Key Economic Concepts and Global Institutions
Key Economic Concepts
Benefit: The result of the difference between expenditure and revenue.
Market: The set of consumers who demand goods and services and all the producers that offer them.
Good and Service: A good is any object, and a service is an activity intended to satisfy a need.
Cost of Living and Inflation: The cost of living is the minimum amount of expenditure for essential goods and basic services (Consumer Price Index – CPI). The rise in commodity prices is inflation.
Investment and Speculation: Investment is the amount of money that is intended to start a business, or to maintain and improve it. When a quick profit is obtained from a commercial or financial transaction based on the variation of the price of goods, it is called speculation.
Production and Productivity: Production refers to the goods and services generated by an economic activity. The relationship between what is produced and the means employed determines productivity.
Gross Domestic Product (GDP) and GDP per capita: GDP is the total value of goods and services produced in a territory over a year. It reflects the wealth or income generated in that country. GDP per capita is the GDP divided by the number of inhabitants in the territory.
Taxes: Payments that individuals and businesses must make to a public body.
- Direct Taxes: Taxes on income. The tax depends on the annual income of people.
- Indirect Taxes: Taxes on acquiring goods and services. People pay the same amount.
Global Economic Institutions
There are international institutions and organizations whose activities affect the functioning of the global economy.
- World Bank: Its main objective is to reduce poverty. It provides loans and assistance to countries in need to promote economic growth and development.
- International Monetary Fund (IMF): The IMF advises governments and may grant financial loans to member countries. Richer countries have more representation and votes, so they can impose their interests.
- World Trade Organization (WTO): It aims to establish the rules of international trade and resolve trade disputes among its members.
- G7: Comprises the U.S., Germany, Britain, France, Japan, Italy, and Canada. In 1997, Russia joined, forming the G8. It meets annually to discuss the world economic situation and decide on joint actions in cases of crisis.
Economic Systems
The Subsistence System
In the traditional or subsistence economic system, families produce everything they need to meet their needs. They sell or exchange any surplus in the local market.
The Communist System
The communist central planning system does not recognize private ownership of the means of production. The state controls all aspects of the economy. This system was widely used for decades, but now only survives in a few countries such as Cuba, North Korea, and China, although China is gradually opening its economy.
The Capitalist System
Known as the free-market economic system, it dominates the world today.
- Private ownership of means of production: land, machinery, technologies, companies, etc.
- The pursuit of profit as an engine of economic activity.
- The regulation of the number of products made by companies and the price at which they will be sold is determined through the law of supply and demand. The production and price of an item increase when the product is scarce.
- The existence of free competition means that any individual or company can undertake the economic activity they want.
- It can happen that one company controls the production and sale of a product, setting the price and quantity of this product on the market (monopoly).
- When the handling of a product is in the hands of a few companies, it is an oligopoly.
Currently, states participate to correct some major problems that occur if companies are left totally free: trying to prevent monopolies from forming, protecting the rights of workers and consumers, and trying to achieve a harmonious development of the economy.