Business

Social Accounting
March 1, 2016
Fifth Form
Standard Of Living

The term ‘Standard of Living’ refers to those factors that indicate a countries wealth, that is, the
quantity of goods and services consumed including quality of food and type of houses.

Indicators of a country’s standard of living:

 Level of goods and services available

 Average disposable income of the population
 Ownership of capital equipment.
 Research and technology.

Whereas the standard of living is measured by physical quantity, a country’s quality of life is
determined by the quality of goods and services enjoyed by citizens. In other words it refers to
the extent to which the population enjoys the benefits of its wealth.

Indicators of a country’s quality of life:

1. Safety (low crime rates)

2. Good diet and nutrition
3. Environmental quality
4. Quality of health and educational facilities
5. Life expectancy
6. Rate of infant mortality
7. Access to public utilities such as water.

Measurement of the Standard of Living

Governments rely on the different measurements such as:

1. Gross Domestic Product (GDP)

GDP is the total money value of all output produced within a country over a year. The
word ‘domestic’ refers to income earned from local production only.
 2. Gross National Product (GNP)
GNP is the total money value of all output produced over one year, both within a country
and from its overseas investments.
Therefore GNP = GDP + overseas earnings by nationals

3. Per Capita Income

Per capita income or average income measures the average income earned per person in a
given area (city, region, country, etc.) in a specified year.

This is calculated by dividing a country’s GNP by its total population. That is,
GNP
Total population
Thus if a country’s GNP is $40,000,000 and its total population is 5,000, its per capita GNP
would be $8,000.
40,000,000 = 8,000
5000

Thus each citizen enjoys on an average $8,000 worth of goods and services.

4. Physical Quality of Life Index

This measures the infant mortality rates, pollution, literacy level and life expectancy rate.

5. Human Development Index – this measures per capita income, inflation and literacy
rates.

GROWTH AND DEVELOPMENT

Economic growth of a country may be seen as increase in the productive capacity of the
economy. It provides a means of achieving higher living standard for all as more goods and
services are produced. It is a quantitative change in the good and services that are available for
consumption. Economic development may be seen as the reduction and eventual elimination of
unemployment and under-employment, poverty and the removal of the inequalities in the
distribution of wealth and income. In other words, development is the process of improving the
quality of life of the citizens of a country. It is a qualitative change that impacts the well-being
of the citizens.
Factors Affecting Growth and Development

1. Rate of investment
2. Rate of increase in the working population
3. Technical training and education
4. Government expenditure
5. Migration

Economic Dualism

Dualism is the division of the economy into two different sectors – one being technologically
advanced and the other technologically backward. Development takes place in the modern
technologically advanced sector which boasts large-scale farming, manufacturing, banking,
insurance, trading and other services that are linked to these industries. On the other hand, the
backward sector includes small peasant farmers, very small manufacturing and handicraft
industries.

Features of underdevelopment

 Large proportion of community engaged in agriculture and the terms of trade for these
primary products worsen year after year.
 Poor educational opportunities leading to high illiteracy levels and lack of skills.
 High levels of un-employment.
 High growth rate of the population
 Shorter life expectancy due to poor nutrition and medical care

Examples

Developed economies – USA, Japan, China, and Canada.

Underdeveloped economies – parts of Asia and Africa
Developing economies – Caribbean countries, e.g. Barbados, Jamaica and Trinidad and Tobago.

Role of Education in Growth and Development

Investment in education is important for a country’s economic growth and development.
Education increases productivity as individuals who are trained and knowledgeable will be more
efficient. Education is the process of imparting knowledge, skills, beliefs and cultures to
empower and influence behaviour.

 Investing in higher education is a huge benefit to countries because tertiary graduates

usually earn higher incomes. Therefore, graduates return more to the state in additional
taxes, for every dollar the state invests in higher education.
  Another way in which higher education pumps dollars into the economy is through
research. By competing, for state dollars, the talented men and women who comprise
university faculties bring to their communities monies that would not otherwise be there.
 By publishing the results of research and by giving consultations to businesspeople,
college and university faculty enable the discovery and dissemination of new knowledge.
This can bring about opportunities for fuller employment, capital formation, growing
profits and surpluses for investment.
 It is from research that new companies are born, new jobs created, new wealth and an
expanded economy emergies.
 There are also the social and economic benefits to be derived, which include savings
from the many costs often associated with the lack of education, including
unemployment, welfare and crime.

National Income

The national income refers to the total value of a nation’s income over a period of one year. This
income would normally comprise the wages, profits, interests, rents and pension payments for
the period. A nation is able to calculate its national income given that, during the year, goods are
produced and services are provided by firms owned by local private individuals, foreigners or the
government. Likewise, goods are produced and services are provided by overseas firm that are
owned by local private individuals and the government. There is also the matter of trade where
goods are sold to other countries and they also sell goods and services to the home country.

National income may be used to:

 Give an indication of the standard of living in a country

 Compare the standard of living of different countries
 Give an indication of the changes in the distribution of income
 Determine the rate at which the national income is growing

Calculation of the National Income

The NI maybe calculated in any of three ways.

Income method
Expenditure method
Output method

Income method

This method involves taking into account all the incomes earned by individuals and firms within
a country. Individuals may earn wages and salaries by providing labour. Both individuals and
firms may earn profits from investments in businesses as well as rent from property owned.
Income maybe remitted to the country from productive concerns abroad. This is included in the
account as Net Factor Incomes from abroad.

Calculating the national income by the income method

Note the formula:

Income from employment + profits +rents + Net Factor Income from abroad
= GNP - Depreciation
= NI

Calculating the national income by the expenditure method

This method involves totaling the amount spent on investment and consumer goods and services
produced during the course of the year.

Investment expenditure at market prices + Consumption Expenditure at market prices +

Subsidies – Indirect taxes + Net Factor Income from abroad = GNP – Depreciation = NI

Calculating national income by the output or product method

This method is calculated as follows:

Total domestic product or GDP + Net Factor Income from abroad = GNP – depreciation = NI

The figure is arrived at by totaling the value added by each firm to a good or service at each
stage of production or by taking final cost of the product.

Personal disposable income

Personal disposable income (PDI) relates to the amount of money that individuals have to
spend after all deductions are taken out.

To arrive at PDI, GNP – which comprises wages, salaries, profits, rents and net income from
foreign assets – is added to government transfer payments, for example, pensions or tax rebates.
The following are then subtracted: income tax, company tax, national insurance contributions,
undistributed profits, depreciation, profits and rents of public undertakings. Take note of the
following illustrations.

GNP + Transfer incomes

- Income Tax
- Company Tax
 - NIS contributions
- Depreciation
- Undistributed profits

= Personal Disposable Income (PDI)

Global or International Trade

Global or international trade is the trade between or among nations. It is an advantage for
countries to be self-sufficient, but there are reasons why trade must take place between nations.

Reasons for International Trade

(a) Lack of certain natural resources to produce essential goods. Oil which is important to
economic life must be imported into countries that do not posses that natural resource.

(b) Lack of capital, technology and specialist labour to manufacture certain goods on a large
scale. For example, Caribbean countries import machinery equipment and vehicle.

(c) Differences in climatic conditions, e.g. many tropical countries import grapes and
strawberries as these produce need cool climates to survive.

(d) Differences in the cost of production between countries. This reason is based on the
principle of comparative advantage which states that benefits will be gained from trade if
countries produce goods in which they have a relative advantage. Therefore, if two
countries both produce cars and coffee but each is more efficient at producing or
produces either at a lower opportunity cost either car or coffee, then trade can take place.
The country that is more efficient at producing coffee should put all its resources into
coffee and import cars from the other country that is efficient in producing cars.

Benefits of International Trade

 Wider variety of goods available

 Reduction of unemployment
 Prevention of famine and starvation in some countries because scarce goods can be
obtained from abroad
 Reduction of the effect of local monopolies, since these monopolies would face
competition from imported products, which may be cheaper and of better quality
 Improvement in the standard of living of a country
Principles Governing International Trade

Comparative cost advantage

This principle is based on the assumption that countries that produce the same goods will
compare their cost of production. Based on these cost, these countries will decide to produce the
goods that cost them less to produce. For example, Guyana may find that it can produce rice
cheaper than motorcars, while the USA may find it cheaper to produce motorcars. Therefore,
Guyana will produce rice and export to the USA and import cars from the USA, while the USA
will purchase rice from Guyana and export its cars there.

Relative efficiency

Where two countries produce similar products and may enjoy comparative cost advantage in
their production, one country may find that it is more efficient in production of these products
than the other. For example, Barbados may find that it can produce more sugar from a given
hectare of land than Jamaica, and hence will maximize its production to benefit from its
economic position.

International specialization

Following from comparative cost advantage, countries will specialize in the production of goods
and the provision of services that are economical. Specialization in production will result in the
division of labour. Together, international specialization and division of labour should lead to
greater efficiency, larger output, higher profits, increased trade and greater variety for
consumers.

Balance of Trade (BOT)

This is the difference between a country’s total imports of goods and services and its total
exports of goods and services for a period.

Barriers to International Trade INTRO.

Trade makes buyers and sellers (exporters and importers) better off. However, in the conduct of
trade, there are times when transactions affect other parties negatively. Governments usually
intervene to control such measures.

Custom duties or tariffs

Tariffs are taxes or duties on imports, which are collected by the government and which raise the
price of the good to the consumer. Also, known as duties or import duties, tariffs usually aim
first to limit imports and secondly to raise revenue.
Quotas and Licences

Quotas are limits on the amount of a certain type of good that may be imported into a country.
Quotas can be either voluntary or legally enforced.

Physical control

This may take the form of outright bans or embargoes placed on the importation of goods eg.
trade between Cuba and Jamaica.

Licences

These are permits to import or export goods. Governments may place certain commodities under
licence. This means that prior to the commodity being imported the importer has to receive a
licence from the government.

Exchange controls

This occurs when claims to foreign currency earned has to be handed over to the government or
its agents, the Central Bank. Exchange controls serve to distinguish between importations of
essential goods and services and to limit the amount of foreign currency spent on imports.

Non-tariff barriers

Non-tariff barriers include quotas, regulations regarding product content or quality and other
conditions that hinder imports.

Product Standards

One of the most commonly used non-tariff barriers, which may aim to serve as barriers to trade.
This is where the Government stipulates how a particular product is package and labeled and
also the ingredients that is contained in the product. For instance, when the USA prohibits the
importation of spices from Grenada, is it protecting the health of the American consumers or
protecting the revenue of the American spice producers?

Counter-trade

This is another non-tariff barrier, whereby overseas suppliers are forced by host governments to
engage in reciprocal trading agreements to purchase or use certain products. Brazil may require
that Barbados purchase its corned beef it is to purchase Barbadian craft items. Trinidad will be
able to purchase leather from Chile only if Chile buys its asphalt.

Some other non-tariff barriers include:

RESEARCH
 Packing and shipping regulations
  Harbor and airport permits
 Bothersome custom procedures

Globalization
Globalization may be defined as the system by which countries of the world interact in order to
develop the world economy, which results in the integrating of societies internationally. It is the
process by which finance and investments markets operate globally.

Pros and Cons of globalization

Pros

 It leads to efficient use of resources and tremendous benefits to all involved. There is a
global market for firms. Individuals have access to goods and services of different
countries.
 It reduces unemployment, bringing more people into the workplace, which raises
standard of living.
 There is an increase in information between countries who may not even have a common
interest.
 There is less brain drain, as locals are able to work for foreign companies and earn
foreign exchange for their country while remaining in their own country.
 Countries share financial interests, and therefore, are more willing to work together to
address environmental issues.

Cons

 Some workers in developed countries are losing jobs because firms are outsourcing
production to Asia due to the low cost of production which allows them to make higher
profits.
 The job insecurity of workers increases because of the constant threat of firms
outsourcing labour overseas.
 There is increased threat of corporate firms effecting takeovers, causing more instability
in the marketplace.
 Developing countries are giving increase power to foreign firms.

Impact of globalization

Globalization has made it possible for free trade and communication to expand among countries.
However, there is a challenge with economic and language barriers as people who speak
different languages have to communicate more. There is a reduction in face to face interaction
as a great deal of trade is done using the Internet. Richer countries also exploit the cheap labour
of poorer countries.
Balance of Payments

Balance of Trade & Balance of Payment

When countries trade with each other, at the end of their financial period – usually a year – they
prepare an account that sets out their indebtedness to their trading partners. This is called a
balance of payments. It is really an account that analyses a country’s financial transactions with
its trading partners. A balance of payment as three main sections.

 Current account

The current account includes

(a) Visible trade which looks at the import and export of goods only.
(b) Invisible trade which examines the import and export of services only. When the
amounts paid for visible imports are subtracted from the amounts paid for visible
exports (in goods only) the figure that is arrived at is called the visible balance.

When the amounts paid for invisible imports are subtracted from the amounts paid for invisible
exports (services) the figure derived is referred to as the invisible balance.

The current account balance is obtained by adding the balance on the visible trade to the
invisible trade.

 Capital account

The capital account aspect of the balance of payments statement looks at short-term and
long-term capital flows (capital coming in and leaving the country).

 Outflows are represented by a minus sign.

 Inflows are represented by a plus sign.
 The capital account includes a balancing item which represents errors in and omission
from the account. Therefore it may be positive or negative (+ or -).

The current account balance, when added to the capital account, gives the balance of
payment figures.

 Official financing

This section of the accounts shows how the balance of payment is treated. If it is a
surplus it shows how the government will use this surplus. In other words, it shows
whether this surplus will be used, saved or spent. If it is a deficit it will indicate how the
government was able to finance the deficit.
A balance of payments deficit is a shortfall in a country’s overseas earnings. This shortfall may
be due to a number of factors.

An unusual situation in the country – hurricane, flood, earthquake, political instability

Importing more goods and services than are exported
Too much overseas borrowing
Too much foreign investment

Financing Balance of Payments Deficit

Internal measures

Use of reserves or savings

Selling of an asset

External Strategies

Borrow from financial institutions, e.g., IMF or World Bank

Sell an asset
Gifts (remittances) may be used but a country cannot always depend on these
Accept loans from other countries regionally and internationally

Treating a balance of payments surplus

A country may use its balance of payments surplus to:

Increase savings
Pay debts owed
Lend to other countries
Invest locally or abroad
Purchase assets

Balance of Payment Problems

This is where a country continues to experience a recurring deficit in its visible and or invisible
balances. Deficits mean there is not enough money to purchase the goods and services required
by citizens.

Methods of Correcting Balance of Payment Problems

1. Tariffs (taxes on imports)

Taxes increase the cost of items imported and therefore will discourage imports. This may
encourage the purchase of cheaper local imports.
2. Import licences

Only holders of this licence can import particular goods and services. Government can restrict
the importation of certain goods and services e.g. those that compete with local goods.

3. Quotas

Restrictions on the quantity of a type of commodity to be imported.

4. Total ban of certain commodities.

5. Encouraging export

Incentives given to exporters.

6. Special Drawing Rights -Drawing on the resources of the International monetary fund

7. Accepting gifts from other countries – This reduces the need to spend foreign exchange.