Sunday 17th December, 2006



Collective use of resources

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For several weeks now, avid readers have communicated to me that my columns on economic indicators after the Budget, were well warranted, but often a bit too complex. I made a commitment to revisit them, and present the simplest perspectives. So, that’s what we’ll do for the next six weeks.

This is so important because in a well-reported 1974 study, conducted by the World Bank, it was found that in underdeveloped and developing countries, which had experienced as much as ten years of rapid growth statistics, at least 30 per cent of their populations had no real benefit from the economic growth.

So what is economic growth? It’s about the collective use of resources and money. It determines what we can buy, what we can save, and what our standard of living is likely to be, now and in the future.

Economic growth occurs when a country is producing more goods and services than in the past. Such a country has more to sell and typically, more people, including persons or companies from abroad who are willing to pay for such goods and services.

What causes a country to produce more? There are two common explanations. The first is that there is a new discovery, or a new resource, like natural gas, for example.

The second way a country can produce more, is by better use of its existing resources. For example, if people are retrained and given new modern tools or computers, they will get more done faster, and with greater efficiency.

Thus more units of goods are produced or more customers can be served. The simple result is more sales, more cash turn over, more profits, more salary, more incentives to work smarter, and more money saved. But keep in mind, that because of the interactions of many factors, social and otherwise, it is not always that simple an equation.

The economic problems occur in deciding what is produced, how it is produced, and who gets the goods and services when they are produced. If company A can produce an item, that is cheaper, and just as good, as that being produced by company B, it leads to competition. In an economy, company A will have an advantage.

Economics has two sides. It can seek to bring a level of understanding by simply describing what exists and how things work. On the other side, economics can be policy economics which seeks to analyse how people will behave if certain measures are imposed, or removed.

Economic indicators are a result of the compilation of statistics, and the analysis of what these figures or trends will mean in three major areas: the labour market, the financial market, and the goods and service market.

The common indicators are inflation, GDP (gross domestic product), GNP (gross national product), unemployment, personal saving rate.

Inflation is about prices. The inflation statistic measures the overall increase in prices in a predetermined basket of goods—used as a base, over a fixed period of time. We have been hearing the terms headline inflation and core inflation. We have also been hearing that the base or the items in the basket of goods can change over time.

Other terms being bandied about are retail price index and consumer price index.

The key question in the inflation scenario is whether you gain or lose during an inflation. That really depends on whether your income rises faster or slower than the prices of the goods and services you buy.

Next week we will go into the terms in inflation.

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