What is economics?

In order to understand the concept of economics, two important principles shall be considered, namely:

• Unlimited needs; and
• Scarcity of resources.

What are unlimited needs?

Unlimited needs are wants that follow from the ongoing intent of improving individual or collective living standards. Consider the following examples of unlimited needs: the desire to eat well, a bigger house, a newer car, to enrol children in a better school, that is, the persisting desire to consume more goods and services.

What is the issue with unlimited needs?

The issue that arises from unlimited needs is the scarcity of resources, i.e, lack of money and time to meet them.

How can the individual or society solve the issue of unlimited needs amid scarce resources?

The individual or society needs to make the best decisions about using time and money, in order to add to personal and the society's satisfaction, overall.

Thus, economics is defined as the science that helps the individual or society to make the best decisions about using scarce resources, such as money and time, to satisfy their unlimited needs.

Who makes decisions in the economy?

Economic stakeholders make economic decisions.

What are economic stakeholders?

Economic stakeholders are all those who make decisions regarding the circulation of money and economic developments. For example, when an individual decides to buy a good or service, or open a business; when the government decides to build a school or raise taxes; when companies decide to invest in a new factory, among others, they are making decisions as economic stakeholders.

Economic activity is the work carried out by an individual, companies and the government, in order to meet their needs and those of society in general, in exchange for money or income.

Economic activity consists of three phases:

a) Production of goods and services (food, clothing, electricity, water supply, among others);

b) Distribution of money or wealth created when producing goods and services, as:

• wages for workers;
• business profits;
• interest to those who save or lend money; and
• rent to the owners of buildings, houses, warehouses and other real estate.

c) Use of money or wealth from the production for consumption or savings to invest in the future.

How is economic activity measured?

Economic activity can be measured by various indicators. However, the most commonly used indicator is the gross domestic product (GDP).

What Is Gross Domestic Product?

Gross domestic product (GDP) is the sum of the value or wealth created in the production of goods and services by the residents of a country or region, over a certain period of time, usually a quarter or a year.

How is the value created in the production of goods and services calculated?

The value from the production of goods and services is the difference between the value of the goods and services produced and the costs of the intermediate goods used to produced such goods and services.

For example, if the value of a pair of shoes produced is MZN 2500 and the cost of the intermediate goods for production is MZN 1500, the value from production will be MZN 1000.

The GDP only adds the value from production of goods and services from all activity sectors, such as agriculture, industry, transport and communications, among others.

There are two other ways to measure GDP, namely:

• The sum of income distributed as wages, profits, interest and rent; and
• The sum of consumer spending by individuals and the government, and investment spending by businesses and the government.

The three ways of measuring GDP produce the same result, for what is produced is equal to the income distributed, which is equal to the expenses of economic stakeholders, in terms of consumption and investment.

What is economic growth?

Economic growth is the increase in goods and services production from one period to the next, that is, the increase in wealth in society.

How is economic growth measured?

In general, economic growth is measured by calculating the change in GDP, which measures the wealth created in the economy.

What makes the economy grow?

Economic or GDP growth depends on the following:

• Greater consumption by individuals to satisfy their wants or needs;
• Greater business investments to produce more goods and services;
• Greater government spending to meet collective needs; and
• Greater exports or sales of goods and services to other countries.