Clase digital 2. Economía global y local (global and local economy)

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Economía global y local (global and local economy)

1. Fundamentación del tema

This topic is part of the Business Communication Learning Unit (UDA, for its acronym in Spanish), and it is based on global and local economic events, which are crucial for an accountant, due to their impact on the economic activities of a workplace, a productive sector, a city, a region, a country, or even worldwide.

To be aware of these events, you should look for reliable and updated sources of information. Valuable information can be found in sources written in a language other than Spanish. For that matter, it is important to know basic concepts of economics and, also, to read news related to these issues in another language, as in this case you will practice with the English language.

2. Objetivo didáctico

Recognize economic terms and topics, both locally and internationally, in the English language, in order to be able to interpret information from different sources, from which the accountant will express an opinion on the matter and, in terms of its general knowledge, will establish a broader view of the economy.

3. Contenido didáctico

Introducción

Welcome back, dear student! We are glad that you have reached enough English level to understand this subject in a foreign language. In this topic, you will learn basic economic concepts in English. You will also read local and international news about economics and understand some economic indicators. 

After this topic, you will be able to form an opinion on economic events, and have a better understanding of local and international economics.

Desarrollo del tema

1. Economics

Before getting into the field of economics (terms, indicators, and news related to it), we have to go through the basics of this subject. The first thing we need to know is its definition. which depends on the author’s point of view.  Here, we are going to use the one that can be found in the COREteam’s ebook. If you are wondering, the COREteam is a global community of teachers, learners, and researchers that provide tools to everyone in order to understand the economics of the world in an easier way. This is their definition of ‘economics’:

Economics is the study of how people interact with each other and with their natural surroundings in producing their livelihoods, and how this changes over time. Therefore it is about:

  • How we come to acquire the things that make up our livelihood: Things like food, clothing, shelter, or free time.
  • How we interact with each other: Either as buyers and sellers, employees or employers, citizens, and public officials, parents, children and other family members.
  • How we interact with our natural environment: From breathing to extracting raw materials from the earth.
  • How each of these changes over time.  

Core-econ.org (2017)

1.1 Macro and Micro Economics

In economics, there are two main subfields that divide the object of study: micro and macroeconomics. However, they are not the only ones; for example, econometrics is considered by some authors to be another subfield.. Econometrics seeks to apply statistical and mathematical methods to economic analysis (Rodrigo, 2020). Although, for this topic, we are considering only the subfields of micro and macroeconomics.

Which topics pertain to micro and macroeconomics?

To answer this question, we are going to look into Back to basics: economic concepts explained (2017), book of the International Monetary Fund: 

Macroeconomics is the big picture of economics, which is concerned with how the overall economy works. For example, topics like employment, gross domestic product, inflation, currencies, monetary politics, or national income.

On the other hand, microeconomics is the little picture of economics, which is concerned with topics like supply and demand of a sector of the economy, such as the automotive sector or the energetic sector. 

(IMF, 2017)

The main difference between both of them is the wide-area phenomena in the topics they analyze. They must be studied at the same time if we pretend to comprehend how the economy works worldwide, in a country, in an economic sector, or even the economy of a single family.

If you want to see a short video that explains the aforementioned, you can access the link below:

1.1.1 Supply and demand

Focusing on how much a good or a service costs to be offered is really important as the first point to determine a price. Even more if you are an accountant, because it can be the reason why you are hired in a company. But that is just one factor that helps to determine a price for a good or service.

Another main factor is how the market of what we are offering is interacting. In other words, how the buyers and sellers are interacting, since, as a matter of fact, the preferences of the consumers and the cost of the suppliers influence the determination of the price for a good or a service.

Let’s try to make it easy by showing you an example mentioned by the COREteam  in their ebook:

For a simple model of a market with many buyers and sellers, think about the potential for trade in second-hand copies of a recommended textbook for a university economics course. Demand for the book comes from students who are about to begin the course, and they will differ in their willingness to pay (WTP). No one will pay more than the price of a new copy in the campus bookshop. Below that, students’ WTP may depend on how hard they work, how important they think the book is, and on their available resources for buying books.

(Core-econ.org, 2017).

The previous example illustrates how the preferences, the willingness to pay of the consumers, and the offer of the main supplier influence the price of a tier-2 supplier of the same good. Maybe you are asking: What does the willingness to pay mean?

Simply put, willingness to pay refers to an indicator that shows how the good or the service is valued by the consumer, measured by the maximum amount that he, she or it would pay for acquiring a simple unit.

1.1.1.1 Demand

Demand is a basic economic term, defined  as the “consumer’s desire to purchase goods and services and willingness to pay a price for a specific good or service”.

(Potters, 2021).

1.1.1.2 Law of Demand

We have seen that demand involves the desire of the consumer to purchase goods or services and the willingness to pay for them, so the price will depend on the previous factors and the demand will be affected by the price. Charles Potters (2021) wrote about the law of demand that “an increase in the price of a good or service will decrease the quantity demanded, and vice versa”. 

But why does this happen? This occurs because of the diminishing marginal utility, which means that the consumer will use a good or service to satisfy his or her needs with higher priority in the first acquisitions, and with less relevance in the later ones.

Let’s think of an example: You are a student and the university where you study is far away enough for you to walk to it. So, you have a need: “transportation”. This need can be solved if you acquire a car, so you decide to purchase one. You go to the dealership and ask them to show you some models. You are amazed by the speed of the BMW’s, but unfortunately you can not afford that type of vehicle, so you purchase the one you can afford: a Nissan Tsuru. You should not be ashamed of having purchased it, because you have solved the need for transportation. You can see the similarities and the differences between those cars: both solve your need, but the more expensive one is better looking, cozier and faster. Those characteristics go into the price, and that difference in the price limits the people who demand it, or the option of buying more than one unit. Of course, it is not that easy, since you can have more options: you can purchase a motorcycle, a bike, or even take a taxi or the public transport, and everything must be considered at that moment.

1.1.1.3 Demand curve

When you analyze the demand of a product or a service, it is important to represent its behavior, so you can have a better idea of the outlook and make the best decision. You may be questioning, what is the demand curve and how does it look? 

The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. In a typical representation, the price will appear on the left vertical axis, the quantity demanded on the horizontal axis.

(Kenton, 2019).

Source: Bang (2019).

This way, we can assume: 

↑   Price   →     –     Quantity demanded

↓   Price →    +     Quantity demanded

Demand is closely related to supply, and both of them can measure the interaction between buyers and sellers. You have to analyze both, so you can understand the behavior of their interaction and make good decisions in response to your goals and aims. 

If you want to see a short video that explains the law of demand, the factors that affect this law, like substitution effect, income effect, the law of diminishing marginal utility, and shifters of demand, all explained with an example of a simple product like a gallon of milk, you can access the link below: 

1.1.1.4 Supply

We have already seen the economic term of demand and its relation with the determination of the price, besides the customers’ behavior when purchasing a good or a service. Now we are going to talk about the other side, the supply. But first, we have to define what it is:

Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph.

(Kenton, 2020). 

1.1.1.5 Law of Supply

The law of supply states that as the price of a good or a service increases, the number of suppliers offered will increase, and vice versa.

1.1.1.6 Curve of Supply

Both, the curve of demand and the curve of supply, are closely related to each other, and both of them help to understand the outlook of the interaction between buyers and sellers. Now, we have to define what the curve of supply is and how does it look like:

The supply curve is a graphic representation of the correlation between the cost of a good or service and the quantity supplied for a given period. In a typical illustration, the price will appear on the left vertical axis, while the quantity supplied will appear on the horizontal axis (Kenton, 2021). 

Source: Bang (2019)

So, we can assume: 

+ Price  =   +   Quantity offered.

– Price     =   –   Quantity offered.   

This is because the suppliers aim for the maximum of possible profits.

After we have seen demand and supply, we are reaching a concept that is quite important and involves both of them; the equilibrium point.

1.1.2 Equilibrium point

The equilibrium point is where the supply and the demand curves intersect, this means the market equilibrium price. 

An increase in demand shifts the demand curve to the right. The curves intersect at a higher price and consumers pay more for the product. Equilibrium prices typically remain in a state of flux for most goods and services because factors affecting supply and demand are always changing. Free, competitive markets tend to push prices toward market equilibrium.

(Potters, 2021).

If you try to reach this point, your product or service price will be competitive and desirable for a huge part of consumers. 

2. Economic Indicators

Economy news uses economic indicators as references to analyze the topic they are talking about. Even though economics is not an exact science, indicators will reflect and provide a lot of information about the economic behavior of the world, the country, the economic sector, or the economy of a single home. This will help to understand past economic events, or even better, forecast economic events in order to make good decisions. These indicators measure the economy, in simple words.

There are two main types of economic indicators: leading and lagging indicators. Leading indicators show where the economy is heading and lagging indicators show how the economy worked in the past and its effects over time.

Here, we will mention the most common lagging economic indicators:

  • Gross domestic product. (GDP) and real GDP
  • GDP Growth rate and GDP per capita
  • Unemployment rate
  • Consumer Confidence Index (CCI)
  • Consumer price index (CPI) (Inflation)
  • Interest rates (Risking/ falling)
  • Poverty Rate and Income inequality

To understand these indicators, we invite you to watch the next videos on the internet:

On the other hand, the most common economic leading indicators are:

  • Stock market performance
  • Retail sales figures
  • Building permits and housing starts
  • Level of manufacturing activity
  • Inventory Balances

It is very important for you to understand that a single indicator does not give enough information to comprehend the economic behavior in the past or in the future, you need to analyze leading and lagging indicators at the same time to reach that objective.

3. Economic News

After this little introduction to economics, it is time for you to read. This will help you become acquainted with economic terms and, also, to develop your English reading skills. You will read international and local economic news:

Local economic news: (You can also hear it by tapping the button on the right side of the page).

International economic news: 

We hope this lesson helped you to understand a bit more about economics, but we highly recommend you to keep searching and studying. There is a lot of economic information that is waiting for you outside, so you can make better decisions and understand how the economy works.

Resumen e ideas relevantes

It is important that you keep in mind:

  • Economics is the study of how people interact with each other and with their natural surroundings in producing their livelihoods, and how this changes over time (Core-econ.org, 2017). 
  • Macroeconomics is the big picture of the economy, which is concerned with how the overall economy works. For example, topics like employment, gross domestic product, inflation, currencies, monetary politics, national income, and much more (IMF, 2017). 
  • On the other hand, microeconomics is the little picture of the economy, which is concerned with topics like supply and demand of a sector of the economy, for example, the automotive sector, the energetic sector, etc. (IMF, 2017).
  • Demand is a basic economic term and is known as the “consumer’s desire to purchase goods and services and willingness to pay a price for a specific good or service” (Potters, 2021).
  • An increase in the price of a good or service will decrease the quantity demanded, and vice versa (law of demand).
  • Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph (Kenton, 2020).
  • The law of supply states that as the price increases of a good or service, the number of suppliers offered will increase, and vice versa.
  • The equilibrium point is where the supply and demand curves intersect.
  • Indicators help to measure the economy.
  • There are two main types of economic indicators: leading and lagging. Leading indicators show where the economy is heading and the lagging indicators show how the economy worked in the past and its effects over time.

Fuentes de consulta