Objectives:
After
completing this chapter, you will be able to:
1.
Identify the "main characters" in the economy
2.
Discover the connections between the "characters"
3.
Travel back in time, exploring the history of the world economy
This
chapter aims to help you understand the main actors in the economy, the
interactions between them, and the role of each actor in shaping and promoting
economic development. At the same time, this chapter also provides readers with
an overview of the history of world economic development, laying the foundation
for a better understanding of the current economic context and future
challenges.
1.1 Households
Households
are one of the most important actors in the economy. They play the role of:
● Consumers: Households use their income to
purchase goods and services, satisfying essential needs and improving their
quality of life. Household consumption decisions directly affect demand in the
market, thereby impacting production and prices.
● Labor providers: Households provide labor to
businesses, contributing to the production process and creating value for the
economy. The quality and quantity of labor from households affect productivity
and economic growth.
● Savers: Households can save a portion of
their income, creating a source of capital for investment and economic
development. Household savings also help stabilize the financial system and
mitigate economic risks.
1.2 Businesses
Businesses
are production and business units that play an important role in:
● Producing goods and services: Businesses
use factors of production such as labor, capital, land, and technology to
create goods and services that meet market demand.
● Creating jobs: Businesses create job opportunities
for workers, helping them earn income and improve their living standards.
● Contributing to the state budget: Businesses
pay taxes to the state, contributing to the budget revenue used for public
activities such as education, healthcare, and national defense.
● Promoting innovation and development: Businesses
continuously research, develop, and apply new technologies to improve
productivity, product quality, and competitiveness, contributing to the
development of the economy.
1.3 Government
The
government is the state management agency, playing a crucial role in regulating
and guiding the economy:
● Macroeconomic regulation: The
government uses monetary and fiscal policy tools to stabilize the macroeconomy,
control inflation, promote growth, and address economic issues such as
unemployment and income inequality.
● Providing public services: The
government provides essential public services such as education, healthcare,
security, national defense, and transportation infrastructure to ensure social
welfare and create favorable conditions for economic development.
● Environmental protection: The
government enacts policies and regulations on environmental protection to
ensure sustainable development and protect people's health.
● Promoting healthy competition: The
government establishes and enforces regulations on competition, anti-monopoly,
and consumer protection to create a fair and transparent business environment.
● International economic integration: The
government participates in negotiations and signs free trade agreements,
promotes international economic integration, expands export markets, and
attracts foreign investment.
1.4 Market
The
market is where buying, selling, and exchanging goods and services between
buyers and sellers take place. The market plays a crucial role in:
● Resource allocation: Through the price mechanism, the market helps allocate scarce resources
to the most efficient production and consumption activities.
● Creating competitive incentives: The market encourages businesses to compete with
each other on price, quality, and service, thereby promoting innovation and
improving economic efficiency.
● Providing information: The market provides information about demand,
supply, prices, and product quality, helping economic agents make informed
production and consumption decisions.
● Enhancing social welfare: The market helps increase choice and product
diversification, better meeting consumer needs, thereby improving social
welfare.
1.5 Interaction
between actors
The
actors in the economy have a close interactive relationship with each other.
● Households provide human resources and capital to businesses, and at the
same time are consumers of the products of businesses.
● Businesses produce goods and services to meet the needs of households,
create jobs, and contribute to the state budget.
● The government regulates the activities of households and businesses,
provides public services, and creates a favorable environment for economic
development.
● The market is where the interaction between households, businesses, and
the government takes place, helping to allocate resources and promote economic
growth.
Harmonious
and effective interaction between the actors is an important factor in ensuring
the sustainable development of the economy.
In
summary, households, businesses, the government, and the market are the four
main actors in the economy. Each actor has its own role and function, and at
the same time, has a close interactive relationship with each other.
Understanding these actors and the relationships between them is the basis for
grasping the operating principles of the economy and making sound economic
decisions.
1.6 Additional
Reading: The Long Journey of the World Economy: From Simple Trade to
Globalization
The history of economic
development is a long story about the evolution of economic systems, from the
most primitive forms to the complex global economy of today. This journey is
not just about changes in the way we produce and distribute goods, but also
about the transformation of thinking, institutions, and social relationships.
Let's look back at some important milestones in economic history to better
understand the world we live in.
1. Pre-industrial period:
The self-sufficient economy
For thousands of years,
people lived mainly by hunting, gathering, and subsistence farming. Each
community produced what it needed to survive, exchanging goods based on
individual needs and capabilities. The division of labor was limited, and most
wealth was distributed based on tradition and customs.
2. The rise of trade and
mercantilism
From the 15th century, the
development of navigation and the discovery of new lands ushered in the era of
international trade. European countries began competing with each other for
control of trade routes and colonies. Mercantilism emerged, viewing trade as a
zero-sum game where one country could only get rich by making other countries
poorer. The economic policies of mercantilist nations focused on accumulating
gold and silver, promoting exports, and restricting imports.
3. Physiocracy: The rise
of the "land-based economy"
In 18th-century Europe, while
mercantilism was prevalent, a new school of economic thought emerged in France:
Physiocracy. Physiocrats, led by François Quesnay, presented a view contrary to
mercantilism, arguing that agriculture was the true source of national wealth.
- Land is supreme: Physiocrats considered land to be the only
factor of production that created a "real" or "net
product," meaning the value of the product exceeding the cost of
production. They believed that other sectors like industry and commerce merely
transformed goods, not creating new value.
- Economic freedom and
"laissez-faire":
Physiocracy strongly advocated for economic freedom and the policy of
"laissez-faire" (non-interference), arguing that the market
should operate freely without government intervention.
- Tax on land rent: Believing that land rent was the only income
with real value, physiocrats proposed a direct tax on the land rent of
landowners.
Despite certain limitations
in underestimating the role of industry and commerce, physiocracy made
significant contributions to the development of economic thought. It laid the
foundation for the emergence of classical economics, particularly by emphasizing
the importance of economic freedom and the market.
4. The Industrial
Revolution and the birth of capitalism
In the late 18th century, the
Industrial Revolution fundamentally transformed the world economy. The advent
of machinery and new technologies increased labor productivity, promoted mass
production, and created unprecedented wealth. Capitalism emerged, characterized
by private ownership of the means of production, free enterprise, and market
competition. Adam Smith, with his classic work "The Wealth of
Nations," laid the foundation for classical economic theory, advocating
for economic freedom and the role of the "invisible hand" in
coordinating the market.
Here is an example of Adam
Smith's "invisible hand":
The Bread Market: Imagine a neighborhood with many
bakeries competing with each other. Each bakery wants to sell more bread and
make the highest possible profit.
- When demand for bread increases: For example, in the morning, many people need to
buy bread for breakfast. This increases the demand for bread, causing the
price of bread to tend to rise.
- The invisible hand acts: Bakery owners see the price of bread increase
and recognize a profit opportunity. They will increase bread production to
sell more.
- Result: The increase in bread production meets the high
demand from consumers. The price of bread may decrease slightly from its
peak, but it remains higher than usual, ensuring profits for the bakeries.
What is the "invisible
hand" here? It is the market mechanism, where the interaction between
supply and demand automatically adjusts prices and output without any
government intervention.
- No one "orders" the
bakeries what to do: Bakery
owners decide to increase production based on their observations of the
market and their desire to make a profit.
- The outcome benefits both buyers
and sellers: Buyers have enough
bread for breakfast, and sellers have additional profit.
- The market self-regulates: If there are too many bakeries producing too
much bread, the price will drop, and some bakeries may have to close or
reduce production. Conversely, if there is not enough bread to meet
demand, the price will rise, encouraging bakeries to produce more.
In summary: The example of
the bread market shows how the "invisible hand" of the market works
to coordinate production and consumption, ensuring that resources are used
efficiently and society's needs are met in the best possible way.
5. The 20th century: The
rise of different economic systems
The 20th century witnessed
the emergence and development of various economic systems.
- Centrally planned economy: The Soviet Union and Eastern European countries
experimented with the centrally planned economic model, where the state
controlled all economic activities. Although achieving some initial
success in industrialization and economic growth, this model ultimately
proved inefficient and unsuitable for a country's economic development.
- Welfare market economy: Western European and North American countries
developed the welfare market economic model, combining market mechanisms
with state intervention to ensure social equity and provide public
services.
- Emerging market economies: Many developing countries in Asia, Africa, and
Latin America have achieved rapid economic growth in recent decades,
thanks to economic openness, attracting foreign investment, and
institutional reforms.
6. Globalization and the
digital age
From the late 20th century,
the world entered the era of globalization and the digital age. The development
of information technology, transportation, and telecommunications has connected
the world's economies more than ever before. International trade and investment
have grown rapidly, creating new opportunities and challenges for nations.
Challenges of the modern
global economy
- Income inequality: The gap between rich and poor, both between and
within countries, is widening.
- Climate change: Global warming and climate change threaten
sustainable development worldwide.
- Economic and financial crises: The global economy remains vulnerable to shocks
and crises.
- Conflict and political instability: Conflicts and political instability in many
regions hinder economic growth and development.
Conclusion
The history of economic
development is a long and complex journey, reflecting the evolution of economic
thought and different economic systems. In the modern world, globalization and
the digital age are creating new opportunities and challenges. To achieve
sustainable development and prosperity, countries need to adapt to these
changes, build strong economic institutions, invest in education and
technology, and cooperate to address global issues
1.7 Questions and
Answers
Conceptual Understanding
1. Question: What is the labor market, and what are
its key components?
○
Answer: The labor market is where the
interaction between workers (labor suppliers) and employers (businesses,
organizations) takes place. The key components include labor supply, labor
demand, and wages.
2. Question: Explain the law of labor supply and the
law of labor demand.
○
Answer:
■
The
law of labor supply states that
there is a positive relationship between wages and the quantity of labor
supplied. As wages increase, workers are willing to supply more labor.
■
The
law of labor demand states that
there is an inverse relationship between wages and the quantity of labor
demanded. As wages increase, employers will hire fewer workers.
3. Question: What factors can influence the supply
and demand of labor?
○
Answer:
■
Factors affecting labor supply: Population of working age, labor force
participation rate, education level and skills, and government policies.
■
Factors affecting labor demand: Demand for products, labor
productivity, prices of other factors of production, and technology.
4. Question: Define the equilibrium wage and explain
how it is determined in the labor market.
○
Answer: The equilibrium wage is the wage rate
at which the quantity of labor supplied equals the quantity of labor demanded.
It is determined by the intersection of the labor supply curve and the labor
demand curve.
5.
Question: What is the capital market, and what
are the different forms of capital?
○
Answer: The capital market is where
transactions, mobilization, and provision of capital take place between those
with idle capital and those who need capital for investment. The different
forms of capital include equity capital, debt capital, foreign direct investment
(FDI), and foreign portfolio investment (FPI).
6. Question: Explain the concept of interest rates
and their role in the capital market.
○
Answer: Interest rates represent the cost of
borrowing or the return on lending capital. They play a crucial role in the
capital market by influencing borrowing and lending decisions, allocating
capital, and promoting economic efficiency.
7. Question: What are the unique characteristics of
the land market compared to other markets?
○
Answer: The land market is unique due to the
fixed nature of land, its scarcity, non-renewability, and complex legal nature.
These characteristics influence land prices, land use, and the overall dynamics
of the land market.
Application and Analysis
8. Question: How would an increase in the minimum
wage likely affect employment levels, particularly for low-skilled workers?
○
Answer: An increase in the minimum wage can
have mixed effects on employment levels. While it may increase income for some
low-skilled workers, it could also lead to reduced employment opportunities as
businesses may cut back on hiring or substitute labor with other factors of
production to manage increased costs.
9. Question: If the demand for a particular product
increases, how would this impact the demand for labor in the industry producing
that product?
○
Answer: An increase in demand for a product
would likely lead to an increase in the demand for labor in that industry.
Businesses would need to hire more workers to increase production and meet the
higher demand.
10.
Question: How does technological advancement
affect the labor market?
○
Answer: Technological advancement can have both
positive and negative effects on the labor market. It can displace workers in
certain industries by automating tasks, but it can also create new jobs in
technology-related fields and increase overall productivity.
11. Question: Explain how the central bank can
influence interest rates in the economy.
○
Answer: The central bank can influence interest
rates through monetary policy tools. For example, it can adjust the base
interest rate, which affects the cost of borrowing for banks and, consequently,
for businesses and individuals. It can also buy or sell government securities,
which influences the money supply and interest rates in the market.
12. Question: What factors contribute to high land
prices in prime locations?
○
Answer: High land prices in prime locations are
typically driven by factors such as proximity to city centers, access to good
infrastructure and amenities, a desirable surrounding environment, and high
development potential. The scarcity of land in these areas further contributes
to price appreciation.
Critical Thinking
13. Question: Discuss the potential trade-offs
between increasing the minimum wage and maintaining business competitiveness.
○
Answer: Increasing the minimum wage can benefit
workers by providing a living wage and reducing income inequality. However, it
can also increase production costs for businesses, potentially leading to job
cuts, reduced profits, or higher prices for consumers. Policymakers need to
carefully consider these trade-offs and strike a balance that supports both
workers and businesses.
14. Question: How can governments promote the
development of the capital market to support economic growth?
○
Answer: Governments can promote capital market
development through various measures, such as:
■
Creating
a stable and transparent regulatory framework
■
Enhancing
investor protection and market integrity
■
Developing
a diverse range of financial instruments
■
Facilitating
access to capital for businesses, especially SMEs
■
Encouraging
foreign investment
15. Question: What are some sustainable land
management practices that can help address the scarcity and non-renewability of
land resources?
○
Answer: Sustainable land management practices
include:
■
Promoting
compact and efficient urban development
■
Protecting
agricultural land and natural ecosystems
■
Encouraging
land reclamation and rehabilitation
■
Implementing
zoning and land-use planning regulations
■
Promoting
sustainable farming and forestry practices
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