Key Economic Concepts: Market, GDP, Inflation, and More

Posted on Dec 14, 2024 in Economy

Key Economic Concepts

Market

A market consists of buyers and sellers of goods, services, or a factor of production. There are different types of markets:

  • By type of property being traded, we distinguish between markets for goods and services and markets for factors of production.
    • Factor markets are characterized by the buying and selling of financial resources for productive activities.
    • Goods and services markets are characterized by the buying and selling of goods, e.g., food items.
  • Considering the number of buyers and sellers and product differentiation, we distinguish between perfect competition, monopoly, oligopoly, and monopolistic competition.
  • Perfect Competition: Characterized by the existence of many buyers and many vendors and a homogeneous product that is not differentiated by brands or models.
  • Monopoly: Characterized by the existence of many buyers and one seller offering its product on the market, e.g., instant photography.
  • Oligopoly: Characterized by many buyers but few companies who sell the same homogeneous product, e.g., gas stations, mobile phones.
  • Monopolistic Competition: Characterized by many buyers and sellers, but a differentiated product by brand, model, or design, e.g., detergents, computers.

Supply

Supply is the willingness of sellers to sell their product at a specified price. Besides price, other factors influence supply, such as:

  • The costs incurred by the company to obtain the goods or product.
  • The weather.
  • Taxes.

The higher the price, the greater the amount of product that sellers are willing to offer.

Demand

Demand is the willingness of buyers to buy a product at a specified price. Besides the price, this provision will depend on:

  • The purchasing power of the buyer.
  • Tastes and preferences.
  • Other factors, such as the existence of substitutes.

The higher the price, the lower the amount of product that buyers are willing to buy.

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the monetary value of all final goods and services produced within a country during a period of time.

  • Final goods and services: Those that are purchased directly by consumers and are not resold or incorporated into the production process.
  • Monetary value: All figures are to be transformed into monetary units to facilitate their aggregation.
  • Period of time: Usually one year, although it is usual to carry out monitoring of GDP in shorter periods.

The Difference Between GDP and GNP

The GNP includes the value of production carried out by national factors of production, whether they took place inside or outside the country.

GDP Calculation

The calculation of GDP is of great importance in determining the progress of the economy. There are three ways to determine GDP at market prices, according to the macro under consideration. This triple via calculation stems from the fact that the value of production has to match the expenditure incurred to acquire it, and both have to match the income generated among the participants in the productive process.

GDP Growth Rate

If real GDP grows, it indicates that the economy is producing a larger quantity of goods and services, which ultimately may provide its inhabitants. This process creates jobs and generates income: wages, benefits, etc.

GDP growth rate (2007) = (GDP2007 – GDP2006) / GDP2006 * 100

Unemployment Rate

The unemployment rate is the percentage of the active population that is unemployed.

  • Active Population: Population of working age (between 16 and 65) who is employed or unemployed.
  • Unemployed Population: Part of the population that has no work and who actively seeks it.

Inflation

Inflation is the general and continuous increase in the price level of goods and services in an economy. Inflation can significantly influence the progress of a country’s economy and the lives of people in several ways:

  1. If prices rise but a worker’s pay does not, there will be a decline in purchasing power.
  2. If the prices in a country increase more than in neighboring countries, it will be more difficult for this country to sell its products abroad.
  3. As inflation rises, the interest rate will tend to do the same, i.e., the price of money.

Consumer Price Index (CPI)

The Consumer Price Index measures the price change of consumer goods in a given period.

Public Deficit

If public spending exceeds revenue, the state incurs a public deficit. To finance the public deficit, the state used to borrow from individuals and domestic and foreign financial institutions. The set of modes with which the state recognizes its debt is called public debt.

To ensure the smooth functioning of the economy, the state carries out different actions:

  1. Provides goods and services not supplied by the private sector, or does so in a manner sufficient.
  2. Redistributes income among citizens. For this reason, it develops systems aimed at citizens who are in a precarious situation.

Public Expenditure

Public expenditure is the set of resources that the State intends to cover the needs of its public nature. Logically, the state has to raise funds to meet its spending commitments. It does so through government revenue.

Public Revenues

Public revenues are all the revenue with which the state funds public spending. The means of collection are taxes.

Balance of Payments

The balance of payments is an accounting document that records the transactions carried out among residents of a country and the rest of the world during a period of time, usually one year.

The Balance of Payments is Made Up of Three Sub-Balances

  1. Current Account
  • Goods – Imports and exports of goods.
  • Services – Tourism, transportation.
  • Revenue – Rents, investment income, workers’ income from seasonal work in other countries.
  • Current transfers – Remittances sent by migrants to their families, EU subsidies, contributions to the EU budget.
Capital Account
  • Transfer of capital funds for EU regional development funds, EU cohesion funds for the environment.
  • Acquisition and disposal of non-financial, non-produced intangibles.
Financial Account
  • Direct investment is that which is carried out with the intention of having a significant degree of influence on the direction of the company.
  • Portfolio investment – Purchases and sales of securities that are not included in the previous section.
  • Other investment – Loans linked to business and financial operations.
  • Variation in reserve – Variation in reserve assets, such as foreign currencies, gold.

Balance of Current Account

The balance of current account is the difference between income and payments. It informs us about the competitive position of the economy of a country to the rest of the world.

Currency Market

In the currency market, coins of different countries are bought and sold.