ensure that the entire population has access to basic services that guarantee a decent life.

In these mixed systems, there is a strong public sector that provides education, healthcare, security, and public transportation to all citizens. This public sector is financed through taxes paid by all citizens.

5. Globalization

 

Economic globalization is a complex process that involves the growing integration of national economies into a single global market. It is characterized by the interconnection and interdependence of economic, financial, commercial, and cultural activities at the global level. Some key aspects of economic globalization include:

  1. Free trade: The reduction or elimination of tariff and non-tariff barriers between countries facilitates the exchange of goods and services internationally. The use of common currencies, such as the euro, is encouraged. Companies with a presence in multiple countries are called multinational corporations, and they are among the greatest beneficiaries of globalization.

  2. Flow of capital: Greater mobility of financial investments across borders, including foreign direct investment, investment portfolios, and international loans.

  3. Technological advancements: The development and dissemination of information and communication technologies have enabled greater connectivity and communication between people and businesses worldwide, facilitating trade and remote collaboration.

  4. Outsourcing of industrial production: Companies tend to seek lower production and labor costs in different countries, which has led to the outsourcing of production to regions with lower costs.

  5. Cultural homogenization: The spread of cultural products, media, and lifestyles worldwide, which can sometimes lead to cultural homogenization or the emergence of a global culture.

  6. Economic interdependence: National economies are increasingly interconnected, meaning that economic events in one country can have significant repercussions in other countries.

Economic globalization has created both opportunities and challenges. It has facilitated economic growth, job creation, access to a greater variety of goods and services, and the transfer of knowledge and technology. However, it has also contributed to economic inequality, job loss in certain sectors, labor exploitation, and environmental degradation, among other issues.

6. Work Today and Economic Sustainability

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6.1 The Impact of Globalization

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While globalization allows those who can afford it to quickly access a wide variety of goods and services worldwide, and to find jobs, whether in person or remote, anywhere, it has also brought great instability to the economies of each country. An economic issue in one country can affect many others, as well as family economies, as job stability is nearly a chimera. Furthermore, technological development is immense, but it also leads to job losses (remember the Industrial Revolution). To adapt to such changing demands, many professions require "workplace flexibility," which in reality means working longer hours, being available during holidays and vacations "if necessary for the company," or being willing to work as a contractor or be paid "per project", with all the personal and family instability this brings. This makes it difficult to balance family life and plan one's life, as people depend on the decisions of their employers almost 24/7.

On the other hand, labor conflict has led to the creation of unions, as we saw during the Industrial Revolution, to channel workers' discontent and seek solutions. To prevent labor exploitation, almost all governments in the world have set a minimum wage.

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6.2 Economic Sustainability

 

Our economic system, although it may seem to endure over time, is not eternal, as the raw materials used to create products will not last forever.

Therefore, sustainability involves the responsible use of the resources we have, ensuring that the well-being of future generations is not compromised. It is our duty as citizens to take responsibility for our actions both socially and ecologically.

In 2003, the United Nations launched the Global Compact for business sustainability, which consists of ten points:

  1. Companies should support and respect human rights.

  2. Companies should ensure that their operations are not complicit in human rights violations.

  3. Companies should support the freedom of association and the effective recognition of the right to collective bargaining.

  4. Companies should support the elimination of all forms of forced or compulsory labor.

  5. Companies should support the eradication of child labor.

  6. Companies should support the abolition of discriminatory practices in employment and occupation.

  7. Companies should prevent environmental harm.

  8. Companies should promote initiatives that encourage greater environmental responsibility.

  9. Companies should support the development and spread of environmentally friendly technologies.

  10. Companies should work against corruption in all its forms, including extortion and bribery.

These points are closely related to the Sustainable Development Goals (SDGs) of the 2030 Agenda.

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