University Laica Eloy Alfaro de Manab

Facultad de Gestin, Desarrollo y Secretariado Ejecutivo 1.1. Land 1.2. Labor 1.3. The capital

ndice
1. FACTORS OF PRODUCTION

2. Economic Systems
2.1. 2.2. 2.3. 2.4. 2.5. 2.6. Types of Economic Systems Scarcity Traditional economic system Command economic system or planned economy Socialism Mixed economic system

Name Santana Zambrano Jessica Gissella

3. The Market Place

Subject Economy to Trade 3.1 Wholesale markets 3.2 On the Internet

4. The new Economy 5. The Globalization

5.1. Advantages of the globalization 5.2. Disadvantages of the globalization

Teacher Licdo. Carlos Caar

6. Competitiveness
Course 7 Semestre Secretariado Bilinge

6.1. Productivity 6.2. The 12 pillars of competitiveness

7. The impact of the government 8. Balance of trade

Academic year 2013 2014

Labor FACTORS OF PRODUCTION An economic term to describe the inputs that are used in the production of goods or services in the attempt to make an economic profit. The factors of production include land, labor and capital. The factors of production describe the function that each resource performs in the business environment. In essence, land, labor, capital encompass all of the inputs needed to produce a good or service. Labor is all of the work that laborers and workers perform at all levels of an organization, except for the entrepreneur. The entrepreneur is the individual who takes an idea and attempts to make an economic profit from it by combining all other factors of production. The entrepreneur also takes on all of the risks and rewards of the business.

The capital
The capital is all of the tools and machinery used to produce a good or service. Capital can represent the monetary resources companies use to purchase natural resources, land and other capital goods. It also represents the major physical assets individuals and companies use when producing goods or services. These assets include buildings, production facilities, equipment, vehicles and other similar items.

Land Land is the economic resource encompassing natural resources found within a nation, such as timber, land, fisheries, farms, gold and other similar natural resources, used in the production of a good. Land is usually a limited resource for many economies.

It is the fundamental challenge confronting all individuals and nations. We all face limitations... so we all have to make choices. We can't always get what we want. How we deal with these limitationsthat is, how we prioritize and allocate our limited income, time, and resourcesis the basic economic challenge that has confronted individuals and nations throughout history.

Economic Systems
There's more than one way for a society to organize its economy. Maybe everyone simply follows tradition, following pretty much the same economic pursuits as their parents and grandparents before them. Or maybe the government decides what's best. Or perhaps the government stays out of it, leaving the economic system to be determined by the combined decisions of millions of individual people. But not every nation has addressed this challenge in the same way. Societies have developed different broad economic approaches to manage their resources.

Traditional economic system Traditional economic system is here's a shocker shaped by tradition. The work that people do, the goods and services they provide, how they use and exchange resources all tend to follow long-established patterns. These economic systems are not very dynamic things dont change very much. Standards of living are static; individuals dont enjoy much financial or occupational mobility. But economic behaviors and relationships are predictable. You know what you are supposed to do, who you trade with, and what to expect from others.

Types of Economic Systems

Scarcity

In many traditional economies, community interests take precedence over the individual. Individuals may be expected to combine their efforts and share equally in the proceeds of their labor. In other traditional economies, some sort of private property is respected, but it is restrained by a strong set of obligations that individuals owe to their community.

Command economic system or planned economy The government controls the economy. The state decides how to use and distribute resources. The government regulates prices and wages; it may even determine what sorts of work individuals do.

The main advantage of traditional economy is that this type of economics produces only those goods and services which are required for the survival or which they want to consume. Hence there is no surplus or wastage and hence it does not waste resources for goods and services which are unnecessary. Also in this economy people know exactly what their roles or job is and hence there is no duplication of effort.

However it suffers from certain disadvantages like this type of economy resist any changes because they tend to think that methods and procedures which are followed by their ancestors for generations are correct and hence which in turn leads to lower productivity thus leading to lower development of the society or country as a whole. Also due to this lower productivity people have lower standard of living than other economies which does not follow traditional economics. Also in this type of economies people have to do job which they are told to do but which they dont like and hence it also lowers their productivity

The advantages The welfare of all citizens is the primary goal of the economic system. Wasteful competition is avoided Wages are controlled by the state there is no industrial unrest. (Such as strike action)

There is greater emphasis on the quantity of life (health, education, elimination of poverty, moral direction) than on the quantity of production (output) in the country. Free health care, education

Socialism Socialism is a type of command economic system. Historically, the government has assumed varying degrees of control over the economy in socialist countries. In some, only major industries have been subjected to government management; in others, the government has exercised far more extensive control over the economy.

Disadvantages: NO freedom of choice for producers or consumers Lack of incentives for workers result in low morale efficiency. Managers are also not motivated. The system is too rigid to adjust when changes occur, this can result in shortages. Government set prices on goods and sets wages. People get paid even if they don't do their job EX: you could sit at a restaurant for an hour and not get served (poor service and rude employees) The classic (failed) example of a command economy was the communist Soviet Union. The collapse of the communist bloc in the late 1980s led to the demise of many command economies around the world; Cuba continues to hold on to its planned economy even today.

In market economies, economic decisions are made by individuals. The unfettered interaction of individuals and companies in the marketplace determines how resources are allocated and goods are distributed. Individuals choose how to invest their personal resourceswhat training to pursue, what jobs to take, what goods or services to produce. And individuals decide what to consume. Within a pure market economy the government is entirely absent from economic affairs.

Essential Characteristics of Socialism:

(1) (2) (3) (4) Emphasis on equalityEconomic and Social Social ownership of the means of production More emphasis on social welfare Economic Planning

(5) Establishment of a classless society Mixed economic system This combines elements of the market and command economy. Many economic decisions are made in the market by individuals. But the government also plays a role in the allocation and distribution of resources.

Social cost of business activities may be reduced by carrying out cost-benefit analysis by the government. As compared to Market economy, a mixed economy may have less income inequality due to the role played by the government. Monopolies may be existing but under close supervision of the government. The disadvantage of mixed economies is that they do not always achieve what they aim to, with either too many regulations hampering business, or too few leading to a failure to protect those most disadvantaged.

The Market Place

A marketplace is the space, actual, virtual or metaphorical, in which a market operates. The term is also used in a trademark law context to denote the actual consumer environment, i.e. the 'real world' in which products and services are provided and consumed.

Features Resources are owned both by the government as well as private individuals. I.e. co-existence of both public sector and private sector. Market forces prevail but are closely monitored by the government. Advantages Producers and consumer have sovereignty to choose what to produce and what to consume but production and consumption of harmful goods and services may be stopped by the government.

Wholesale markets Wholesale marketing can take place at a market which primarily sells to traders such as caterers and small

shopkeepers, rather than to members of the public, although members of the public are not necessarily excluded.

It describes the recurring economic processes of a commercially organized state in which private property, division of labor, and free competition prevail.

On the Internet The growth of Internet access has enabled new markets to emerge online. One example is eBay, a globally available virtual auction house for products. The Internet has also enabled other marketplaces to thrive by connecting buyers and sellers from disparate locations. The formation of online marketplaces often occurs quickly in response to social or economic trends.

The Globalization
Globalization is growing quickly. A German company can produce cars in Argentina and then sell them in the United States. A businessman in Great Britain can buy a part of a company in Indonesia on one day and sell parts of another business in China the next, thanks to globalization. Its hard to think of any aspect of modern life that globalization does not influence or touch in some way. The rising tide of globalization plays a growing role in business, culture, the environment, human migration patterns, international development, politics and science and technology.

The new Economy

The new economy describes the result of the transition from a manufacturing-based economy to a service-based economy.

Example Your shirt was made in Mexico and your shoes in China. Your CD player comes from Japan. You can travel to Moscow and eat a Big Mac there and you can watch an American film in Rome.

Competitiveness
Competitiveness is defined by the productivity with which a nation utilizes its human, capital and natural resources. To understand competitiveness, the starting point must be a nations underlying sources of prosperity. A countrys standard of living is determined by the productivity of its economy, which is measured by the value of goods and services produced per unit of its resources. Productivity depends both on the value of a nations products and services measured by the prices they can command in open markets and by the efficiency with which they can be produced. Productivity is also dependent on the ability of an economy to mobilize its available human resources.

Advantages of the globalization It lets countries do what they can do best. Gives you a larger market. You can sell more goods and make more money. You can create more jobs. Consumers also profit from globalization. Products become cheaper and you can get new goods more quickly. The many, substantial benefits of globalization include higher average incomes, greater innovation, richer cultural exchanges and improved standards of living around the world.

Disadvantages of the globalization It causes unemployment in industrialized countries because firms move their factories to places where they can get cheaper workers. More environmental problems. Globalization can lead to financial problems. Human, animal and plant diseases can spread more quickly through globalization

Productivity Productivity is also a key driver of the rates of return on investment, which, in turn determine the aggregate growth rates of the economy.

distance between regions, with the result of truly integrating the national market and connecting it to markets in other countries and regions.

Macroeconomy The stability of the macroeconomic environment is important for business and, therefore, is important for the overall competitiveness of a country. Although it is certainly true that macroeconomic stability alone cannot increase the productivity of a nation, it is not less true that macroeconomic disarray harms the economy. Firms cannot make informed decisions when the inflation rate is in the hundreds (typically as a result of public finances being out of control).The financial sector cannot function if the government runs gigantic deficits (especially if, as a result, it represses banks and forces them to lend it money at below-market interest rates).The government cannot provide services efficiently if it has to make enormous interest payments on its past debts. In sum, the economy cannot grow unless the macro environment is stable or favorable.

The 12 pillars of competitiveness

Institutions The institutional environment forms the framework within which private individuals, firms, and governments interact to generate income and wealth in the economy. The institutional framework competitiveness and growth. has a strong bearing on

It plays a central role in the ways in which societies distribute the benefits and bear the costs of development strategies and policies, and it has a bearing on investment decisions and on the organization of production.

Health and primary education Infrastructure The existence of high-quality infrastructure is critical for ensuring the efficient functioning of the economy, as it is an important factor determining the location of economic activity and the kinds of activities or sectors that can develop in an economy. High-quality infrastructure reduces the effect of A healthy workforce is vital to a countrys competitiveness and productivity. Workers who are ill cannot function to their potential, and will be less productive. Poor health leads to significant costs to business, as sick workers are often absent or operate at lower levels of efficiency. Investment in the provision of health services is thus critical for clear economic, as well as moral, considerations.

Higher education and training Quality higher education and training is crucial for economies that want to move up the value chain beyond simple production processes and products. In particular, todays globalizing economy requires economies to nurture pools of well-educated workers who are able to adapt rapidly to their changing environment. To capture this concept, this pillar measures secondary and tertiary enrollment rates as well as the quality of education as assessed by the business community. The importance of vocational and continuous on-the-job training, neglected in many economies, cannot be overstated, as it ensures a constant upgrading of workers skills to the changing needs of the production system.

allocated appropriately and provided with incentives to give their best effort in their jobs. Labor markets must have the flexibility to shift workers from one economic activity to another quickly, and to allow for wage fluctuations without much social disruption. Efficient labor markets must also ensure a clear relationship between worker incentives and their efforts, as well as the best use of available talentwhich includes equity in the business environment between women and men.

Financial market sophistication An efficient financial sector is needed to allocate the resources saved by a nations citizens to its most productive uses. A proficient financial sector channels resources to the best entrepreneurs or investment projects rather than to the politically connected. A thorough assessment of risk is therefore a key ingredient. A modern financial sector develops products and methods so that small innovators with good ideas can implement them. A well-functioning financial sector needs to provide risk capital and loans and be trustworthy and transparent. Most critical to productivity is business investment. Therefore economies require sophisticated financial markets that can make capital available for private-sector investment from such sources as loans from a sound banking sector, wellregulated securities exchanges, and venture capital.

Goods market efficiency Countries with efficient goods markets are positioned to produce the right mix of products and services given supply-and-demand conditions, and such markets also ensure that these goods can be most effectively traded in the economy. Healthy market competition, both domestic and foreign, is important in driving market efficiency and thus business productivity, by ensuring that the most efficient firms, producing goods demanded by the market, are those that survive. And to ensure the best possible environment for the exchange of goods, there must be a minimum of impediments to business activity through government intervention. Labor market efficiency The efficiency and flexibility of the labor market are critical for ensuring that workers are allocated to their most efficient use in the economy. In a productive economy, workers are

Technological readiness This pillar measures the agility with which an economy adopts existing technologies to enhance the productivity of its industries. This is a critical concept, as technological differences have been shown to explain much of the variation in productivity between countries. In fact, the relative importance of technology adoption for national competitiveness has been growing in recent years, as progress in the dissemination of knowledge and the rising use of information and communication technologies (ICT) have become increasingly widespread.

particularly important for economies in the innovation-driven stage of development. The quality of a countrys business networks and supporting industries, which we capture by using variables on the quantity and quality of local suppliers, is important for a variety of reasons. When companies and suppliers are interconnected in geographically proximate groups (clusters), efficiency is heightened, leading to greater opportunities for innovation and to the reduction of barriers to entry for new firms. Individual firms operations and strategies (branding, marketing, the presence of a value chain, and the production of unique and sophisticated products) all lead to sophisticated and modern business processes.

Market size The size of the market affects productivity because large markets allow firms to exploit economies of scale. Traditionally, the markets available to firms have been constrained by the borders of the nation. In the era of globalization, international markets have become a substitute for domestic markets, especially for small countries.

Innovation The last pillar of competitiveness is technological innovation although substantial gains can be obtained by improving institutions, building infrastructure, reducing macroeconomic instability, or improving the human capital of the population, all these factors eventually seem to run into diminishing returns. The same is true for the efficiency of the labor, financial, and goods markets. In the long run, therefore, when all the other factors run into diminishing returns, standards of living can be expanded only by technological innovation. Innovation is particularly important for economies as they approach the frontiers of knowledge and the possibility of integrating and adapting exogenous technologies tend to disappear.

Business sophistication Business sophistication is conducive to higher efficiency in the production of goods and services. This leads, in turn, to increased productivity, thus enhancing a nations competitiveness. Business sophistication concerns the quality of a countrys overall business networks, as well as the quality of individual firms operations and strategies. This pillar is

Thus, a more competitive economy is one that is likely to growth faster over the medium to long term.

the final consumer but the administration of the VAT system is a cost for business.

The impact of the government Legal changes

The government of the day regularly changes laws in line with its political policies. Examples of legal changes include: The creation of a National Minimum Wage. The requirement for businesses to cater for disabled people, by building ramps into offices, shops etc.

How businesses are affected by government policy

Governments create the rules and frameworks in which businesses are able to compete against each other. From time to time the government will change these rules and frameworks forcing businesses to change the way they operate.
Key areas of government policy that affect business are:

Economic policy
A key area of government economic policy is the role that the government gives to the state in the economy. Taxation policy affects business costs. For example, a rise in corporation tax (on business profits) has the same effect as an increase in costs. Businesses can pass some of this tax on to consumers in higher prices, but it will also affect the bottom line. Other business taxes are environmental taxes (e.g. landfill tax), and VAT (value added tax). VAT is actually passed down the line to

The Ecuadorian government's economic impact

Since 1995, Ecuador began to accumulate numerous imbalances that have plunged into the worst crisis in its history. The emergence of a set of political problems led to a

loosening of fiscal and monetary tightening that led to an acceleration of inflation and a decline in confidence to invest in productive activities. The lack of fiscal discipline, the war with Peru, the economic damage caused by the El Nio phenomenon, the fall in oil prices in 1997-98 and the crisis of the financial system, were factors behind an economic situation that deteriorated rapidly. In 1999, the economy declined by more than 7% over the previous year, unemployment in cities doubled between 1995 and 1995 and inflation in 2000 exceeded 100% annually. In particular, the largest decline occurred after 1998. Indeed, GDP per capita declined by -1.6% in 1998 and -9.0% in 1999. During 2000 the economy had zero growth in per capita terms. The future prospects are not encouraging. Even under the optimistic assumption that real GDP will grow by 5% from 2001, the country will take at least four additional years to reach production levels per capita before 1998. The depth of the economic crisis means that the formal sector will have a major lag in the reabsorption of labor who lost their jobs during the crisis. The sudden economic downturn has affected the entire Ecuadorian population, but has the greatest impact on lowincome sectors, indeed, the crisis has reduced to poverty many Ecuadorians who previously had expectations to improve their living standards. The recent measurement of poverty by consumption capacity of households shows that poverty in the country in 1999 was 1.6 times that of 1995. The proportion of the population living in households whose consumption is below the poverty line increased from 34% in 1995 to 46% in 1998 and finally to 56% in 1999. The incidence of extreme poverty or indigence also increased significantly. Between

1995 and 1999, rose from 12% to 22% nationwide. That is, today, one in five live in households Ecuadorians cannot even meet their dietary needs. A particularly noteworthy durante1999 phenomenon is the emergence of "new" poor, mainly in the cities. Between 1998 and 1999, recent poverty increased from 9-14%. But not only has increased the number of Ecuadorian / as living in poverty, but today the poor are poorer than before. The poverty gap, a measure of the consumption deficit of poorshows an increase of 11% to 22% between 1995 and 1999, this increase implies that while in 1995 the consumption aggregate deficit of the poor accounted for 4 % of GDP, in 1999, this figure rose to twice (8% of GDP). Also, in the same period, the severity of poverty, a measure of inequality among the poor-was increased from 5% to 11%.

Balance of trade
Balance of trade, the difference in value over a period of time between a countrys imports and exports of goods and services, usually expressed in the unit of currency of a particular country or economic union (e.g., dollars for the United States, pounds sterling for the United Kingdom, or euros for the European Union). The balance

of trade is part of a larger economic unit, the balance of payments (the sum total of all economic transactions between one country and its trading partners around the world), which includes capital movements (money flowing to a country paying high interest rates of return), loan repayment, expenditures by tourists, freight and insurance charges, and other payments.

The assumptions of mercantilism were challenged by the classical economic theory of the late 18th century, when philosophers and economists such as Adam Smith argued that free trade is more beneficial than the protectionist tendencies of mercantilism and that a country need not maintain an even exchange or, for that matter, build a surplus in its balance of trade (or in its balance of payments).

If the exports of a country exceed its imports, the country is said to have a favourable balance of trade, or a trade surplus. Conversely, if the imports exceed exports, an unfavourable balance of trade, or a trade deficit, exists. According to the economic theory of mercantilism, which prevailed in Europe from the 16th to the 18th century, a favourable balance of trade was a necessary means of financing a countrys purchase of foreign goods and maintaining its export trade. This was to be achieved by establishing colonies that would buy the products of the mother country and would export raw materials (particularly precious metals), which were considered an indispensable source of a countrys wealth and power.

A continuing surplus may, in fact, represent underutilized resources that could otherwise be contributing toward a countrys wealth, were they to be directed toward the purchase or production of goods or services. Furthermore, a surplus accumulated by a country (or group of countries) may have the potential of producing sudden and uneven changes in the economies of those countries in which the surplus is eventually spent.

Generally, the developing countries (unless they have a monopoly on a vital commodity) have particular difficulty maintaining surpluses since the terms of trade during periods of recession work against them; that is, they have to pay relatively higher prices for the finished goods they import but receive relatively lower prices for their exports of raw materials or unfinished goods.