Friday, April 13, 2012

Post 3. The Economy - The bigger picture: National Income Accounting (micro and macroeconomics)

You need to grasp what is meant by "the economic cycle"

Macro-economics has to do with the total production of goods and services in an economy.
This would then also account for the total expenditure on those goods and services. The total income - which is earned by employing the factors of production will also be part of the national accounting system. Issues such as the total employmnet level in an economy, the general level of prices of the goods and services, the total supply of money in an economy will all be issues that will fall into the ambit of Macro-economics.

These processes are encapsulated in what is generally referred to as the "economic cycle"

In the first place it is important to understand that the economy consists of, or can be classified into, different sectors. Firstly one has the "households" on the one hand and "firms" on the other. These participants are the decision makers regarding the transactions that take place between them. These transactions - how many, what and the prices at which these transactions take place is studied in Miroeconomics (also called Price Theory).

Their relationship is also influenced by other participants, namely the Public sector (Government) and the foreign sector (imports and exports) and Financial Institutions. This expanded view is studied in Macroeconomis (obviously there will be an overlap between the two.

Decisions between the participants are influenced by the values that they attain when trading with one another. The households want the goods and services to satisfy their needs - the firms want what households have to offer - land, capital, labour and entrepreneurship. As one can see the split between firms and households is an artificial one because in reality they are the same entities - labour may be a slight exception, though labour is a very important source of financial capital in the form of savings (through pension funds and other instruments).

There are two characteristics which affects the decisions of the households and firms in deciding how much to spend on which resource - firstly it is the scarcity of the required resource for a particular purpose and secondly the alternate use to which a particular scarce resource can be employed.

This decision is led by the marginal value that can be attained by employing a particular resource for a particular purpose. This marginal value is expressed by the price of the resource or good. This process will be explained later when we look into marginal value.

The economic processes that the economist is interested in is: Production (price and quantity), how prices are formed in a market, the role of the entrepreneur, the effect of economic freedom versus control, the relationship between economic freedom and wealth creation, trade, consumption patterns, how some economic systems keep people poor, the effect of property rights regimes on the creation of income and wealth, the effect of government involvement in an economy, expenditure and so on.

It is also important that the student of economics understands what markets are and how they operate.

At this point it will be a useful investment of your time to read the Wikipedia article on Economics

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