What Is Economics?

Since I'm reviving this blog, I thought I'd start a fresh in some ways. I therefore have decided to open up this new era of the blog with the simple, yet very difficult to answer question of what economics actually is.  It's a very ambiguous subject in regards to how you'd define it, the study of what exactly? I've encountered a good example of just how difficult it is to define the subject recently during my search for a university. The fact that different universities place the subject in different areas is the said example. The University of Birmingham, for example, place the study of economics within the business school - giving the subject a more monetary focus. However, this contrasts from the University of Warwick whom place economics within the faculty of social sciences - looking more at wants and scarce resources. This differentiation from the universities suggests that Economics is a broader subject than some may have first imagined.

Let's look at a few potential ways of defining economics. One definition could well be 'the human science which studies the relationship between scarce resources and the various uses which compete for these resources'. If we analyse this definition somewhat we could agree that this definition holds true. Economics could most definitely be classed as a human science. It's not an art and studying it will almost always involve looking at the action of humans. The relationship between scarce resources and the uses of resources is also looked at in the study of Economics. One of the first things you learn about as a beginner economist is the basic economic problem of scarce resources and unlimited wants. So, you wouldn't be wrong to define economics in this particular way.

Another definition I've come across is that 'economics is the science of production and consumption, or the use of goods and services'. Production and consumption are definitely involved in the study of economics, these link back to the scarce resources problem that occurs due to consumption being higher than production. However, I feel using 'the use of goods and services' in a definition for the subject is a bit lacklustre and doesn't quite do it justice. But that isn't to say this definition is wrong, as it most certainly isn't. Along with the likes of 'economics is the study of how to improve society'. Economics does look at how best to allocate scarce resources to improve society partly, but not all for that reason. These two definitions aren't incorrect, I just think they don't get the whole point of the subject across.

This debate wouldn't be complete without a token definition relating somehow to money! 'Economics is the study of wealth'. Well, there it is, the study of wealth. Somewhat true of course, the economy is measured in terms of money, goods and services are normally purchased using money and a lot of people evaluate their position in life by how much wealth they have. But what actually is money? It's a medium for exchange when buying goods, a unit of account for placing a value on things and a store of value when saving. So technically, anything could have ended up being money instead of coins and notes as long as it was in scarce and controlled supply, stable and able to keep its value, divisible without loss of value and portable.  Money does play a big part in the economy, some would even say the economy revolves around money with the flow of income and what not, but I'm still not entirely convinced the subject can be classed as the study of wealth.

I could go on and on, reeling off lists of different definitions of 'Economics', but I won't of course, you have better things to do than read that. I'll leave it there and hope I've successfully got the point across that I was trying to make -Economics is a very broad subject and therefore very difficult to define whilst accurately including everything the subject covers. If i was being asked, I'd class it as the study of scarce resources. I question you to have a think about how you'd define the subject!

That's all from me for now, thank you for reading!

I've Returned

Hello again any of you who have been frequently following my blog!

After a fairly hectic last few months which have included exams, applying for university, results and the like i'm back and going to get this blog going again. It'll follow the same process as before - i'll try and talk through basic economic principles and theories to help the learning of others. I'm now officially a 1st year economics student at the University of Birmingham so when i start my lectures i will be passing what i've learnt on to you.

I plan on going through all previous subjects I've blogged about again in more detail as I've gained more knowledge on the principles and can therefore get deeper into the subjects. I'm on Twitter now as well with an account specifically for the blog, so give @TutorEconomics a follow. That's also a good place to get hold of me if you have any questions, queries or anything else to say related to the blog.

That's about it for my 'welcome back' speech, thanks for reading and stay tuned for some more posts!

I'll be back...

Still studying hard, decided to stop this till the Summer when i've done with college and have no exams to prepare for.. Sorry guys!

Need me you can follow me on twitter: @Sam_Burrell

Lack of New Posts...

Yeah, about the lack of new content. I'm currently going through exams and therefore am concentrating on studying for them at the moment. Expect the next post to be early February.
Feel free to comment with requests for posts.

Causes of Long-Run Economic Growth (Macroeconomics)

I'm fully aware that there is already about a post about economic growth, however i want to use this one to focus in specifically on economic growth in the long run. Long run economic growth isn't so dependent on aggregate demand changes, but a lot more dependent on changes to the long run aggregate supply curve. A shift the the right of the LRAS curve is a sign of long run economic growth.

Increases in LRAS on a diagram resemble an increase in the economies capacity to supply goods and services, and for this increase to happen there needs to be there needs to be either an increase in the quantity of the factors of production or an increase in the quality of them. The most important factor of production is undoubtedly the labor force, so therefore these are what i'll focus on.

There are few ways to increase the quantity of the labor force. First, increasing the size of the population. This is difficult to achieve artificially as it is influenced a lot by social and cultural factors. The second way is to increase the labor force participation rate. This is a measure of the proportion of the population able to work and either in employment or actively seeking it. Changes to the taxation and benefit system can influence this by making it more appealing for people to actually start seeking work and get into employment. The final way is to increase the flow of migrant workers, better known as immigration. Joining groups such as the EU allows free-er movement of labor among countries which can increase the population. However, immigration may only be temporary and therefore there may be no long-term increase in the productive capacity.  

It is also possible to improve the quality of the labor force. The first method is through education and training. It improves each workers productive potential allowing each worker to make more due to the better knowledge and skills gained through the education. As economic growth occurs, economies tend to move away from primary and secondary industries and onto tertiary industries. It is important to equip the population with the skills to take part in the tertiary sector so the economy can complete the transition away from primary and secondary sector industries.

There we go.. to summarize: The quantity or the quality of the factors of production are required to increase for the economies productive capacity to increase which then causes economic growth in the long run. Thanks for reading.

Absolute and Comparative Advantage (Macroeconomics)

Today we come to the theories of comparative advantage and absolute advantage. Lets start with 'text-book' definitions:

• Absolute advantage - A country is said to have an absolute advantage over another country when it can produce a good at a lower cost (using less resources).
• Comparative advantage - A country is said to have a comparative advantage over another country with regard to a product which it can produce at a lower opportunity cost expressed in terms of alternative goods forgone. 

An example now. Take two countries, country A and B and lets look at their production of apples and televisions (crazy examples, but hey ho!). When both countries use 50% of their resources producing each good, country A can produce 5 apples and 15 televisions and Country B can produce 3 apples and 12 televisions. The opportunity cost of country A producing bananas in terms of televisions is 3. For every banana they are giving up the chance to produced 3 televisions. For Country B the opportunity cost is 4. The opportunity cost of country A producing televisions in terms of bananas  is 1/3 and the opportunity cost for country B is 1/4. 

Looking at these figures, Country A has the lowest opportunity cost for producing bananas, therefore they have the comparative advantage in producing bananas, leaving country B to produce television.  

Simple eh? Nope, it's a difficult concept to get your head around, but that is the basics. Thanks for reading and sorry about the delay. 

Exchange Rates (Macroeconomics)

Exchange rates are something that affects all of us, be it directly or indirectly. Exchange rates are basically the value of a currency compared to that of another currency. They fluctuate a lot, which leads to price changes.

I'll be using the Sterling (£) in my examples throughout. Firstly, let's look at what determines the value of a currency. The value of the £ is determined by the free market, so therefore the powers of demand and supply dictate the value of the £. The majority of the demand for the £ will come from trading partners demanding the U.K's exports and therefore needing the £ to buy them. The majority of the supply of the £ comes from us demanding foreign imports, and needing to sell the £ to get foreign currency to buy the imports.

An increase in the demand for the £ will increase the value compared to other currencies. This is often referred to as a "strengthening of the £" or an "appreciation". Obviously, a fall in demand for the £ will have the opposite effect. An increase in the supply of the £ will decrease the value compared to other currencies. This is often known as a "weakening of the £" or a "depreciation". A decrease in supply will have the opposite effect, raising the value.

Another key factor that influences the demand and supply of the £ is interest rates. If interest rates in the U.K. are high, then we will see a high demand for the £ as people will make a better return off of it in U.K. banks. This will increase the value of the currency. A decrease in interest rates will see money flow out of the U.K. in search of a better return on their investment and therefore demand and the value of the £ will fall.

There are two different exchange rate mechanisms. The first one is the floating mechanism. This is when the value of the currency is determined by the free market - the powers of demand and supply. The advantage of this mechanism is that theoretically the exchange rate should automatically adjust which will eliminate any imbalances withing the Balance of Payments. The other is the fixed mechanism. This is when the exchange rate is fixed and determined by the government or central bank of a country. The bonus to this is that it gives more stability to the value of the currency but runs the risk of goods becoming to un-competitive if it's too high or the market can be flooded if it's too low.

That's the lot for exchange rates, thanks. Also, any requests for what to come next? Post it in comments and ill see what i can do. Thanks for reading, follow the blog if you enjoy!