Economics 101 (#31) Balance of Payments

February 6, 2012

International trade can be a profitable enterprise but many rich countries buy far more (in terms of €£$) than they produce thanks to the demands of consumers for highly finished, expensive goods which are produced cheaply in economies with lower costs (lower wage rates, lower cost of raw materials, lower production costs, lower operational costs etc).

A governments main account details the interaction between what it buys and what is sells. This is known as the balance of payments. This details all the financial flows (credit and money)  between a country and its trading partners.

Heres the PDF PIIGSty Econ 101 #31 BOPs

Lets have a look at some sample figures…


Economics 101 (#30) Currencies and Exchange Rates

February 6, 2012

A currency is essentially like any other good. It follows the law of demand and the law of supply and prices of it adjust accordingly (more abundant, the lower its price/value – the more scarce, the higher its price/value). Currencies facilitate trade because trade needs an established price value of goods. This price is expressed in a local currency i.e. US$, EUR€, GBP£ and others, and it determines demand for a good. As a result, the price of a currency determines demand for what you produce which determines how much you sell (as exports) and how much money you make as an economy. The price of a currency relative to another is called the exchange rate.

Heres the PDF PIIGSty Econ 101 #30 Currencies and Exchange Rates

A ‘strong’ currency isn’t necessary a good thing….

Economics 101 (#29) International Trade

February 6, 2012

Countries can’t possibly produce everything within their borders they need to keep their citizens happy. The only solution is to produce what you can based on the resources you have and buy all the rest from abroad. Producing everything would mean spreading a country’s resources and labour very thinly and inefficiently (imagine Ireland had to build its own cars, electronics etc).

Like any business, a country focuses on what it can best produce with trade making the whole system operate smoothly. This means Ireland can buy cars from Japan and electronics from the US or China while it focuses on producing agricultural, chemicals, medicines, financial services and all the other things Ireland has an advantage in (whether absolute, or relative vis-à-vis the trading partner in question)

Heres the PDF PIIGSty Econ 101 #29 International Trade

A government, through its resources, has substantial economic power. As such, a government can regulate trade (limiting it, making the country more ‘protectionist’ or promoting it, making the country more ‘open’)

Economics 101 (#28) Fiscal Policy

February 6, 2012

In these days of austerity and governments scrimping and saving, the most important policy activity of government is fiscal policy. ‘Fiscal’ policy is any action by the government which affects the size or make up of government (exchequer) revenue/income or expenditure/spending. This section will deal with the all important issue of the national debt and how its size and growth affects the overall economy.

Heres the PDF PIIGSty Econ 101 #28 Fiscal Policy

How does a government tackle the national debt?  Like your average consumer with your typical debt, you have to tackle spending in the first place (and so control your overall debt levels) and pay down your debts by spending more money on them. A government does this by slashing public spending (education, transport, health etc) and increasing taxation. But what makes for a good tax system and what tax options does a government have?

Economics 101 (#27) Economic Objectives of the Government

February 5, 2012

In #26, we saw that government can (and does) take action to tackle inflation. But this is not all government can do. Backed by massive tax revenues and so substantial resources (huge money reserves and the power associated with that), governments have significant policy controls at their disposal which they manipulate as they see fit. Of course, juggling these is a very fine balancing act as they each objective can conflict with each other.

Heres the PDF PIIGSty Econ 101 #27 Economic Objectives of the Government


Economics 101 (#26) The Price Level (and Inflation)

February 5, 2012

Prices rarely stay the same for long. Over time, prices can rise or fall on most goods but usually, its one way traffic. Like a balloon, the rising of prices is called ‘Inflation.’ Remember that the price of any good is determined by the quality demanded and quantity supplied of that good (or, to use one word, scarcity). If a good is scarce, theres not much of it around but people still demand it so those who produce that good can charge more and increase their profits (think of oil).

If the cost/price of what you buy is rising at a faster rate than your income is growing – your real income (purchasing power) is falling (because you now can buy less per €). In a general sense, the government can control prices and incomes through taxation and other methods. But to do this, we need to measure prices.This isn’t always straightforward.

Heres the PDF PIIGSty Econ 101 #26 The Price Level

A big question then is whether inflation is a good thing or a bad thing? First of all, there are many different types of inflation and each has its own causes. Second, you’d think that the higher inflation runs, the less likely it is that our incomes are rising at the same rate – so high inflation is a bad thing?  The real answer is: It depends on who you are and what you do in the economy itself.

Economics 101 (#25) Factors Affecting National Income

February 5, 2012

Carrying on from #24, PIIGSty presents an additional (but equally important!) insight into this ever important issue. Now we turn and look at what factors affect the level of national income.

Heres the PDF PIIGSty Econ 101 #25 Factors Affecting NI

One of the most important concepts in economics is detailed in the following diagram on the circular flow of income. This explains how different sectors of the macroeconomy are linked and interact with each other from your average household to the workplace. How does money flow IN and what makes money flow OUT?

Economics 101 (#24) National Income

December 1, 2011

A term that has entered back into every day eco-speak is ‘national income‘ which quantifies the size of an economy. Its defined as the total income earned by permanent residents of a country in a year OR the total value of economic output produced over a year OR the total spend on output…

Pretty flexible definition then! Each has its pros and cons but ALL are important to know.

Heres the PDF PIIGSTY Econ 101 #24 National Income

These figures can all be very useful but there are also limitations to measuring an economy…


Economics 101 (#23) Money and Banking

December 1, 2011

Money makes the world go ’round. But..what exactly is money? Is it just those banknotes and coin we carry around…? How is money created and what can banks do to create it..all these questions are answered in this Econ 101!

Heres the PDF PIIGSTY Econ 101 #23 Money and Banking

Let us look at the commercial banks more closely…

Economics 101 (#22) Enterprise and Profit

December 1, 2011

The 4th Factor of Production (FOP) is Enterprise (and the reward for providing it, profit). Enterprise  is defined as the intitiatve involved in organising land, labour and capital and which bores the risks involved in production.

Heres the PDF PIIGSTY Econ 101 #22 Enterprise and Profit