Basic Economic Concepts

Basic Economic Concepts

This paper aims to explain certain basic economic concepts to my recently graduated son who before officially entering the job market has approached me to explain these concepts. They are discussed in the following sections.

Absolute and Comparative Advantage

In simpler terms, an Absolute advantage in international trade context highlights the advantage or the benefit that a country enjoys in producing a certain good or service for which it has great resources of. For example, Japan has the absolute advantage of producing quality and cost effective technological goods and services as it has an ample source of relevant skilled workforce with high technical skills. Conversely, Comparative advantage is said to associate with that country in the production of that good or service that has a relative lower opportunity cost of production when compared with other countries. This form of advantage is mainly assessed based on the costs involved. For example, if China can produce one pound of rice for half dollar or fifty cents, while in US it takes one dollar to produce the same quantity, then China has the comparative advantage over US to produce more output in lesser cost per unit (www.globalization101.org).

Thus, the theories of comparative and absolute advantage play a vital role in International Trade Economics as they both act as a guiding measure for countries to better decide which good or service to produce, import and export.

Invisible Hand

The Invisible Hand Theory, as it is popularly referred, was put forth by the father of economics Adam Smith in 1776. This theory is based on the assumption that all members of a society wants to become rich, but at the same time they want to exchange or trade what they have with other members of the society, in order to thrive. This signifies that people are required to produce goods and services, at a fair price, for others to purchase and consume. This theory greatly impacts the decision-making process in all economic systems in the manner that it helps direct the utilization and division of labor and potential of free trade for economic growth and sustainability of a country (www.elearnportal.com).

Circular Flow Diagram

This Circular Flow Model consists of many primary groups or sectors that participate in various economic activities. These include the buyers, sellers and the government. These buyers are representative of the Households who buy and consume various goods and services, while it is ...