Economics for governments


Trade
	One party may send 10,000 tonnes of wheat to another person, who sends 2,000 tonnes of oranges back 

		in return

	On an individual level, a person may had over a $5 note in return for 2 meat pies, for example.



Production

	Economics is about producing items, e.g. growing food on farms, building motor vehicles, building houses etc.



Currency

	Economic activity is much more efficient if there is a currency in widespread use. This may be coins

		of gold, silver or other metals, or paper banknotes.


	Banknotes can be issued in two major forms

		commodity-backed, each note is directly exchangable for a physical item, e.g. 0.1 ounces of gold


		non-commodity-backed, each note is simply a paper note. In this case the volume of notes

			must be carefully controlled, and some prices must be set by law (e.g. milk, $2 per litre)

			This form of currency is more suited to large scale use than commodity-backed currencies.



employment


	a person works from, say, 2:00pm to 5:00pm Mondays to Fridays at a work location, engaged in work 

	such as building furniture, and receives currency each week (say 8 gold coins) from the person

	managing that location, in return for doing that work.


	The owner arranges the location, pays for the supplies, and receives payment from the customer

	(banknotes) in return for taking the finished items.



Inflation

	If you create a large volume of money (coins and banknotes), inflation will occur, which is 

	a general rise in prices across all items.

	A small amount of inflation is not considered harmful (up to 4% p.a.), larger inflation rates 

	cause a large number of problems.



Commercial law

	A country needs an effective legal system, which resolves disputes between different parties

	involved in business transactions.



Free-market systems


	In a free-market system, each person is responsible for their own needs, and usually obtains

	cash from employment or owning a business, and uses the cash to purchase food, a house to live in, etc.

	This requires a high level of skill and knowlege however.



Allocation systems


	In an allocation system, a person is allocated a job, a house to live in, and usually currency

	to spent on essential items.

	This is a more practical system for most people, however there may be a cost involved for the

	person running the system.



Property rights

	Implied in these notes is the concept of property rights, which is that some items belong to an 

	individual person (their clothes, personal items (mobile phone etc), and possibly a motor vehicle and house).

	This is the case when dealing with strangers, such as engaging in trade with people in other countries.

	Generally anything carried by the person when they walk along, or items in their house, are considered to be items

	of property owned by that person.

	Some locations may not have strong references to this concept.



Prices

	Prices are critical to the operation of an economic system. In many cases wage rates are too low, as

	there is an natural tendancy for them to fall due to competition from individuals to get jobs.

	It is essential that prices and labour rates be at fair levels in order for systems to be effective.

	e.g. cost of a large meal, 10/1000 ounces of gold, general rates 500/1000 ounces of gold per hour.


	Attempts can be made to measure this as the amount of economic value produced from the work, 

	versus the sums of money paid as a salary.

	
	This paragraph is general economics, however the key point is that prices are critical.


		e.g.	ok	1 hamburger	$3

				rates		$400 per hour




			no ok


				1 hamburger	$3

				rates		$7.5 per hour



	If necessary introduce regulations to increase wage rates.



Competition

	Price setting works more effectively if there is competition, i.e. several businesses offering the

	same product.


	Ideally there should be 12 to 15 businesses offering each type of product, with no agreements 

	between them involving setting prices. Usually there are only 2 or 3. Any steps that increase the number 

	of separate businesses is a positive step for price setting and	economic activity in general.




2.

Services

	services involve prodiving some service in return for fees, e.g. transporting goods from one location to another

	haircuts, legal advice, banking. The fee is the amount of money (cash) for that service.



Tax

	Governments need to raise funds (money) for their own expenses, and to pay for public roads, schools, hospitals etc.

	Some tax methods include a percentage of a transaction, or an added amount.


	e.g.

		Amount paid by customer			$100
		
		Tax rate 2%

		Amount sent to the government		$2

		Amount kept by the business		$98




		
	Or alternative, a gross-up structure

		Cost of shipping			$100

		Taxes					  $4

		Total amount due			$104




Theft, violence

	The two things that dest. an economic system are t. an v. (i.e. these are bad things that prevent there

	being plenty of food and housing).

	The use of auditing, price setting methods etc. may assist in reducing these problems.



