Lecture 13: Systems of Economy

Question 1

What is economics?

Answer 1

• Trade
- A way to get what you need to live
- exchange something you have for something you need
- invent money or trade will be complicated and slow
• Economics
- How system of trade operates
- Promote efficiency: people get what they need
- Economic theory and practise: refine money system
• Society
- All this involves / connected groups of people and resources
• Macroeconomics
- An attempt to describe, predict and control all this the scale of whole populations
Common population scale: GDP, unemployment, inflation, productivity, inequality

Question 2

What are the systems of economy ?

Answer 2

• traditional
• command
• free market
• mixed

Question 3

Define the systems of economy and their disadvantages

Answer 3

• Traditional economy
- Evolved according to social customer (before industrial revolution)
- Common for self sufficient societies (i.e. agriculture)
- Production driven by direct need and what is known to work
- Highly efficient when tuned to specific conditions e.g. local ecosystem
Disadvantages
- Limited to stable long term conditions
- Becomes inefficient and endangers whole community
- If climate, pop, external political factors change => tradition slow to respond

• Command economy e.g. soviet union, china
- Centrally managed production 
- Achieve efficiency by coordinating mechanisms of production, trade etc.
- Move surpluses to where they are most needed, avoid unnecessary production  Disadvantages
- Requires lots of effort in control and planning
- Large scale apparent efficiency could mean small scale inefficiency i.e. not easy to plan and control down to fine details
- Requires reliable understanding of how trade etc. work but systems too complex for it

• Free market
- Minimal control, allows markets to find efficient equilibria 
- Supply (Resources), demand, price reach equilibrium 
- Spontaneously evolve most efficient system (max benefit to all involved) Disadvantages 
- Tends to assume markets at stable equilibrium (rarely true)
- Markets never free - those involved predict and control to maximise benefit
- Not clear that goal is efficiency exchange - more interested in individual benefit 

• Mixed economy (most modern economies)
- Combination previous three
- Try to benefit from free market but add control to avoid negative effects  Disadvantages
- Economies managed at national scale => different nations are interdependent 
- Nations import and export; global sum of import and export fixed
- Multinational businesses
- National currencies - different, need basis for exchange, need trust (politics)

Question 4

What is macroeconomics?

Answer 4

GDP, unemployment, inflation,

Question 5

Define GDP

Answer 5

• Total value of everything produced by country = smaller GDP, smaller economy
  
  • GDP change used as measure of growth
• Criticised = doesn’t measure trade efficiency

Question 6

Define unemployment rate

Answer 6

(% of working age pop)
- Relation with GDP
- All trade relies on exchange => need income to trade to make economy work
Data suggests fix unemployment to fix economy

Question 7

Define inflation

Answer 7

(% rise in typical prices across nations trade activity)

- Trust - is it worth the same tomorrow as today?
- Relation to employment = rising costs, rising prices, rising wage or less people buy
- Relation to saving and investment => investment not worth it if it returns less than inflation rate (trade decrease) =>  saving rate higher than inflation rate , more money saved than spent (trade decrease)
- Negative inflation (deflation) = prices fall over time, discouraging spending and decreasing trade
- Relation to taxation

Question 8

Define economy as flow model

Answer 8

• i.e. leakages = savings - money not kept in supply, not used to trade
  inputs = money input from outside to increase assets and activity

Question 9

What is the role of financial organisations (E.g. banks) in circular economy?

Answer 9

To handle leakages and investments to maintain balance

Question 10

What is the role of government in circular economy?

Answer 10

To maintain stable equilibrium and improve economy efficiency

Question 11

What if savings and investments are out of balance?

Answer 11

• economy grows or shrinks

- out of stable equilibrium = ‘boom and bust’ cycle

Question 12

What is an efficient economy?

Answer 12

Efficient economy one that most successfully achieves exchange of need and surplus
• Productivity - how much output per unit input
• Purpose of economy Is to operate trade => exchange what you need for what you have
Balanced exchange fundamental to economic flow model

Question 13

What is an inefficient economy?

Answer 13

• PLC owned by shareholders = receive dividends (earnings per share)
• Dividends paid from company profits = amount decided by CEO/ management boards
• Shareholders want increasing value of shares
• Company value assumed to be equal to share price x existing no of shares
• Executives bonus dependent on share price or paid directly in shares
• Share price related to demand = companies invest in own shares to drive price up

Question 14

What is financialisation? Where do the profits go?

Answer 14

• over past 30 years, increased focus on profit generation as purpose
• profits used for:
  => pay dividends
  => increase shareholder value to buy back shares
  => feed increase in CEO pay

**rather than invest in new projects, assets etc.

Question 15

Why does financialisation matter?

Answer 15

profits should be reinvested into new business, better products BUT profits ‘drained’

• innovation frustrated => shouldn’t be putting it into shareholder value (to make money) but into finding new solutions
• growth => should be used to for better resources for long term growth
• frustrate society => profits don’t lead to better social benefits so increases inequality, decreases trust