Wed | Nov 22, 2017

Economics and how it affects our daily living

Published:Wednesday | September 3, 2014 | 12:00 AM
Dr André Haughton

Dr André Haughton, Contributor

IN LIGHT of Jamaica's economic situation, it is important for Jamaicans to understand the fundamental principles of economics and their application to Third World Small Island Developing States.

In this new season, The Briefing, will define economics as a discipline, discussing macroeconomic theories and applications and their relevance to the Jamaican economy within a global context.

What is economics?

Economics is the study of the efficient allocation of resources (land, labour, etc). Based on the assumption that these resources are scarce, economic agents (such as individuals, firms and government) must make choices to maximise their lives. If an individual, for example, earns $1,000 for his salary, knowing he will not be able to buy everything he desires (several choices, only $1,000 available), this individual must make careful decisions as to what to purchase to maximise his utility.

Upon making these choices, the individual will have to give up the next-best alternative, the price of which is the true cost of the decision, and is referred to as the opportunity cost. For example, he might be able to buy a pair of shoes, or take a girl out for dinner with the $1,000, but not both. If he chooses to take a girl out for dinner, he cannot buy the shoes; the opportunity cost here is the price of the shoes, and vice versa.

How does the principle apply to Government?

Similarly, if the Jamaican Government earns $1 million in tax revenue, it must make a choice of how to spend this money to maximise the utility of the country. For example, it can choose to use $1 million to fix roads, or to spend it on Independence celebration, but not both, based on the premise that resources are scarce. If it chooses Independence celebration, it means some roads will not be repaired. In this case, the opportunity cost of the Independence celebration is the price of fixing the roads, and vice versa.

These are basic decisions we face on a daily basis and economics helps us to understand how to maximise our decision-making process (choices), given that resources are scarce. This fundamental principle of scarcity, choice and opportunity cost forms the core of modern economics, which is broken down into two broad headings - microeconomics and macroeconomics.

What is micro-economics?

Microecono-mics is the study of how individual and businesses make decisions to maximise their well-being. For example, you will decide what to buy with the salary you earn and the supermarket decides what to sell, at what price, based on what you want at the time. Microeconomics, for example, looks at how each business can maximise production and use its capacity to increase its competitiveness in the marketplace. It also analyses how individuals maximise their utility given, limited budget and infinite choice bundles available to them.

What is macroeconomics?

Macroeconomics is the study of how these decisions add up to affect the country as a whole, not just the individual or the individual business. In microeconomics, you will analyse an individual or a single business entity. In macroeconomics, you will analyse the decision-making process of everyone collectively (aggregate behaviour). Macroeconomics explores issues such as what factors contribute to economic growth or a recession? What is a government stimulus package and how might it help? How can problems in the housing market affect the rest of the economy? What is public debt? What is the government budget deficit? How do these affect you the consumers, taxpayers, businesses and the country as a whole?What are other important issues?

Macroeconomics addresses other important issues like why does cost of living keep rising. Why are some countries rich and some countries poor? What policies might help a country grow out of poverty? Why do some countries import a lot and export very little? What is the trade deficit? How can it be reverted? How does it affect a country's well-being? What factors contribute to unemployment? How can a country increase productivity? What is the relationship between unemployment, inflation and long-run growth?

Over the next couple months, these are fundamental questions which will be explored within the context of macroeconomic theory with practical applications to the Jamaican economy. These are elementary principles that we need to understand to have a better view of where we are and how our individual actions and choice patterns contribute to the country as a whole.

Dr André Haughton is a lecturer in the Department of Economics at the Mona campus of the University of the West Indies. Follow him on twitter @DrAndreHaughton; or email editorial@gleanerjm.com.