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Media and Journalism ModuleBusiness and Economics For Reporters2. Introduction to Economic Issues

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This week’s lesson

• What is an economy? • Main components of an economy and the roles they perform:• Households• Manufacturing and service industries• Governments

• Economic data• common terms and how they are expressed.

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What is an economy?

• Thousands of definitions of economies and economic models

• General agreement on the following definition:• The economy of a nation is the ways in which goods and services are bought and sold, and the way the nation’s money system operates.

• Four basic sectors in an economy:• Households or individuals - consumers • Businesses –producers• Governments –regulators and set taxes• Foreign entities – traders (nearly all economies trade with others)

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Key Definitions

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Subsistence economies

• Economies that traditionally operated solely within themselves and obtained all the things needed for life from within the group.

• Wealth is not measured in any form of currency - it exists in the form of natural resources. • Food is grown or hunted• Homes built from surrounding trees, caves or other naturally occurring shelters.

• Short surpluses • Reliance on renewal and reproduction within the natural environment to ensure survival.

• Before currency was invented, subsistence economies were the dominant economic system throughout the world.

• Less and less true subsistence economies

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Goods

• Goods are tangible, i.e. something that can be seen or touched

• The production of goods requires using limited resources to produce in order to satisfy wants

• An example - a farmer who grows sugarcane • The farmer uses equipment manufactured from resources • The ground is a natural resource used to grow the cane

• the growth and burning of the cane depletes the nutrients in the soil

• fertilisers are needed to restore the nutrients and grow strong cane

• limited resources used to produce natural or chemical fertilisers

• Water might be used to irrigate the crop • At harvest - additional resources used – cane knives,

equipment, petrol, labour, trucks, trains and so on• RESULT - a good that can be used or sold

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Services

• Services are intangible and can be provided in numerous ways. • can often see someone providing a service, but the service is not something that someone can pick up and take home to use.

• An example of a service is a ride in a taxi:• It takes resources for the owner or driver to provide the

service• the passenger knows he is receiving a service - riding in the

taxi• When the ride is completed, the passenger doesn't have

anything tangible to hold, except possibly a receipt. • Resources have been used to provide the service. • The car used as the taxi, the fuel used to operate the taxi,

and the time spent by the driver are all examples of resources being used to provide a service that will satisfy a want.

• As goods and services use resources that are limited• Goods and services may also be scarce.

• Scarcity results when the demand for a good or service is greater than its supply.

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Sectors in the EconomyThe economy of a nation is the ways in which goods and services are bought and sold, and the way the nation’s

money system operates.

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1. Individuals, consumers, households sector

• We are all individuals who consume products. • Where there are no large shopping centres or

supermarkets, most of us buy food, we go to the market and buy vegetables, a pig or some cooking pots, buy clothes or even put petrol in our cars.

• No matter how sophisticated or simple the economy, the tasks of the individual or consumer is the same.

• It is at the individual level that decisions are made about:• What products to buy• Which brand or variety of product to buy• How much to pay

• As individuals we have a vital question to consider – we want something, so how do we pay for the products?

• The decisions we make at the level include:• Getting a job• Starting a business• Investing money• Borrowing money

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2. The Business Sector

• The business sector produces the goods and services

• Three main groups:• commercial • industrial • professional

• The business sector is responsible for production by combining the four basic resources:• labour• capital• land• entrepreneurship.

• In economics these resources are called the factors of production and all four factors are required.

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Factors of production - Land

• Land provides the basic raw materials that become the goods.

• Land in economic terms is more than the physical earth• the naturally occurring materials of the planet used for the production of goods and services

• includes the land itself• the minerals and nutrients in the ground• the water, wildlife, and vegetation on the surface• the air above.

• The natural resources and materials of the land become the goods produced.

• Without these materials, there is no production.

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Factors of production - Labour

• Labour does the hands-on work.

• Labour is the mental and physical efforts of humans used to produce goods and services.

• Labour includes:• the physical effort of factory workers and farmhands

• the mental effort of executives and supervisors

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Factors of production - Capital

• ‘Capital” is the tool that makes the job easier.• Generally capital means the investment in goods that

can produce other goods in the future• In economics - capital refers to the machines, roads,

factories, schools and office blocks which human beings produce in order to produce other goods and services• Most modern, industrialised economies have a large amount

of capital• The capital we are referring to here is the produced

factor of production. • Society often faced with the choice between producing

consumption goods that satisfy wants and needs, and capital goods that are used for future production.

• Key role of capital is to make labour more productive • A team of construction workers could well build a four-

bedroom house with nothing but bare hands, BUT it would be much easier and more productive for them if they could use a range of hammers, saws, and other tools.

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Factors of production - Entrepreneurship

• Entrepreneurship organises the entire process.

• Entrepreneurship is the human effort that takes on the risk of bringing labour, capital, and land together to produce goods.

• Entrepreneurship is the factor that organizes the other three.

• Without someone to organise production, the other three factors do not produce.

• A key component is risk. • An entrepreneur is one who brings together all the resources of land, labour, and capital to produce a better product or service.

• The entrepreneur is willing to assume the risk of success and failure.

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3. The Government Sector

• The government sector includes all levels of government• federal, • state, and• local or provincial if these levels exist

• Not all countries have multiple levels of government. • Australia has a Federal Government, individual state governments and then government by local councils and municipalities

• Fiji has a Federal Government and a series of local government and provincial operations.

• The role of the government sector regarding the spending includes two related concepts• government spending and • government purchases.

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The Government Sector

• Government Purchases: • Specific term meaning actual expenditure made by the government sector on goods and services

• Expenditures are used to purchase a share of gross domestic product.

• Examples include military and defence spending, road and bridge construction, education, and police protection

• Government Spending: • Generic term for all spending by the government sector.

• spending for the purchase of goods and services i.e. government purchases.

• Also includes Transfer payments – e.g. welfare payments such as unemployment benefits or other social security payments.

These two terms are sometimes used synonymously, BUT there is a difference. As journalists we should be careful to use the correct terms.

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Economic Function of Govt.

• The main economic function of the government sector is to impose resource allocation decisions on the rest of the economy

• Role of central bank - Reserve Bank of Tonga, Fiji etc.:• issues the country’s currency• makes decisions about the nation’s financial systems and

• holds the reserves of money for the government

• Regulation - establishing, executing, and enforcing laws and rules.

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Economic Function of Govt.

• Governments• control how businesses can operate• make decisions about how to spend government money

• decide on issues that affect the economy•how much foreign investment to allow•health standards must be followed by businesses making food, etc.

• government sets the rules and businesses must follow them

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Economic Function of Govt.

• Society has decided that providing goods and services in some circumstances is better handled by the imposition of government rules than by voluntary market decisions.

• To regulate the economy, a government needs resources, which it acquires through taxes. • The ability to collect taxes requires government spending.

• The taxing and spending ability creates an important dimension of government.

• Rather than "ordering" others what to buy, the government sector can do so directly.

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Role of Taxes

• The role of taxes is important• Three main consequences:

• taxes reduce the disposable income of the household sector

• tax revenue is diverted to government control and provides the government sector with the revenue it uses to operate

• Tax incentives or disincentives can be used to encourage or discourage certain businesses

• An effective way of reallocating resources.

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4. Foreign sector

• Everyone and everything outside the political boundaries of the domestic economy• households, businesses, and governments in other countries.

• For example Fiji’s principal trading partners are Australia, New Zealand, Japan, and the United Kingdom – so the citizens of those countries are members of the foreign sector of the Fijian economy.

• The main facets of the foreign sector are:• Exports - goods purchased by the foreign sector that are produced by the domestic economy

• Imports - goods purchased by the domestic economy that are produced by the foreign sector.

• Net exports - the difference between exports and imports, or exports minus imports.

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Foreign sector example

• What happens in Fiji? • The government of Fiji consistently runs a budget deficit

• In 1997, revenues were $665 million with expenditures of $680 million.

• The balance of trade was also negative • exports were $544 million• imports were $1,254 million

• Sugar accounts for about one-third of Fiji’s exports. • Clothing, fish, gold, and lumber are also important. • The primary imports are machinery and transportation equipment, petroleum products, and food.

• In the Fijian economy the foreign sector accounts for a large proportion of the economy.

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How can we measure an economy?

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Economics data

• How can an economy be measured?

• What factors need to be considered when trying to understand what is going on in a country’s economy?• or within a segment of an economy?

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How to measure an economy

• Economists have ways of gauging a country's economic status

• These numbers take the form of how much money is in the economy• Important to distinguish between the real numbers and the nominal numbers.

• Real numbers are numbers that are adjusted for inflation. Inflation makes numbers seem larger than they really are, so real numbers are nominal numbers that have had the amount inflation accounts for removed.

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Measures of an Economy

• The usual measures of an economy are:• Gross Domestic Product (GDP)• Unemployment rate• Inflation rate

• These figures tell us if an economy is:• expanding or contracting, • doing better or doing worse and • look at trends and past performance.

•Statistical bureaus within a country collate and publish these figures •at frequent intervals e.g. Fiji Islands Bureau of Statistics.

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Different types of data

• Four types of economic data:• Total:

• A study of an overall economy is full of total data - count everything. Used for calculating gross domestic product.

• Average: • The arithmetic mean of several observations. A common average is per capita income - the average income for each person in the economy.

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Different types of data

• Percentage: • The relative proportion of a value compared to a total. The unemployment rate--the percent of the labour force unemployed.

• Index: • Composite number that shows changes relative to some given time period or value. Leading economic indicators combine assorted measurements like the money supply, stock prices, and unemployment compensation claims

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Gross Domestic Product

• GDP measures the combined output within a country's economy. • includes all output occurring within a country, individual income, business income, everything in one year.

• The most common measure, and when economists say the economy has risen or fallen by a certain amount, they mean how the GDP has changed

• Measures everything occurring within that country, even if the money was made by foreigners and foreign corporations.

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Gross Domestic Product ctd

• Gross National Product (or GNP). • measures the output of a country's businesses and people, even if they are overseas.

• Citizens of a country that make income in another country would be counted in the GNP.

• Multinational corporations would also have their profits registered in the GNP of their home country.

• GNP minus GDP yields the net foreign income• Output represented by foreign activity• Can be positive or negative depending on whether a country invests more overseas or more overseas countries invest in it.

• Sometimes, net foreign income is not significant because overseas profits and foreign profits made domestically may offset each other.

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Unemployment rate

• The proportion of a civilian labour force of employable age actively seeking employment• They are unemployed and not engaged in the production of goods and services.

• The unemployment rate is estimated and reported monthly by most government statistic bureaus. • Prime measure of labour unemployment in the economy• A key indicator of business-cycle instability

• The unemployment rate measures the proportion of the labour that is willing and able to work, but unemployed.

Unemployment rate = total unemployed X 100% total civilian labour force

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Inflation rate

• Rise in prices measured against a standard level of purchasing power• Previously the term used to refer to an increase in the money supply, (now called expansionary monetary policy or monetary inflation)

• Inflation is measured by:• comparing two sets of goods at two points in time• computing the increase in cost not reflected by an increase in quality

• Many measures of inflation depending on the specific circumstances.

• The most well known:• CPI - measures consumer prices• GDP deflator - measures inflation in the whole economy

• Inflation is caused by the interaction of the supply of money with output and interest rates.

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Inflation rate

• As journalists, you’ll come across these terms which all relate to inflation:• deflation - a general falling level of prices

• hyper-inflation - an out of control inflationary spiral,

• stagflation - a combination of inflation and poor economic growth.

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How do we measure inflation?

• Many different ways to measure inflation. • Each inflationary measure takes a

"basket" of goods and services• then the prices of the items in the

basket are compared to a previous time• then adjustments are made for the changes

in the goods in the basket itself. • For example if a month ago milk was sold in 1

litre cartons and this month it is sold in 1.5litre cartons, then the prices of the two cartons have to be adjusted for the contents.

• The result is the amount of increase in price which is attributed to "inflation" and not to improvements in productivity.

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How do we measure inflation?

• Many measures of inflation• which basket of goods and services are used as the basis for comparison

• Different kinds of inflation measure are used to determine the real change in prices, depending on what the context is.

• Some common measures:• Consumer Price Index (CPI) - measures the price of a selection of goods purchased by a "typical consumer".

• GDP Deflators – uses an entire economy as the basket of goods and services. The term "deflator" means the percentage to reduce current prices to get the equivalent price in a previous period.

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How do we measure inflation?

• Purchasing Power Parity - adjusts for the inflationary effects of goods being non-tradeable between two or more economies, for example land prices. Used to compare standard of living purchasing power between two economies. PPP adjustments are measuring inflation in location, rather than in time. Many inflation series numbers are also published for particular geographic regions.

• Historical Inflation - used for the purpose of comparing absolute standards of living “imputed inflation figures”.

• Note: Most inflation data before the early 20th century is imputed that is based on the known costs of goods, rather than compiled at the time. It is used to adjust for the differences in real standard of living for the presence of technology. This is equivalent to not adjusting the composition of baskets over time.

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Summary

• The basic structure of an economy• the flow of products and money throughout a standard economy.

• Past contribution of subsistence economies in the development of the world

• Concentrating on the most common economies now.

• Main functions of the economy and the roles performed by:• Households• Manufacturing and service industries• Governments• Foreign sector

• Main measures of an economy• Common types of economic data.

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Coming up!

• The key economic theories that shape the world

• The role economics plays in business and everyday life• Basic Economic Questions• Economic Decision-Making Model• Choices• Opportunity Costs• Economic Systems• Private Sector vs. Public Sector• Micro economics• Macro economics

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