Chapter 14: Specialization, exchange and money

Specialization: The concentration on particular products or tasks

Specialization of Countries

What countries are good at producing is influenced by the quantity and quality of their resources.

If countries specialize in what they are best in producing, their output should be higher and their citizens should enjoy high living standards.

ADV: If the country produces a relatively narrow range of products, then the countries will have to export those products to gain revenue to spend on imports.

DISADV: Concentrating on a few products is fine if demand for such products remain high and costs of production do not rise. If either demand falls or costs of production rises suddenly, then the countries won’t earn much revenue from selling those products. Producing a wide range of products spread risks.

Specialization of firms

ADVANTAGES

1.       Firms that specialize in a narrow range of products can get to know their markets well and build up a reputation.

2.       Easier to control a firm that only makes a few products

DISADVANTAGES:

1.       Risks of demand of product falling are high. This would lead to less profits being made

INFLUENCERS

1.       Nature of resources available to producers

2.       Location of firm and demand in that location

Specialization of Workers

Also referred to division of labour

Instead of producing the whole good, a worker carries out one task

ADVANTAGE

1.       Lower cost per unit produced-

a.       The worker can specialize in the task they are best at and by doing it again and again, they become very good at it and their productivity rises. Unit costs decrease.

b.      Concentrating on particular tasks mean that workers may be trained more quickly and they would not need to obtain knowledge about handling the full range of equipment. Thus time will be saved and the workers could work for longer.

DISADVANTAGE

1.       Workers may get bored of doing the same task every day. Therefore, the workers would make more mistakes.

2.       Having specialized staff will also make it difficult for other workers to cover up for those that are absent due to sickness and training

Specialization and the individual

            Entrepreneurs

            ADVANTAGES

1.       An entrepreneur starting a new firm would find it easier to concentrate on the manufacture of one or two products. He could then later on employ staff with expertise in different areas.

Workers

ADVANTAGES

1.       Workers who are specialized can become very skilled and if their skills are in high demand then, they can earn high wages.

2.       Concentrating on a particular job or task can help a worker pursue his specific interests. Eg: a doctor interested in brain disorders would like to specialize in that field.

3.       Specialization in less demanding jobs can reduce pressure on workers.

DISADVANTAGES

1.       If demand for that particular type of job falls, then the worker may not be able to get another type of job.

2.       Concentrating on particular task may be boring and will not make full use of the workers’ talents

Consumers

ADVANTAGES

1.       Lower prices and better quality of products

DISADVANTAGES

1.       Consumer may lose out in terms of variety. Eg: A builder would focus on building flats of the same type

The extent of specialization

Factors that influence the extent of specialization include:

1.       Size of the market- If the market is large, then the size of its output will be large and so it will employ a higher no. of workers. In this case its workers can specialize as each worker can do a specific task. All the tasks would be completed because the number of workers is high.

2.           

        Transport Links- If there are many good transport links (good = product) , then the firm can sell its products to different parts of the country. This increases the size of the market as the number of consumers have increased. So the size of firms would increase causing them to employ more workers.

3.      

     Money also facilitates specialization. When workers and firms special specialize, trade becomes imperative. Some products produced have to be exchanged for other products.

Functions of money

1.       Acts as a medium of exchange and allows people to buy and sell products.

2.       Acts as a store of value

a.       Money can be stored

3.       Unit of account

a.        Money is used to place values on items. This function enables buyers and sellers to agree on what items are worth, relative to each other.

4.       Standard of deferred payments               

a.       Money allows people to borrow and lend

Types of money

Coins, notes and bank accounts

Money can be transferred from one bank account to another by direct debits and cheques

Bank accounts are the most important form of money. However, neither bank accounts nor cheques are legal tender.

1.       An item does not need to have an intrinsic value to be act as money. Eg: Silver.

2.       Recognizable (People can easily see that the item is money)

3.       Should be limited in supply.

4.       Should be durable

5.       Divisible ( should be able to divide into different units)

6.       Homogenous ( every note or coin is the same value)

Chapter 20: Trade Unions

Types of Trade Unions

·         Craft Unions – Workers with particular skills. These workers may be employed into a number of industries. Eg: Plumbers and weavers

·         General Unions- Workers with a range of skills and from a range of industries.

·         Industrial Unions- Represent all workers in a particular industry. Eg: Those in a rail industry

·         White collar Unions- Represent particular professions for example: pilots and teachers.

Unions in a country often belong to a national union organization. For example: In India a number of unions belong to the AITUC.

Some also belong to the international trade union organization such as International Confederation Of Free Trade Unions

Definition- An association that represents the interests of a group of workers.

Role of Trade Unions

·         Negotiate on behalf of the members on pay scales, working hours and working conditions. Eg: basic pay, overtime pay, health safety, promotion prospects.

·         Protect or improve workers’ rights

·         Provide information on a range of issues for their members. Eg: Pensions

·         Help with education and training schemes

·         Participate in measures designed to increase demand for the product, thus increasing the demand for labour.

·         Provide range of benefits to their members including strike pay, sickness pay and unemployment pay

·         May pressurize govt. to adopt a legislation- which will benefit workers by fixing a national minimum wage.

Collective Bargaining

An individual worker may not have the time or skill or willingness to negotiate with his or her employer. A worker will also have a limited bargaining power. The  employer may dismiss an individual worker and replace him if he asks for a higher wage.

Unions however enable workers to press their claims through collective bargaining. This incolves negotiations between the union officials, representative of a group of workers and representative of a group of employees.

Collective Bargaining: Representatives of workers negotiating with employers’ associations.

Basis Of Wage Claims

• ·         Workers need a wage raise because:
• ·          because they have been working hard and have increased productivity.
• ·         The industry is making more profits and workers have been linked to those profits
• ·         Comparability argument- The workers it hires should receive a pay rise in order to keep their pay IN LINE (not the same) as similar workers. Eg: If doctors get a pay raise, then the union of nurses will demand a higher pay as well.
• ·         Meet their cost of living

Factors affecting the strength of the union

·         Factors affecting the strength of the economic activity- If output and input in the country are the increasing,  industries will be doing well. When output reaches high levels and those want to work are already employed firms will be competing for workers. To retain existing workers and to hire more workers, firms will agree to union requests and pay higher wages and allow better working conditions.

• ·         A high number of members- The more number of members a union has:  the more funds it is likely to have to finance its activities and the harder it is to replace the union labour with the non-union labour.
• ·         A high level of skill- Unions representing skilled workers are in a stronger position as it can be difficult to replace those workers
• ·         A consistent demand for the product produced by the workers. Unions that represent workers make goods and services that are essential to consumers are in a strong position to bargain.

Industrial Action

• ·         Workers may refuse to work overtime
• ·         Workers may undertake the tasks required by the contracts only.
• ·         They can strike-  Official strike- Strike approved by union. Unofficial strike- One that the union does not agree with, or is over before the union has time to approve it.
• ·         Strike action can be measured by: No. of strikes, numbers of workers involved and number of working days lost.

Question: Why do govt.s try to prevent strikes.?

They do this by asking unions and employers to go into arbitration, in case negotiations don’t work.

                

             Inluence on the supply of labour

·         Unions can raise the workers’ wages by restricting the entry of workers into the industry by either insisting that the workers have high qualifications or by maintaining a closed shop- Firms are not allowed to emply non-union workers.

Trade unions, Firms and Workers

Firms can be harmed if industrial action is taken against them. A firm’s costs and flexibility will also be affected by overtime bans and a ‘work to rule action.’(Doing only what is required and nothing more.)

Unions also do benefits to firms. The firms will have to negotiate with the union and not every individual worker. Unions also encourage workers to gain education and pursue training, which promotes health and safety and raises productivity.

Unions also benefit non-union members too as they also receive the high wages.

Disadvantages of unions- They can make people lose jobs. They can restrict the entry of workers into the company. They can get all the workers kicked out.

Unions around the world-

High union power in European Countries- The public supports things like strikes

Some countries ban trade unions

Managers threaten the workers that they will close down the factory if they form unions.

Chapter 19: Changes in earning

Changes in the earnings of individuals over time

·         For most people, the wages increase as they grow older

o   This is because the longer people work, the more skilled and productive they become

o   Their productivity increases because they gain experience in their work and in some cases undertake training

·         Some workers may change employers to earn a higher wage whereas others may accept more responsibility

·         However in some cases, the workers may decide to give up working overtime and some may switch to less demanding work- This could cause a decrease in their may

·         Over time the firm may be in financial difficulties, so it may cut wages and bonuses.

Changes in earnings of occupations

Mainly due to a change in demand or supply of labour

Other factors- Changes in bargaining powers, changes is government policies and changes in public opinion.

Changes in demand for labour

Increase in demand for labour (Sorry for not mentioning the equilibrium)

Demand for labour will increase if

·         Demand for the product increases. Demand for the labour is derived demand. So if demand for the product increases then the number of workers employed will also increase.

·         A rise in labour productivity. Higher productivity increases the return from hiring workers.

·         Increase in the price of capital: In some jobs it is possible to replace labour with capital

If demand for labour increases then:

·         If demand for labour increases, wages will rise and bonuses will increase and more overtime hours will be available and they would be paid at a higher rate too.

Changes in supply of labour

The factors that could cause a decrease in the supply of labour are:

·         A fall in the labour force. Fewer workers would make it harder for the businesses to recruit workers

·         A rise in qualifications or training required to do that certain job. This will reduce the number of people eligible for that job.

·         A reduction in non-wage benefits of the job as well as an increase in the number of risks involved in doing a job.

·         A rise in the wage or non-wage-benefits in other jobs. People would then choose the other job instead.

          A decrease in the supply of labour would increase the wage rate. This is because there are less

                Workers capable of doing that job. So, if a company does not pay them high wages, then the

                Workers will leave and the company won’t be able to find a replacement.

               

                The extent to which Earnings change

The magnitude of change in demand for, or supply of labour is influenced by the size of the change and the price elasticity of demand and supply for labour. In inelastic demand and supply, there is a bigger impact on the wage rate causing it to increase drastically. This, however does not happen to elastic demand and supply, where the increase is not so drastic.

The determinant of elasticity of demand for labour is:

·         The proportion of labour costs to total costs: If this proportion is high, then a change in wages would have a significant impact on costs causing the demand to be elastic

·         The ease with which labour can be substituted by capital. If it is easy to do this, then demand will be elastic

·         The elasticity of demand for the product produced. A rise in wages increases costs of production which then increases the price of the product. This causes the demand for the product to contract and causes demand for labour to fall. The more elastic the demand for the product is, the greater the fall for the product and the demand for labour- making demand for labour elastic

·         Time period- Demand for labour is usually more elastic in the long run as there is more time for the firms to change their methods of production

The determinant for elasticity of supply of labour

·         The qualifications and skills required. The more of these needed, the more inelastic the supply of labour will be.

·         The length of the training period. A long training period will cause some workers to not do the job. This would also increase the time over which those training will join the labour force, causing supply of labour to be inelastic.

·         The level of employment- If most workers doing that specific job are already employed. The supply will be inelastic, as the employer will have to increase the wage by a lot to attract some employees.

·         The mobility of labour: The easier it is to change jobs and the easier it is to move from place to place the easier it will be for the employer to recruit more labour by raising wage rates. High mobility = Elastic supply

·         The degree of vocation: Higher the attatchment of workers to the job; the more inelastic the supply will be.

·         The time period: The supply of labour tends to become elastic over time. This is because it gives workers more time to notice wage changes and to gain any qualifications or undertake any training needed for a new job.

Definitions

Elasticity of demand for labour- A measure of the responsiveness of demand for labour to a change in the wage rate.

Elasticity of supply for labour- A measure of the responsiveness of supply for labour to a change in the wage rate.

Other influencing factors’

·         A change in the trade union’s power. If trade unions are allowed then the wages will increase

Governments can change wage rates by:

·         Raising the national minimum wage, thus increasing the pay of low paid workers

·         Improved education may raise the wages of skilled workers as it may increase their demand more than supply. So, employing skilled workers à lower costs of production and increase international competitiveness. Demand for products made by country’s firms should increase and more MNCs may be attracted to set up their franchises in the country

·         Govt. Policies on immigration- If it makes it easier for foreign people to live and work in the country, supply of labour will increase causing wages to fall

·         Introduction of government anti-discrimination laws will change public opinion and increase career prospects and wages of disadvantaged groups. For example: Decreasing sexism will increase the wage rates for women.

·         Advances in technology can alter wage rates. In some cases it can decrease demand for workers and so reduce demand for workers. For example: Technology in the banking industry has reduced the number of banking staff and decreases wage rates as the staff are now easily replacable and because the staff is not in high demand anymore. However, in cases such as production of DVDs, advances in technology has increases supply of labour and wage rates.

In the test write both sides of the answer

Chapter 15: Banks sample question

You are a manager of an indian firm. You want to open new branches. Discuss what factors you would take into consideration in deciding how to finance the expansion.

I would either borrow from the bank, issue new shares, obtain government grants and using retained profits.
To borrow from the bank, I would look at the rate of interst. If I would feel that the rate of interest paid by the company would be less than the profit gained from investment. However, the money to be repaid may accumulate and I may not be able to pay it back. This may lead to my company making a loss. If my firm also starts making continuous losses this would make it difficult to pay back the loan.

Issuing new shares would not do any harm to the company, but if I increase the supply of shares, then the share price may decrease. This would make the shareholders unhappy as they would make a loss by selling their shares. This would also make it easier for another company to take over mine.

Govt. Grant- I would not mind taking the offer of taking a grant if the conditions are reasonable. However, if they are unreasonable this would mean that it will be difficult for the firm to do this.

I want to use retained profits to establish new firms. Using retained profits would mean, that I will not have to pay profits. I would however see opportunity cost- I may put this money in the bank instead

Chapter 15: Banks

Main types of Banks

• Commercial Banks
• Central Banks.

In exams, read carefully whether the question is talking about commercial banks or central banks.

Commercial Banks

Commercial banks are private sector banks which aim to make a profit by providing a range of banking services. 

They are also known as joint stock banks, retail or high street banks

• Commercial banks are banks that seek to make a profit. 
• Shareholders have limited liability ( the state of being legally responsible for something )
• They are in the private sector
• They are either public limited companies or private limited companies.
• They sell banking services.
• They are the banks we are most familiar with

Main Functions of commercial banks

1. Accept deposits

Deposits can be made into two types of banks accounts. Current accounts (a.k.a demand accounts) and deposit accounts (a.k.a time accounts)

In current accounts:

• There is easy and immediate access to money.
• However interest is not paid on such accounts
• Customers use these accounts to receive and make payments

In deposit accounts:

• A period of notice has to be given before money can be withdrawn. 
• Interest is paid on money held in such accounts
• Customers use such accounts as a way of saving.

2. Lend money 

Banks make most of their profit by charging higher interest from borrowers than that is paid on the money held within the banks. There are two main ways of doing this- Overdrafts and loans

In overdrafts

• A customer is allowed to spend more than what is in his or her account up to an agreed limit. 
• Interest is charged on the amount borrowed
• This is a relatively expensive way of borrowing money.
• Customers use it to cover short term gaps between expenses and income

In loans

• Taking a loan is for a particular purpose.
• Interest is charge on the full amount of the loan.
• The rate of interest for loans is likely to be lower than that of an overdraft.
• The customer may be asked to give some form of security- collateral
• This is to ensure that if the loan is not paid the collateral can be sold and the money can be recovered.
• Banks try to avoid this, by checking very carefully, whether the person seeking the loan would be able to repay it.

Lending and borrowing from banks means that they act as financial intermediaries. They accept deposits from those with more money than they want to spend and lend it to those with an immediate desire to spend more money than they have at hand. 

3. Enabling customers to receive and make payments

Banks act as agents for payments and provide money transmission services. There is now a range of ways in which people can receive money and make payments out of their accounts such as cheques, standing orders, direct debits, debit/credit cards and online banking.

4. Other Functions

1. Provide travellers with cheques
2. Change foreign currency 
3. Customers can leave important documents such as house deeds and small valuables with their banks.
4. Banks can also help with the administration of customers' wills
5. Provide advice and help with financial matters-
1. Such as completion of tax forms and the purchase and sale of shares. 
6. Sell insurance 
7. Offer a wide variety of savings accounts with a range of conditions and interest rates.
8. Offer mortgage loans as well

Aims of commercial banks

Making a profit for their shareholders

• The main way it does this is by giving out loans

Liquidity

• Banks have to ensure that they can meet their customers' requests to withdraw money from their accounts.
• To do this banks have to keep a certain amount of liquid assets - items that can be quickly turned into cash without incurring loss.
• Banks earn most of their interests by giving out long term loans
• However if they lend out all their money in these loans then they will not be able to pay money to the consumers who are requesting it.
• Thus, banks have to balance profitability and liquidity
• Having some assets that are earning profit while being illiquid and having others that are earning low or no interest but being liquid.

 Central Banks

Central Banks are government-owned banks which provide banking services to the government and commercial banks.

 For example: Federal Reserve Bank Of the USA, Europeen Central Bank and Bank Of England.

Functions of a Central Bank

1.     Acts as a banker to the government

o    Tax revenue is paid into the government's account at the central bank

o    Payments by the government are made out of the government's account at the central bank.

2.     Operates as a banker to the commercial banks

o    Holding accounts at the central banks allows the commercial banks to withdraw money from there if their own customers are taking out more money than usual.

3.     Acts as a lender of last resort

o    It will lend money to those banks that are temporarily out of cash.

4.     Manages the national debt 

o    National debt is the total amount of money that the government owes.

o    Over time government debt tends to build up. 

o    The central bank carries out borrowing on the government's behalf

§  It does this by issuing government securities such as issuing government bonds, paying interest on these and repaying them when they fall due

5.     Holds the country's reserves of foreign currency and gold

o    The central bank keeps foreign currency and gold to influence the exchange rate

6.     Issues bank notes

o    It is responsible for printing notes and destroying notes which are no longer available for circulation. It also authorises the minting of coins

7.     Implements the government's monetary policy

o    The policy is to keep the inflation low and steady.

§  This involves controlling the money supply 

§  Influencing interest rates through the economy (changing interest rates it charges on loans.)

§  In some cases central banks decide the interest rates.

§  In others, the government may decide the interest rates

8.     Controls the banking system

o    Regulate and supervise the banking system

9.     Represents the government

o    At meetings with other banks and international organisations such as the World Bank and international monetary fund.

Independance of Central Banks

 A lot of central banks have the authority to decide the rate of interest. The govt. still decides the aims of central banks and gives a target for inflation. Eg: The bank of England has been given an inflation target of 2%. If it thinks that the prices may rise by more than 2%, it will raise the rate of interest and vice versa                  

There are some advantages in allowing the central bank to make the rate of interest- it will not be tempted to lower the interest rate to win public support. Central banks also have extensive knowledge of the banking system and know the appropriate rate of interest to set.

Disadvantages?

Other Types of banks 

There are two other types of banks- investment banks and savings banks

Investment banks or merchant banks-

• These are banks that tend only to large firms. They accept deposits from them and lend money to them as well.
• They manage the issue of new shares and buy and sell shares and other financial securities on behalf of their own customers.
• They also give advice on, and help with mergers and takeovers.

Savings banks

• They try to encourage people with relatively low incomes to save,
• They make it easy to withdraw cash with few penalties
• A large proportion of the money lent by these banks goes to the govt.

Banking and Islam

In Muslim countries, commercial banks are not allowed to charge interest on bank loans. This is because Muslims regard charging of interest (usury) a sin.

So to tackle this problem- Muslim banks have provided finance to banks by lending to them in return for a share of profits.

Islamic sharia scholars are employed to issue religious edicts that approve financial products including loans.