Topic: Circular flow of income
Unit 2 – Managing the Economy
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Division of labour enabled workers to become specialised for specific jobs. Division of labour means the work is divided into smaller tasks and each task becomes the work of one individual or group of workers. When this happens, each worker who took that special task becomes specialised at that task and quickly masters the art of performing that work.
1. More goods and services can be produced.
When workers become specialists in the jobs they do, repetition of the same operations increases skill and the speed of the worker and as a result, more is produced.
2. Full use is made of everyone’s abilities.
With specialisation, there is greater chance that people will be able to do things at which they are best and which interest them most. This means people can become perfect in their special abilities.
3. Time is saved.
If a person has to do many different tasks or operations, then much time will be wasted switching from one task to another. With specialisation time is saved by not having to move around.
Time also can be saved when training people. It would be difficult and time consuming to train somebody to do all the tasks required to build a complete car, but a person can be trained quickly to fulfil one operation of the process.
4. Use of machinery.
As labour is divided into specialised tasks, specialised machinery can be used which is further increase the productivity.
1. Work may become boring.
A worker who performs the same operation each and every day is likely to get very bored.
2. People become too dependent upon each other.
Due to specialisation, no single person alone is able to complete the production process. It also means that people have to rely on others for the provision of goods and services.
3. Lack of variety.
Though the number of goods produced increases but they are identical or standardized.
4.Lack of mobility
Due to specialisation workers might find it difficult to switch between occupations.
Next topic: Spending, saving and borrowing
A trade union is an organisation that represents the interests of its workers in negotiations about improving working conditions with employers and government.
Each employee who wishes to join a trade union must pay an annual fee, which contributes towards the costs and expenses that the trade union incurs when it provides services to its members, and supports industrial action by the workers.
1. Craft Unions
Craft unions represent workers across several industries with a particular skill.
2. Industrial Unions
Industrial unions represent all workers in one industry with different skills.
3. General Unions
General unions represent workers from many different occupations and industries.
4. White-collar Unions / Staff Associations
This type of unions represent workers in professional and commercial jobs.
A trade union will act in the best interest of the workers and try to secure the best possible working conditions, pay and protect jobs. Trade unions are financed by the workers who will normally pay a monthly subscription for the right to be a member. When a union represents a group of workers to their employers it is known as collective bargaining.
1. To improve the pay of its members.
2. To improve the working conditions and the working practices of its members.
3. To support the training and the professional development of its members.
4. To ensure that their members’ interests are considered by the employers when any decision is made which will affect the workforce.
To achieve the above aims, trade unions may take different types of actions:
This means, one union will represent all the workers in a particular place of work.
This action can take a number of different forms:
• Work to rule – this means that workers do not carry out duties that are not in their employment contract. This can mean workers observing safety laws to the letter, when they are normally disregarded, which can lead to slower working;
• Overtime ban: It is when the employees refuse to work overtime or for additional hours of work apart from their normal working hours.
• Sit-ins – workers refuse to leave a premises after production has finished;
• Picketing – this involves members of a union on strike standing outside a firm’s entrance trying to persuade other workers not to cross it;
• Strike – this is the ultimate sanction a union can take. Employees refuse to work either for a set period of time or indefinitely. A majority of workers must vote in agreement of the strike in a secret ballot.
Trade unions can really benefit their members. However especially in times of recession they cannot protect job losses nor gain wage increases. Often they can lead to firms having higher costs and in extreme cases the firms may become uncompetitive and in this case the firms may go out of business and workers may lose their jobs.
Despite the good work that unions have done for laborers in the past, the union tradition is comparatively weak among the white-collar and (especially) the professional occupations, which have accounted for a large part of the new jobs in recent decades, so many of the iPod generation see unions as an anachronism.
Next topic: Specialisation
Sometimes we find that workers who are doing the same job and have the same job title earn different salaries. In this topic we discuss the reasons for the difference in earnings between different groups of workers.
Male workers usually earn a higher salary compared to their female counterparts. The reasons could be:
1. Males usually devote more working hours(for many reasons, women find it difficult to devote extra time for the work. Eg:- Women may have to attend to children at home)
2. Males are always part of labor force, so they have more experience. (many female workers may have to take more leaves from work due to many reasons like, pregnancies )
3. Males are better at negotiating salaries (this can be arguable nowadays, even a female can negotiate for better salaries. But the above factors could give her a lower bargaining power than a male)
4. Discrimination (many societies are still quite backwards in this aspect. Women could be discriminated even if the nature of the job does not give men any physical or any other advantage over women.)
Skilled workers earn more than unskilled workers because:
1. Skilled workers have greater productivity (they can produce more efficiently, they can produce more output than unskilled workers with the same resources
2. Their supply is low. (skilled workers are often difficult to get because they are not available as much as unskilled workers)
3. They have special skills to perform a particular job (there are certain jobs which only a skilled worker can do. Example, doctors, engineers, electricians, accountants)
4. Their job requires a qualification (to get qualified in a particular field may take years and requires a lot of money to pay for the training and course fees)
In the third world countries, the agricultural workers are paid less than manufacturing workers because the supply of agricultural workers in third world countries is high. It is also because manufacturing industries require skilled workers compared to agricultural industry and the risk involved in manufacturing industy is also higher than the agricultural industry.
Workers belonging to the services industry earn more than the workers in manufacturing industry.
Discrimination can happen in many ways. Gender discrimination is already mentioned above. There are other ways in which discrimination can happen. Sometimes law of a particular country may give certain privileges to a employees of a particular field (for example, independent commissions in Maldives) who may earn a much higher salary even with a lower level of education compared to many other professional jobs.
Next topic: Trade Unions
Change in earnings occurs due to change in demand for labor and change in supply of labour. If demand for labor increases the earnings increases. If supply of labour decreases the earnings increases.
Although patterns of change differ from person to person and some individuals remain in poverty for extended periods of time, most of us experience fairly large changes in income over time. Our earnings from work and our investment income are likely to change over our lifetime as we first enter, and then leave, the workforce; we may receive irregular or infrequent sources of income; persons may enter or leave our households; and our incomes are influenced by factors affecting the economy as a whole.
Over the course of our working careers, most of us experience fairly substantial income changes as our earnings follow the typical lifetime pattern. We usually begin our working careers at relatively low-paying entry-level jobs. As we gain skills and work experience, move to new jobs that better match our skills and interests, and further our on-the-job training and formal education, we become more valuable as employees and are rewarded with increases in pay. During our working years, we may defer some portion of current earnings for later years. As we near retirement, our pay is likely to peak, and then be partially replaced by pensions and Social Security — forms of deferred compensation — when we fully retire from the workforce.
Lifetime Investment Income
Our incomes also tend to change in a regular pattern as our savings behavior, and therefore our investment income, changes over our lifetimes. We typically do not save much from the relatively low pay we earn when we first enter the labour force. Over time, as our pay increases, we usually begin to save some of our income, build our house, and make other investments. The income from these investments added to our increasing pay gives us much higher incomes than we had as young adults. By the time we retire, we often have accumulated investments that provide a source of income that can be drawn down over time.
Fluctuating Patterns of Income
While most of us will have income from earnings and investments that follow the regular lifetime patterns outlined above, others will experience relatively large year-to-year fluctuations in their incomes. For example, workers in economically cyclical industries, such as construction, often have some good years, when income is well above average, and some bad years, when income is well below average. Fishermen, farmers and other small business owners also often experience wide fluctuations in income.
Further, even workers whose incomes normally follow a regular lifetime earnings pattern may, for a variety of reasons, experience income fluctuations in some years. For example, someone may, for an unexpected reason, may lose his job and and that year will be a difficult year for him.
Next topic: Differences in earnings
There are thousands of different occupations, each with its own conditions of work. Some people work indoors while others work outdoors. Some work for large companies and some for small businesses. Some work at night and others work during the day. Some people are self-employed and work for themselves. There are many factors which affect a person’s choice of occupation. These factors can be categorized into wage and non-wage factors.
An important consideration in choosing a career is the wages paid. For example, doctors and accountants usually earn more than electricians and drivers.
Wages are payments for carrying out the works. The higher the wage, the more attractive the job may seem. However, highly paid jobs typically require a lot of training and skill development, which can reduce the supply of qualified applicants. Some dangerous jobs – for example, working on an offshore oil ring – will attract applicants only if the wages are relatively high.
In choosing an occupation, a potential employee will usually consider the following:
Non-wage factors are highly influential on the choice of occupation. They include:
Next topic: Changes in an individual’s earnings
Definition: Money is anything which is universally acceptable as a medium of exchange. Therefore if we can buy goods and services with it then it could be seen as money.
In ancient age, before people started to use money, barter system was used to exchange goods for one another. Barter system was useful because it allowed people to exchange what they had in excess for things which they did not have. However, there were problems of barter system. For example, how many goats would be exchanged for one cow? How many bags of rice for one bag of wheat flour?
There was also another problem, if A has rice, and wants wheat flour, B has wheat flour but wants only fish, then barter system cannot satisfy their wants, unless there is C who has fish and wants rice. So A has to go to C and exchange rice for fish and then only A can go to B to get the fish exchanged for wheat flour.
The creation of money solved this problem.
Read the story “The Goldsmith Who Became a Banker — A True Story” to get an idea of how people started using money in ancient days.
Also read A brief history of Money
Medium of Exchange – When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange. It thereby avoids the inefficiencies of a barter system. Exchange is easier and less time consuming in a money economy than in a barter economy.
Measure of Value / Unit of Account – e.g. 1 apple = MVR5, while a can of Redbull = MVR25. In a barter system (as described above), even if a double co-incidence of wants is found, there is no common unit of measure. In today’s world, each and every country has money. Therefore, determining the relative prices is very easy and quick.
Store of Value – To act as a store of value, a money must be able to be reliably saved, stored, and retrieved – and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time.
Standard for deferred payments – Money is also inevitably used as the unit in terms of which all future or deferred payments are stated. Future transactions can be carried on in terms of money. The loans, which are taken at present, can be repaid in money in the future. The value of the future payments is regulated by money.
Money must be durable, which means it should be usable for a long time and must be of good quality. It should not be something that gets damaged easily or spoiled in a short period of time. Since money is durable, it can be used as a store of wealth/value.
Since anything to have economic value, it must be scarce. Money is scarce and that’s why it has value. People can accept something as money only if it has value.
Money must be something that people can easily carry with them from one place to another. Today paper currency is used instead of gold and silver because paper currency is more portable.
Money must be something that everyone can accept for a unit of account and medium of exchange.
Money must be something that can measure all the goods and services accurately. For this purpose, money must be something that we can divide into small denominations.
Money must be something which has a relatively stable value over time. It should not lose its value over time. Its function as a store of value can be fulfilled only if its value is stable.
This is the 3rd Unit in Cambridge O Level Economics Syllabus.
Since we already know that individuals are concerned about satisfying their wants. Let us see the example of Ahmed who works as a farmer.
He works at the farm, grows crops and sells the produce in the market – He is doing production, therefore he is a producer.
He gets money by selling his produce and he uses that money to buy things needed for his family at home – He is a consumer, because he is using up goods and services.
He borrows money to expand his farm. He also may borrow money if he needed to buy a few extra things for his family, and if the money he has is not sufficient. Therefore, he is also a borrower.
From this we can see that an individual is a producer, a consumer and at the same time a borrower.
In this unit, the following topics are required. Click on the topics to see the tutorials.
Next Unit: The private firm as producer and employer
The unemployed are those individuals of working age who are capable of work, and are actively looking for work, but who are not employed. If labour is employed, but not effectively used, the situation is called underemployment.
The two main methods of measuring unemployment in the UK are currently the International Labour Organisation (ILO) method, and the claimant count measure.
The Claimant Count measure of unemployment counts only those people who are eligible to claim the Job Seeker’s Allowance. The JSA was introduced in October 1996 replacing unemployment benefit. Claimants who satisfy the criteria receive the JSA for six months before moving onto special employment measures. One problem with the claimant count is that it misses out many people who are interested in finding work and who might have searched for work in the recent period – but they don’t meet all of the criteria for claiming and therefore are not included in the monthly unemployment count. It excludes housewives and those on training schemes.
How useful is the Claimant Count?
The Claimant Count may not reflect the true level of unemployment in the UK economy, given that not all the unemployed will bother to claim, and some are deterred because they cannot prove they are looking for work. This is especially true of part-time employees who are much less likely to register as unemployed compared with full-time workers. While some individuals may fraudulently claim, it is generally recognised that the Claimant Count under-estimates actual unemployment levels.
The Labour Force Survey covers those who have looked for work in the past month and are able to start work in the next two weeks. The claimant count only includes those who are unemployed and claiming benefit. As such it excludes a number of people who are classed as unemployed under the ILO definition – for example women seeking work whose partners are on means tested benefit. On average, the labour force survey measure has exceeded the claimant count total by about 400,000 in recent years.
The labour force survey is undertaken by the International Labour Organisation (ILO) and is a more direct assessment of unemployment, rather than those who claim benefit. It is based on an interview of a sample of 60,000 households (approximately 120,000 people) and tries to measure ‘unemployment’ as a whole, rather than those simply claiming benefits. To be considered as being unemployed individuals must:
1. Have been out of work for 4 weeks.
2. Be able to start work in the next 2 weeks, so they must be readily available for work.
3. Workers only need to be available for work for one hour per week, so part-time unemployment is included in the measurement, though these workers are unlikely to claim unemployment benefit. This tends to make ILO unemployment much higher than the Claimant Count.
It may be that the claimant count, which measures those actually claiming Job Seeker’s Allowance, is in a way a better measure of hardship. There are again problems in this measurement, but these are of a different nature, so it is worthwhile to have sets of data to gain an overall picture of unemployment.
In times of economic prosperity the measures tend to move apart, with the ILO measure higher than the claimant count, and the trend moves in the opposite direction in an economic slowdown. The study of the reasons for these changes give a deeper understanding of how the measures are made, and much of the information is available.
Also read the tutorial about the types of unemployment.