Unit 2: The economic organization of society

CONTENTS

  1. How economic activity works
  2. Factors affecting production
  3. The phases of the economic activities.
  4. The economic agents and institutions
  5. Economic sectors
  6. Economic systems
  7. Geo-economic regions in the world 

Introduction

The economic systems in the world today include subsistence models, capitalism, planned economies and mixed models. All these systems help people’s needs and desires in different ways. Our planet resources are limited, and economic exploitation can lead to the overuse of resources and the creation of excessive amount of waste. Future generations should work on this problem, or we will not have enough natural resources. We must all work together to consume the Earth’s resources responsibly.

1. How economic activity works?

People have individual needs, such as food, clothes, hygiene and exercise, whereas society has collective needs, such as healthcare, justice, communication and education.

2. What is economic activity?

Economic activity describes all the jobs done by workers in order to satisfy the needs of people and societies by providing goods or services.

The term economic activity refers to the production, distribution, and consumption of goods by society as a whole. Human beings meet their needs via these goods. These goods can be tangible, such as foodstuff, or intangible, such as services like education and health. 

  • Production is the term used to describe the total goods supplied by economic activity. In order to produce goods, natural and human resources are needed.
    • Natural resources come from nature; for example, plants or animals.
    • Human resources refer to the workforce, the capital, or assets available for production, and the technology, knowledge or methods employed for production. 
  • Distribution consists of the transportation of goods to the market to be sold. The market consists of the producers who supply goods, and the consumers who demand them. It is also the place where goods are traded. Distribution occurs after the production and consists of the delivery of goods or services to the consumer. This involves: Storage, transport, marketing, sale of goods. The distribution can be made in:
    • WHOLESALE Wholesalers buy many products and sell them to companies, who then sell the goods to individual consumers
    • RETAIL: Retail businesses buy a few goods from wholesalers and sell them directly to the public in shops
  • Consumption is the purchase or use of produced goods. The buying of goods and services allows people to satisfy their needs. This means they are able to consume products or use goods and services People consume goods, such as food or drinks, and use others, such as television or computers.

3. The phases of the economic activities.

The key ingredients for the production of goods are: natural resources, labour, capital, technology and expertise.

  • Natural resources: Nature gives us many elements that we transform to satisfy the needs of human society. Because these resources are limited and could run out soon, we need to make sure we do not over exploit them.
  • Labour: is all human activity, whether physical or intellectual, that is required to produce goods or provide services that are necessary for people and society.
  • Capital: includes all the resources used to produce goods and services. There are two type of capitals:
    • Physical capital. This includes the land on which the business is built, the construction and maintenance of the premises, and the machinery and raw materials required for the production of goods and services. All this requires a considerable investment.
    • Financial capital. Money needed to begin production. This includes loans of banks or other institutions.
  • Technology and expertise: Technical expertise makes possible the design, construction and use of machines and devices for the production of goods and services. We can distinguish three types of production according to this technology: • Manual production • Mechanical production • Hi-tech production Competitive companies require quality training programmes for the employees and also laboratories to reach new technology and new products.

4. The economic agents and institutions

Economic agents 

The components that make up the economy are businesses, households, and the State. 

  • Businesses are the basic units for the production of economic goods. Their role is to produce, distribute and sell tangible goods and services to consumers. The aim of these activities is to make a profit
  • Households are the basic units of consumption. Their economic function is to spend money on goods and services in order to meet their needs. The income that families use to consume comes from wages earned from work, property, or other valuables. 
  • The State is both a unit of production and consumption. Its purpose is to produce the tangible goods and services that society requires, and to consume the goods and services from private companies. The objective of the State is to achieve the wellbeing of society. 

Economic institutions 

  • Banks. A bank is a place where money can be saved or loaned out from. Someone’s money can be placed in the bank for safe keeping. Otherwise, the bank can give out loans to people for an agreement to pay the bank back at a later time, usually with interest. The people who run a bank are called bankers
  • The stock exchange market. The total capital of a company is divided into a number of shares. In the stock exchange market, shares are sold and bought. When someone buys shares, he becomes a shareholder. A shareholder is a person who owns shares of a certain company. The income received from shares is known as a dividend. When someone sells shares at a higher price than that of purchasing, he gets benefits; otherwise, he makes a loss. In any case, shareholders always take risks because of the unexpected evolution of the markets. 

5. The economic sectors

Economic sectors are so diverse that they have been traditionally divided into three large economic sectors.

  • The primary sector This sector includes activities that produce food for consumption and raw materials for industry. It consists of agriculture, livestock farming, fishing and forestry.
  • The secondary sector This sector includes all economic activities that transform raw materials found in nature through industrial processes into manufactured products. The main activities are: Industry, Construction, Exploitation of energy sources (water, oil, gas)
  • The tertiary sector This sector includes a wide variety of activities. It does not produce material goods like the primary and secondary sectors. It provides services to the population or to companies such as healthcare, education, transport, tourism, trade and culture. This sector is the fastest-growing sector due to the appearance and expansion of an information society, which has aided the development of scientific and technical research, including on-line services and shops.
  • The quaternary sector This is a new economic sector based on expertise that includes activities related to the creation, distribution and manipulation of information, and also social, cultural and economic innovation and research. Workers in these fields need special training and high levels of expertise. The use of advance technology.

6. Economic systems

All societies need to think about what products they can make, how they make them, and who they will make them for. These systems can be organized in different ways according to the society’s beliefs and historical background.

The subsistence system: This system is characteristic of societies with low levels of development, people produce what they need to meet their basic needs. They work the land for food, build their own houses, make their own clothes, etc. Any surplus goods are sold in local markets.

The capitalist system: This system defends free competition between individuals and companies to develop economic activities. It is also called the free market system. It is based on the LAW OF SUPPLY AND DEMAND for fair prices for good and services that people need. The means of production are private. Capitalism started with the Industrial Revolution in the late 18th century.

The planned economy system: In this system, the state owns the means of production and controls all aspects of the economy. It decides how much is produced. It also decides how much goods will cost and what to do with the profits. Today, this system exists in countries like China or North Korea. China, however, is changing it slowly by opening its economy to foreign countries and investment.

Alternative economies: These economies reject capitalism because they say it does not meet the real needs of its citizens and promotes inequality. They suggest a unique model for society that is based on solidarity between people, respect for nature and the common good.

7. Geo-economic regions in the world 

Different geo-economic regions in the world are categorized according to their level of integration in the global economy. 

The triad countries 

The U.S.A. and Canada, the European Union and Japan make up the Triad. These countries are known for investing heavily in science and technology and, therefore, production in these countries is characterized by the technological development of industry and elevated levels of consumption, due to a high standard of living. 

Traditionally most of the world’s economy has been centred in these three regions of the world, leaders in manufacturing, technology, services and resources. 

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4.2. Emerging countries 

Emerging countries are nations that were underdeveloped not long ago, but which have recently undergone a process of economic growth at a faster pace than the rest of the world. Today, they occupy a prominent position in the global economy. 

The most important emerging countries are located in Asia and Latin America: 

  • In Asia, the strongest emerging countries are: the so-called “Asian dragons” (South Korea, Singapore, Taiwan and Hong Kong), China and others such as India, Malaysia, the Philippines, Turkey and Indonesia. 
  • In Latin America, the main emerging countries are Brazil, Mexico and Argentina. 

4.3. Regional economy powers 

A regional economic power is a developed state that has become a central focal point for economic activity within a geographical region. Some of the most important regional powers in the world are Russia, Australia, South Africa and some oil and natural gas producing countries in the Middle East. 

4.4. Less economically developed regions 

Production in these economic regions is usually focussed on traditional agricultural activities, and industry is underdeveloped. These regions are located in Latin America, Asia and especially in sub-Saharan Africa. These regions have low levels of consumption due to the low standard of living. That countries run the risk of finding themselves excluded from global trade, which could make it even more difficult for them to develop economically. 

4.5 The Eagle’s: emerging and growth-leading economies. 

After the failure of the BRICS and its project to establish itself as an alternative, in the first years of the great global crisis to the economic power of the Western world, other groups of countries have emerged that seek to emulate the old emerging countries. Its name: EAGLEs, or what is the same, Emerging Economies and Growth Leaders.

Unlike the BRICS, whose acronym was static – the countries were just Brazil, Russia, India, China and South Africa – the EAGLE club is dynamic, with countries moving in and out of the two existing groups based on their economic performance.

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