Understanding Economics: Markets, Labor, and Government
Income and Capital Markets
Income
Income represents the value or price of a factor of production in a given period. Income receives different names depending on the productive factor generating it: income from work is called salary, income from natural resources is called rent, and income from capital is called interest.
Capital Market and Interest
Capital market interest is the value of services or capital, more specifically, the price of money.
- Demand (Borrowing): This is formed by different economic agents who want to meet their consumption needs (in the case of a family), investment needs (in the case of a company), or spending needs (in the case of the government).
- Supply (Lenders): This consists of savings (of families), earnings (of companies), and surplus (of the government).
- Equilibrium Interest Rate: The European Central Bank influences interest rates.
- Lenders: Those who lend money.
- Maturity: When the agreed-upon period has elapsed, the lender recovers the amount lent.
- Interest: A concept that quantifies the value of having renounced consumption.
- Borrowers: They prefer present consumption to future consumption.
Job Market and Wages
Labor Demand
Labor demand is derived from the jobs offered by companies.
- Wage Level: If the value of wages increases, costs increase, and companies are willing to hire fewer workers.
- Price of Goods or Services Produced: The higher the price at which companies can sell products, the more likely they are to hire new employees to increase production.
- Productivity: The worker’s qualifications, training, and experience affect their work output.
Labor Supply
Labor supply comes from families, specifically workers.
Equilibrium Wage
The minimum wage in 2007 was fixed at €624,000, an amount that is updated every year.
Minimum Wage
The minimum wage is the minimum amount, regardless of profession, that any worker in Spain should receive.
Employment Policy
Employment policy is a set of plans and procedures that aim to reduce unemployment in the economy.
Population Characteristics
Working-Age Population (WAP)
Spanish educational laws set compulsory schooling until the age of sixteen.
Labor Force (LF)
This includes both people working and those who want to work but cannot find work.
- Employed: People who are employed by others (employees) and those who work on their own (self-employed).
- Unemployed: People who are of legal working age, actively seeking a job, and unable to find one.
Inactive Population
People who only consume.
Employment and Unemployment Rates
Activity Rate (AR)
The activity rate is defined as the relationship between the labor force and the working-age population.
Unemployment Rate (UR)
The unemployment rate is the ratio between the number of unemployed and the total active population.
Employment Rate (ER)
The employment rate is the ratio between the number of employed and the total population.
Classes of Unemployment
Cyclical Unemployment
This type of unemployment depends on private initiative and the succession of phases of economic expansion and recession.
Seasonal Unemployment
This is due to the existence of certain activities that only require labor at certain times of the year.
Structural Unemployment
This type of unemployment arises from imbalances between labor supply and demand.
Frictional Unemployment
This is voluntary unemployment where individuals, although they can work, choose to take time to study, rest, or find a better job.
Market Failures
Definition
A market failure is a result of negative market performance and occurs when the market does not allocate resources efficiently.
Examples include the instability of economic cycles, the existence of public goods, externalities, imperfect competition, and unequal distribution of income.
Instability of Economic Cycles
This is the most important market failure because it directly affects the quantity and characteristics of jobs in a country.
Economic Cycles
Economic cycles are fluctuations in economic activity with alternating phases of expansion and recession.
- Non-Intervention: Some believe that the market will self-correct and exit the crisis, leading to economic expansion again.
- Intervention: By producing or consuming goods and services, the state can artificially increase the level of economic activity to compensate for the lack of private demand.
Externalities
Externalities are the consequences of an economic activity that affect people other than those who conduct the activity and are not reflected in the prices of goods and services produced.
- External Cost: The cost of an economic activity that falls on people other than those who develop the activity.
- External Benefit: The benefit of an economic activity that affects people other than those who carry out the activity.
The Welfare State
The welfare state is a particular case of a mixed economy system characterized by a series of basic rights recognized by the entire population, such as health, education, and housing.
- Universal Benefits: Offered to all people free of charge; one simply needs to request the benefit.
- Contributory Benefits: Available to those who have contributed to Social Security for a certain period.
- Social Benefits: The most robust benefits, as the beneficiaries are groups with few or no resources.