All about economics
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Goods can range from a simple safety pin to a satellite. Services could be basic household services like vegetables and milk vendors or professional services such as teachers, doctors and lawyers. For production of goods and services, an entrepreneur needs money to buy machines and also to pay the salaries to workers.
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WHAT IS AN economic system? Production of goods and services is the heart of the economic system of any country.
Goods can range from a simple safety pin to a satellite. Services could be basic household services like vegetables and milk vendors or professional services such as teachers, doctors and lawyers.
For production of goods and services, an entrepreneur needs money to buy machines and also to pay the salaries to workers.
For example, if a pen has to be produced, a factory has to be set up, some workers will have to be hired to run the machines and managers to plan and sell the pens to customers.
To set up a factory, a producer needs money, for which he could either use his own funds or borrow from banks or raise funds from the share market. In addition, electric power, transportation facilities such as lorries, trucks, and rail wagons to bring materials and a communication network of posts, telecommunications and couriers.
Category of Goods
The first category of goods is consumables including non-durable goods such as fruits, vegetables, soaps, etc and durable ones such as refrigerators, cars, televisions etc. Another category is called intermediate goods such as steel sheets used for car manufacture or plastic for bottles.
Capital goods such as machines and tools used for cutting, polishing and packing of goods are another category.
Now assume, all the goods and services have been produced and are ready for consumption. This is the supply side. The other side is the demand side or the groups that consume the goods and services.
Three groups consume the goods and services. First, the household sector, families buying consumables.
Second is the business sector that buys intermediate goods and machinery and also consumables.
The third sector is the Government sector responsible for law and order, water supply, drainage, irrigation, providing banking services etc. They also produce goods like the business sector e.g. oil, petrochemicals etc. The Government sector is also a consumer of goods and services. This is the demand side.
Interactive system
How do the two sectors transact business? That is where the market comes in. Market is the interaction of demand and supply and for this money is needed.
It is the RBI that supplies money. Managers of money have to be very careful to make sure that neither too much or too less is available in the system.
Suppose the goods and services produced in the economy are worth Rs. 100, they should be consumed by the three sectors of the economy.
But at times, good and services produced within an economy may fall short of the requirements. For example, we need to import oil to meet our demands; hence imported goods also come into the supply side.
Similarly within these goods and services there may be some surplus such as tea, cardamom, textiles that can be exported.
These are the outlines of an economic system.
And could be symbolically expressed as Y=C+I+G+(X-M) where Y stands for good and services produced, C for the household sector, I for business, G for Government and X for Exports and M for imports.
(As told to Puja S Navin by R.S Dhananjayan, Head, Department of Economics, Bharathiar University)
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