Module 6

Economics

What is an economic system? 

An economic system is an organized way in which a country allocates

resources and distributes goods and services across the whole nation
or a given geographic area. It is includes the combination of several
institutions, entities, agencies, decision-making processes and patterns
of consumption that make up the economic structure of a specific
community.
Economic System Models

1.Capitalism –the factors of production and distribution are

owned and managed by private individuals or corporation.

Essential characteristics of capitalism are:

● Private property
● Economic freedom
● Free competition
● Profit motive

2.Communism – opposite of capitalism. The factors of production

and distribution are owned and managed by the state.
 ● No private property
● No free competition
● No economic freedom
● Presence of central planning

3. Socialism is a combination of capitalism and communism. The

major and strategic industries are owned and manged by the state
while the minor industries belong to the private sectors

Three main economic systems

Economic systems can be basically classed into three categories.

Market economy: here prices are determined by levels of supply and demand, instead

of central and or local government. Market forces determine what is produced, how
much is produced, how it is distributed, plus the prices of goods and services.

In a market economy, the government plays a minor role and only lays down the rules
so that businesses can thrive. An outdated word for this type of economy is Capitalism.

Planned economy: all decisions regarding production, distribution, salaries, investment

and prices are made by a central authority – usually the government. The closest
examples to this type of economy today are North Korea and Cuba.

In a planned economy, also known as a centralized economy, controlled economy or

command economy, central government has planners who make all the decisions.

According to economists, the most fundamental difference between a market and

planned economy is the existence of private property, i.e. it exists in the free market and
does not in the command economy.

Mixed Economy: market economies sometimes get into trouble, at which point the
government feels compelled to intervene. Sometimes, when lawmakers believe some
players are being exploited unfairly, or the level playing field for business is under
threat, the government may become involved.

Similarly, the leaders of a command economy may decide that more investment is
required, and the only way to accomplish this is by allowing more freedom.

Vital criteria to judge the performance of various economic system. These are
briefly explained:
Abundance – refers to goods and services that individual members of society have
received. Are these sufficient and are the people satisfied. Are there no problem in
food, clothing, shelter, medicare, education and recreation?

Growth – the growth of the economy is tangible, and is measurable in term of numbers
of buildings, houses, schools, cars, hospitals or technologies made in a given year.

Stability – refers to the absence of inflation and unemployment. The problem of inflatin
alone can easily create more economic stability.

Security – economic security generally depends on economic stability. Workers and

employees do not lose their jobs if there is prosperity in economy.

Justice and equity – is the distribution of wealth, income and power among the
members of society fair? Is there no big gapo between rich and poor?

Economic freedom – is a consumer is free to choose his food, style of his house, any
kind if appliances, his recreation or his education, then there is economic freedom. If the
businessman is free to invest his money to put up any business or to decide his
strategy, then there is economic freedom.

Social Justice - The Goal of Economics

Economics is basically concerned with the fair distribution of goods and services. Such
fundamental role of economics has been focused towards the attainment of the
following objectives:

● Economic growth

● Full employment

● Price stability

● Economic freedom

● Equitable distribution of wealth and income

● Economic security

Module 7 (maximum of 4 members)

Business cycle: unemployment and inflation
 A business cycle is the repetitive economic changes that take place in a
country over a period.
The business cycle refers to the alternating phases of economic growth
and decline. Since the phases are recurring, they often occur in an
identifiable pattern where one phase usually follows the other.
 a trade cycle consists of the following four phases:  

1. Expansion: When a nation’s GDP shows an upward move or recovers

with time, this period of growth is remarked as economic expansion.
During this phase, the various economic indicators like consumer
spending, income, demand, supply, employment, output, and business
returns shoot up.
2. Peak: During the expansion phase, the GDP spikes to its highest level;
this is considered the economy’s peak. At this point, economic
factors like income, consumer spending, and employment level remain
constant.
3. Contraction: Next comes the phase of economic slowdown; it occurs
when the stagnant peak GDP starts tumbling down towards the trough.
With this, the nation’s production, employment level, demand, supply,
income level, and other economic parameters plummet.
4. Trough: This is the stage at which the GDP and other economic
indicators are at their lowest. During this phase, the economy gets stuck
at a negative growth rate. Additionally, the demand for goods and
services reduces.

Limitations
Predicting the business cycle phase is crucial for policymakers and
governments so that they can deal with deflation and inflation
accordingly. The cycle also warns investors, owners, consumers, and
strategists. However, the following are the disadvantages associated
with the business cycle:

● Limited Information: Since the economic cycle analysis is based on

research, it becomes difficult for economists to access complete and
 accurate data. Moreover, the process of correlating and interpreting
acquired information is equally challenging.
● Two Contrasting Models: The Keynesian theories consider money
supply to be the important factor behind fluctuations. But the Real
Business Cycle theory opposes this concept and proposes that market
imperfection is the important factor behind fluctuations.
● Human Glitch: Economic researchers are humans; they are the ones
who study trade cycle trends and present economic indicators that
cause the trend. Thus, this analysis is prone to human errors.

Theories of business cycle

Theories of business cycle can be classified into two categories
1. Exogenous theory – forces outside the economic system create
the business cycle. Example of these factors are wars, political
development, natural disasters or major innovation.
2. Endogenous theories – forces within the economic system cause
the fluctuation in the economy. Examples are accelerators,
multipliers, innovation or monetary policies. An increase in
aggregate demand results to a greater increase in investment.

Unemployment is when a person who’s actively seeking employment can’t find

work — but its effects go beyond any one individual looking for a job. Unemployment
also has implications for families, employers, and the economy.

Effects of Unemployment

Because of unemployment’s far-ranging consequences, it’s important to understand

joblessness, the different types of unemployment, and how to avoid becoming
unemployed. Following are some of the groups that unemployment can affect:

a)Unemployed Workers and Families

When workers are unemployed, they lose wages and purchasing power, losses that
could leave them unable to afford basic needs, such as quality healthcare and nutrition.
Unemployed individuals no longer contribute to the economy by providing goods or
services, and that also can lead to an erosion of their skills. Additionally, when people
 lose their jobs, they may face depression, anxiety, and loss of self-esteem; sometimes
those issues can lead to divorce, domestic violence, or even suicide.

b)Employers

Unemployment costs employers time and money. When an employee leaves a job,
whether voluntarily or involuntarily, the company incurs costs in finding, hiring, and
training a replacement.

c)The Economy

Unemployment has the potential to plunge the economy into recession. Consumer
purchases help fuel the U.S. economy — and when unemployed workers have less
discretionary income, their consumption typically declines. Less spending power
means less money to purchase goods that others have produced, potentially
jeopardizing their jobs as well..

d)Society

Widespread unemployment can lead to increases in crime, in some cases leading

people to illegal activities to make ends meet or to fill idle time. Unemployment
concerns can also lead to anti-government activism that feeds political instability

Measures of Unemployment
To gain a complete picture of unemployment statistics, reviews factors such as:

● Number of employed people

● Number of unemployed people
● How people became unemployed
● How long people have been unemployed
● Unemployed people’s demographic information, such as gender, age, ethnicity, and education
level
● Where unemployed people live
● Whether unemployment rates are increasing or decreasing
Types of Unemployment
1. Cyclical Unemployment

The term “cyclical unemployment” refers to the variation in the number of unemployed

workers during cycles of economic strength and weakness. When demand for a
product or service declines, production also goes down. This creates less need for
employers to hire people who are looking for jobs, causing the unemployment rate to
increase. During the early stages of the COVID-19 pandemic, for example, people were
confined to their homes, leading many businesses to shut down.

2. Frictional Unemployment

Frictional unemployment is the result of people voluntarily leaving their jobs. People

who’ve resigned from their jobs and graduates seeking their first jobs need time to find
employment, leaving them unemployed in the interim. The economy that emerged from
the COVID-19 pandemic saw frictional unemployment, for example, when employers
asked employees to return to work in person after they’d worked remotely for many
months.

3. Structural Unemployment

Fundamental changes in the economy and labor markets, such as evolving technology,

government policies, and competition, can create structural unemployment. This
means that while jobs are available, the people who could fill those roles either don’t
have the right skills for them or aren’t in the right location.

4. Natural Unemployment

Natural unemployment is the combination of frictional and structural unemployment. It

refers to the lowest unemployment level a healthy economy can sustain without
causing inflation. People are always voluntarily looking for new jobs, causing frictional
unemployment, and job skill requirements are always evolving, causing structural
unemployment.

5. Long-Term Unemployment

Cyclical and structural unemployment drive long-term unemployment. Some

individuals who were unemployed for a long time as a result of the economic downturn
found themselves no longer fit for the skills the jobs required, driving structural
unemployment.
 6. Seasonal Unemployment

Seasonal jobs are limited to a certain time period, sometimes leaving people who work
in those jobs without employment after the season ends. Theme parks, for example,
employ workers only during their operational seasons, which in many climates is
limited. A ski lodge’s employees generally work only when people are skiing.
Agricultural workers’ jobs are timed to when crops are in season.

7. Classical Unemployment

Classical unemployment, also known as real-wage unemployment, occurs when real

wages, or the cost of employing a worker, are too high. This circumstance leaves
companies unable to afford all the workers who are available.
Companies that can’t afford real wages decide not to hire as many people as are
seeking jobs. An example of classical unemployment is when workers negotiate for a
minimum salary that’s more than what a company can afford, making hiring those
employees too costly for that company and leaving those workers unemployed.

8. Underemployment

Underemployment differs from unemployment in that it describes people who are

working, but aren’t employed at their full capability. Measuring underemployment
shows how effectively the economy is using the labor force’s skills, experience, and
work availability. Following are the categories of underemployment:
● Visible underemployment. With visible underemployment, employees work part time despite
their desire to work more hours. Underemployed people, such as office employees who can
find only part-time roles, may work multiple jobs to earn the equivalent of a full-time salary.
● Invisible underemployment. When individuals who can’t find a job in their chosen field take a
job that isn’t in line with their experience and skills, they represent invisible underemployment.
Their work often pays less than a role that’s more in line with their background would pay. A
person with an engineering degree working at a coffee shop is an example of invisible
underemployment.

Inflation

is defined as the persistent increase in the price level of goods &

 Inflation
services and decline of purchasing power in an economy over a period of
time.

Cause of inflation are:

Demand Pull Inflation
● Arises when aggregate demand in an economy outpaces aggregate
supply.

● It involves inflation rising as real gross domestic product rises and

unemployment falls. This is commonly described as “too much
money chasing too few goods”.

● Possible causes of demand-pull inflation:

oExcessive investment expenditures

o Excessive growth of consumption expenditures
o Low-cost loans
o Tax cutting
o Augmentation of government expenditures
Cost Push Inflation
● Cost Push Inflation is a type of inflation caused by large increases in
the cost of important goods or services where no suitable alternative
is available.

● Possible causes of cost-push inflation:

o Imperfect competition
o Increased taxes
o Rising wages
o Political incidents (like oil crises)
Built In Inflation
● Induced by adaptive expectations, often linked to the “price/wage
spiral

● It involves workers trying to keep their wages up with prices and

then employers passing higher costs on to consumers as higher
prices as part of a “vicious circle.

● Built-in inflation reflects events in the past, and so might be seen as

hangover inflation.