Global Economics Classroom

RELEASE #8
WHAT IS NORMAL PROFIT?

Normal profit in economics is the one that a business firm considers necessary to stay in business. Beyond this level, it earns what is called 'supernormal profit'.

It occurs at a point where total cost equals total revenue of the enterprise, or equivalently, price per unit equals total cost per unit. Here, cost includes both explicit costs (like wages, rent, and materials) and implicit costs (such as the opportunity cost of the owner's time and capital spent in the business, and business risk).

Opportunity cost and business risk vary from firm to firm and have different values for different businesses. These components have, therefore, different loadings onto the cost.

A firm is most cost-competitive when it sets a price that yields just the normal profit. If market conditions are such that it cannot get even the normal profit, it slips into losses.

Release #7
WHAT ECONOMIC GLOBALIZATION IS ABOUT

Economic globalization connects different countries of the world on an economic plane. Spurred by growing interdependence between countries, it has proceeded at a phenomenal pace over the years.

Many countries have benefited immensely from the international movement of capital, people, information, skills, raw materials, final products and technologies. The benefits have been largely in terms of better resource availability, higher productivity and larger production capacity. This has helped raise their GDP levels, per capita incomes and quality of life.

And then there are several countries, particularly in the low-income category, where economic globalization has made them externally dependent, inherently unstable and vulnerable to external economic shocks. These countries have experienced any one or more the following :

• Currency depreciation
• Imported inflation
• Unstable stock markets
• Huge trade and balance of payments deficits
• Unsustainable external debt.

Such countries have not been able to withstand the tide of global competition and have suffered heavily in terms of GDP and economic stability. It has led to rise in global disparity in wealth and income.

Economic globalization has a huge dynamics that has to be understood in terms of its determinants, undercurrents and impact. It is deeply intertwined with international geo-political factors, international economic relations and regional economic groupings among countries.

Global economic networks and exchanges are a great resource for any country. The country must have sound macroeconomic policies to leverage globalization to its advantage.

Find out how the government of your country is handling globalization and how it can be leveraged for its faster growth and progress.

©Suresh Bedi, 2022.

Release #6
EXPLAINED: THE STRUCTURE OF AN ECONOMY

To know the structure of an economy, you need to know the sectors that constitute it. An economy is classified into sectors based on what they produce, the nature of their transactions, their functional roles, and how they are placed in the economy.

This structure varies from economy to economy depending upon their economic system, resources, skills, technology and economic policies of the government. The structure is seen through the following sector groups:

• Household, business and government sectors
• Primary, secondary and tertiary sectors
• Domestic and external sectors
• Real and monetary sectors
• Public, private and joint sectors
• Formal and informal sectors
• Productive and welfare sectors
• Endogenous and exogenous sectors
• Economic and non-economic sectors

And then, there are sub-sectors within each sector. These sectors are not independent of each other. They intersect and interact with one another continuously and keep the wheels of the economy moving.

Classifications like real and monetary sectors are made to provide analytical insights into the working of an economy. The understanding of the structure helps a government to formulate its economic policies and see where more action is required. The working of the sectors and their interrelationships help business managers to understand their current business environment better.

Do you think that the economic structure of your country needs to change for faster growth and better integration with the global economy?

©️ Suresh Bedi, 2022.

Release #5
UNDERSTANDING AN ECONOMIC SYSTEM

To understand the nature, structure and performance of a country, it is important to know its economic system. Every country works under an economic system of its choice. So, there is a variety of economic systems around the world. It provides a framework within which an economy operates. In most countries, economic systems:

• Are enshrined into their constitution, or
• Have historically evolved over time, or
• Have been adopted by the government in power which has its own economic philosophy, or
• Are products of economic institutions, conventions or laws.

An economic system is relatively stable, though it keeps on adapting to changing economic circumstances. It lays down the system of production, resource allocation and the distribution of products. It also prescribes how the economy will interact and transact with the rest of the world.

An economic system regulates the markets for factors of production and products, the manner in which prices will be determined and the decision-making freedom of producing and consuming units, including the intermediaries.

Based on the various economic systems, we have traditional economies, free market economies, command economies, socialist economies, mixed economies and economies with market socialism. This classification is not watertight; there are overlapping characteristics between them.

Explore the economic system of your country and find out how it facilitates or hinders its economic growth and welfare.

©Suresh Bedi, 2022.

Release #3
THE NATURE OF MACROECONOMICS

Macroeconomics is the study of the behavior of economic aggregates, and the way they are interrelated. It is not the study of individual economic units or their groups which typically belongs to microeconomics.

What are economic aggregates? These are the variables like total output, investment, consumption, money supply, government spending, imports and exports which are totaled up at the national level.

And then there are economy-wide phenomena like inflation, growth rate, unemployment, exchange rate and recession which are studied under macroeconomics.

Most of the aggregates are the sum total of values at the microeconomic level. For example, aggregate output is sum total of the outputs of different producing units in the country. Average state of prices of all goods and services results in the general price level.

A change in one macro variable often has a ripple effect throughout the economy, just as you throw a stone in a stagnant pool of water. A rise in interest rates affects inflation, investment and profitability, consumption demand and even foreign investment and exchange rates.

Macroeconomics takes us through all these relationships. Sometimes, the effects of a variable change are in opposite directions which complicate the task of policy makers. Reliable data and analysis tools are needed to study these relationships.

Sound macroeconomic policies are needed to keep an economy in good health. Poorly formulated policies can land an economy in economic crises. These problems can be in the form of low productivity, high dependence on imports, recessionary conditions, inflation, unemployment, slow growth, unsustainable debt levels and currency depreciation.

Many of these issues are interrelated rather than independent. Today, many countries in Western Europe, North America, South Asia and elsewhhere are facing the twin problem of rising inflation and unemployment which are typical characteristics of a situation called 'stagflation'.

You can easily find out which specific macroeconomic problem is plaguing your country of residence and what the government is doing to address it.

©️Suresh Bedi, 2022

Release #2
WHAT IS MICROECONOMICS?

The whole field of economics is divided into microeconomics and macroeconomics.
Microeconomics is the study of economic activities of individual economic units and their groups. These include consumers, workers, lenders, entrepreneurs, business units, suppliers, and the like. It does not study an economy as a whole which belongs to the area of macroeconomics.

In this field, we study such things as how consumers buy products, how companies price their products, how land and building owners decide their rents, how companies compete in the market and how your car mechanics promotes their services. The study of one IT company and the entire IT industry (group of all IT companies) come under microeconomics.

Microeconomics enables us to know how economic units allocate their resources to various competing uses. As a hostel student, you will be concerned with how to allocate your money to fees, books and stationery, dresses, food, entertainment and other items in your list. A firm will decide how to allocate its budget to research and development, payout to staff, interest expenses, building rents, business promotion, new technology, machinery maintenance and the like. Microeconomics teaches us how to do the most efficient and productive allocation. Inefficient allocations waste resources and increase costs.

A major part of microeconomics is concerned with consumer behaviour and demand analysis, production decisions, cost analysis, determination of product prices and determination of wages, interest rates, rents and profits. A part of it also deals with the aspects of economic welfare.

Microeconomic decisions greatly influence the economy as a whole though macroeconomics is a separate area of study with many issues unique to it.

Right knowledge of microeconomics helps business managers to understand markets and take best possible business decisions. It helps them to understand the precise nature of demand for their products, decide the appropriate technology and the best level of production at which per unit costs are minimum and which meets the demand, determine prices which are acceptable in the market and meet business goals, meet the challenges of market competition and make appropriate investment decisions.

Principles of microeconomics are scientific and universally applicable under standard assumptions. In real-life applications they have to be adapted to meet specific conditions and situations. A large number of business organisations engage business economists who are skilled in microeconomics and the study of business environment. They employ sophisticated economic models, tools and techniques for the analysis, estimation and prediction of economic variables related to their business.
Watch out for the next release which will explain the nature of macroeconomics.

©️Suresh Bedi, 2022.

WHAT IS ECONOMICS?

Trying to define economics is like putting an elephant in a box.

Economics is exciting, thought provoking and crucial for individual and collective existence, growth and wellbeing.

It is a study how our scare resources (materials, time, skills, money, efforts) are and should be allocated to different activities so that they are used most productively and efficiently.

The allocation decides what and how much to produce, how to produce (the technology queation), where to produce (the location question) and for whom to produce (the end user).

Its major functional areas include production, distribution, exchange and consumption of goods and services. Two major divisions of economics are macroeconomics which focuses on the working of an economy as a whole, and microeconomics which deals with the behaviour and interactions of individual economic units (consumers, business firms etc).

Economics is based on the the assumption of rational behaviour of economic units. Irrational people are difficult to understand and predict.

Goos resource allocation requires good economic decisions by the individuals, business units, governments and the society at large. Decisions by these economic units have different objectives, like a business house may focus on maximum profits and a municipal corporation on providing good quality civic services at affordable prices. A national government may target public welfare.

Economists are the professionally trained people to take decisions in these areas. They need data and sophisticated tools to analyse situations and take decisions.

When economic units (individuals, business units etc) start interacting, markets are established which connect buyers and sellers and establish prices.

Bad or irrational economic decisions lead to wastage, inefficiencies and misdirection of resources and cause loss of output.

©️Suresh Bedi, 2022.