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  • Writer's pictureDhanesh Narroo

The Lexicon of the Economy

In my own words, I will try to explain the defining concepts of the economy and how they are relevant to the post-COVID era.

Scarcity


The very first term used in most economics textbooks - scarcity - refers to the limited amount of resources available at all times. In production and manufacturing, there is only a finite amount of goods that can be produced due to the limited amount of resources available. Solar-powered electricity grids are unable to provide a 24-hour power supply due to the limited availability of sunlight, even though there have been significant developments in solar grid technology recently to achieve a 24-hour supply.


Trade-offs


Human beings have unlimited wants and with newer technology comes higher expectations. However, resources are limited. Labour, land, access to technology, and capital are all available in limited quantity. Therefore, choices have to be made about which goods and services to prioritise so as to satisfy the maximum of consumers. Who makes these choices though? I would call it a three-tiered relationship between consumers, firms, and governments. The most in-demand goods throughout the pandemic have undoubtedly been personal protective equipment, mostly masks. Firms have had to redeploy resources to produce masks. Med-Con, the only factory producing medical masks in Australia has ramped up its mask production by a staggering 2400%. The company’s CEO Steve Csiszar claimed that the pandemic-led demand caused the company to hire people day-by-day with their machines running 24/7 amid an unprecedented level of activity in their factory. These workers hired by Steve helped in the economy producing more masks than for example, cups of coffee that were less in demand due to cafes not opening as a result of the lockdown.


Opportunity cost


The notion of choice is the very basis of opportunity cost. Choice involves choosing between two or more possibilities. Opportunity cost, is by definition, the highest-valued alternative that must be given up to engage in an activity. The opportunity cost of watching a two-hour movie on Netflix is the loss of an afternoon nap or a study session. Governments investing massively in roads and public infrastructure is a choice over developing new sectors of the economy for future sustainable growth. The opportunity cost of having take-away food is giving up on cooking home-made food.

Gross Domestic Product


The Gross Domestic Product is the market value of all goods and services produced in a country during a period of time. It is important to highlight that GDP is measured only in monetary value, based on the country’s currency, and also equivalent in USD as a base of comparison against other countries. The difference between intermediate goods and services and final goods and services is essential in calculating GDP. An Italian restaurant purchases pasta and other basic ingredients from its suppliers. Eventually, after all, preparation by the chefs, the final products which include tomato and cream sauced-pasta as well as several types of pizzas are bought by customers. Thus, plain pasta and other basic ingredients are the intermediate goods while the cooked pasta and pizzas are the final goods. GDP measures only final goods in an economy and the value of cooked pasta and pizzas sold yearly would be accounted for in the calculation of GDP. Such a practice is adopted as the Italian business owner uses a pricing strategy that includes the cost of intermediate goods, labour, and other expenses involved in producing the final good. Therefore, accounting for intermediate goods would cause double counting.

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