Basics of economic development

Basics of economic development – How the three factors work?

The basics of economic development of a country or a region start with how people buy and sell. The forces of demand and supply then determine the development of a region. Another factor which is included in the basics of economic development is the working population, as they are the producers as well as consumers of factors of production. An economy starts off primarily as an agriculture-based economy, with land being the most important factor. The other two factors are human labour and capital work on land to produce goods. As the economy develops, mechanisation comes into agriculture and the focus shifts to industrial production. Here, capital becomes central to development and human labour and land are secondary. The final chapter in the development is a shift to services. Agriculture now has the least share of the GDP, followed by industry. In a service based economy, human labour is the critical success factor and capital and land act as secondary factors. Australia is currently a developed economy with industries in a decline. However, the people migrating from other parts of the world add value to the economy with their skills. In fact, High immigration masks Australia’s economic decline.

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Economic concepts and choices

How to understand economic concepts and choices

Understanding economic concepts and choices are becoming more and more important in our everyday life. Economic thinking and economic concepts have sneaked into our everyday behaviour and activities. You can see the influence of economic thinking on yourself by observing the way that you take your decisions. For example, when you or your parents decide on the right university for you or when you try to figure out how to spend your vacations. One thought is always guiding your decisions. It is the thought of efficiency. Efficiency is the main concept of economic thinking. It is defined as using fewer resources to gain a better output. So, are you are still asking yourself who needs economics? Then you are probably not aware of the fact that everyone needs them. You need them to understand yourself and the world around you and to be able to judge your own thinking. Economic concepts and choices that humans make are linked together. The main linkage between them is rationality.

3 basic economic systems

3 basic economic systems at work in Australia

The 3 basic economic systems that are present all over the world, and in Australia, are the market economy, the traditional economy, and the command economy. These 3 basic economic systems answer three basic questions faced by every economy. The questions are – What needs to be produced? How can we produce what is needed? And How to distribute what is produced? The answer to these three basic questions is the secret to a healthy economy, and the three systems have to work in tandem to achieve this goal. The traditional economy takes into view customs and beliefs to run the system which is not ideal but works in some cases. The market economy professes that all the economic resources lie in the hand of the people and the forces of demand and supply should have a free reign. However, the command economic system professes planning by the government and owning of resources by the government. But following any of the two in pure form can lead to imbalances, and according to a recent survey An economic crash could trigger World War Three. The mixed economic system is the best which takes together the best of market and command economic system. Infrastructure should be regulated by the government (Command economy) while normal markets should have a free reign (market economy). This makes the system sustainable in the long run. So, the economy of China which is command economy and economy of America which is a market economy is not the solution to the three economic questions. A combination brings the balance.

Presence of monopoly in real life

All of us have played the Funskool game Monopoly as kids. The winner was the one who owned all in the end, by trade and commerce. Little did we realise then that Monopoly in real life was possible. Monopoly in real life means a situation where one seller owns and controls the supply of a particular product/service. In that case, the normal rules of demand/supply and price do not apply. The monopolist decides how much to produce and how much to send to the market. The pricing which is generally decided by the market is also decided by the monopolist. It is an undesirable situation in the economics context. In the real world, it is not one player who can become a monopoly due to the globalisation of trade and commerce. However, monopolies exist in the form of groups that control resources known as “cartels”. The examples of monopolies in real world are the OPEC (Organisation of Petroleum Exporting Countries) and the Indian Railways which is a government enterprise.

Monopoly in real life - OPEC

Inflation & Deflation

Inflation & Deflation : Necessary evils for the economy

Inflation & Deflation are economic terms that should be well understood by everyone. Inflation & Deflation mean a rise in the price of goods and services and dip in the price of goods and services respectively. Inflation is caused when the goods and services are in high demand. This leads to a shortage in supply and subsequent increase in prices. In the case of inflation, the rise in prices can also be due to increase in buying power of consumers, or due to dropping in supply due to natural disasters. Deflation, on the other hand, occurs due to the availability of too many goods and not much buying power in the hands of the consumer. This can lead to overstocking and force companies to decrease prices. The banks and financial institutions tend to cut credit further reducing the buying power. This can lead to further deflation. Deflation is dangerous as it can lead to a period of depression where goods and services have to be sold at prices below their break-even point. Hence, central banks tend to shoot down deflation as soon as it appears. A fine balance between inflation and deflation is required for a healthy economy. Australia has a policy of controlling inflation which has led to buying power in a number of hands. However, in the past couple of years, the prices of goods and services have gone down. Is deflation coming to Australia? Well, it is too early to make that call.

Our economy today is stable?

Our economy today - is it stable?

Our economy today is facing all kinds of road blocks. It has been able to stall inflation and seems quite stable. But is it stable? It seems so for the time being, but signs indicate that we are headed towards bad times. The mainstay of the economic policy for our economy today is keeping inflation down. However, it will not be long before the two main supporting factors will turn negative. In fact, one factor has already turned negative. China, one of our major trade partners, has seen single-digit economic growth after almost 3 decades. The growth of the Chinese economy has supported Australia, but now when the Chinese economy is on the way down, the effect will eventually trickle down. The second factor that has been supportive of our economy has been the low oil prices. They remain low, but OPEC has decided to up them starting August 2016. So the second factor that helped to keep inflation down is also going to disappear soon. The future seems challenging.

Politics versus Economy

Politics plays a critical role in a country economy.  Some people may want to dispute this fact but politics will always shapes a countries economy. That is why electorates are always asked to be careful who they elect as their leaders for they will influence more than just representation but economy at large.

economyDifferent countries have different forms of governments which shape the political system. In a democratic government, people are given a chance to elect whoever they prefer to be their leader. This creates division among citizens with each group having their own views hence political parties are formed. Some of the views that each political party has include how they think how the economy should be managed. These views may include raising taxes, cutting interest rate, internal borrowing as opposed to international borrowing, introducing or expanding social welfare, increasing minimal wage etc.

Depending on the economic status, one political party strategy on economy might improve or destroy the economy. Let us not forget that the world has become a global village. One country internal political change might create ripple in the global economy.  If a new government had campaigned on nationalization policy, then investor will start pulling out for fear of losing their investments. This will create a vacuum that cannot be filled instantly which in turn will affect international trade, interest rate, inflation and many other aspect of the economy.

Utterance by politicians will also play a role in building investor confidence. Any utterance that will be deemed as fueling internal conflict will scare away investor.  Every country needs external investors to grow. If the political environment will not be conducive for any potential investor then they will opt to go to other countries that they see as invest-able.