Economic concepts

Economic concepts

Derived demand

             Owen (2005) defines derived demand as demand for a commodity or factor of production such as labour that occurs due to demand of another good or service. For example, if the demand of maize increases the demand for labour also goes up in the maize farms and ware houses. Research by Owen (2005) shows that a change in demand of a product results to change in demand for workers in the economy. In the steel company, a change in demand for steel will result to a change in labour demand in the firm. An increase in demand will result to an increase in the demand for workers necessary for producing steel.

Factors that determine supply of labour in the market

            Labour supply means the number of people that are willing and have the ability of performing a particular task in the economy at a given wage rate. According to International Labour Conference and International Labour Office (2012), the factors that affect labour supply in the market include wage rate in the market where higher wages encourage people to join workforce, overtime payments, barriers that prevent entry of labour in the market, occupation substitutes, and net migration of workforce as well as non-monetary features of specific occupations.

 Factors that have changed the supply of labour over the last twenty years

             International Labour Conference and International Labour Office (2012) postulates that the supply of labour has changed over the last twenty years. The main causes of change are population changes due to rapid increase in the population size, changes in the labour earnings or income, deviations in the costs of the related products and services and changes in the employees’ expectations. The expectations may include health and social security.

How a firm determines the price and quantity of labour required during a given period

            A firm may determine the price and quantity of worker based on changes in the application of other factors of production for example employment of more manuals may result in the increment in the firm’s marginal product.  International Labour Conference and International Labour Office (2012) state that the increase in marginal productivity may encourage the firm to increase the number of accountants. Also, change in technology can influence the demand of labour in the firms. International Labour Office (2012) perceptively states that improvement of technology in an organization can increase the demand of specific personnel and at the same time reducing demand of other workers and reducing their prices for example introduction of computers have resulted in increased demand of computer experts and decline of other employees due to computerization of some tasks. International Labour Office (2012) argue that the firm may determine labour requirement based on the demand of the company’s product. High demand may increase the labour requirement in the organizations.

Reasons why income inequalities exist

            A study by Hlasny, Verme Hlasny and World Bank (2013) shows that income inequalities exist in the economy. Hlasny et al., state that there are four main causes of inequalities in income distribution. Changes in family structure influence income distribution. Technological advancement in the economy changes the demand of the labour by employing more skilled personnel and eliminating individual with fewer skills and experience. Also, due to globalization the markets have grown rapidly internationally providing new participants in trade that break the boundaries of local and smaller markets. Immigration is also a major cause of inequality.

How income inequality is measured

            Gini coefficient measures inequality in income distribution. The measure determines how distribution of income in a nation differs from the required equity. Zero coefficient shows perfect equity in an economy. Hlasny, Verme Hlasny and World Bank (2013) state that the inequality in income distribution has increased form 1980s to date mostly due to technology improvement in the economy.

Role of US government

            US government participates in the area of income inequality by changing the tax laws in the nation. The government intervenes by applying the progressive tax system, increasing income tax on salaries earned and credit charges as a mean of redistributing wealth resources to the poor people in the society.

Argument for government involvement

            Hlasny et al., (2013) postulate that government involvement help to maintain inequality in income distribution at a low level among the country’s population. Also, government involvement avails more opportunities and reduces criminal activities in the economy.

Argument against government involvement in income inequality

            Hlasny et al., (2013) argue that government should not intervene in the area of income inequality because it is an avoidable and acceptable feature of a progressive economy. A study by Hlasny et al., (2013) show that government intervention involves controlling the externalities such as poor health services, higher levels of crime and lack of opportunities to work that cause poverty in the country and not income inequality.

Reasons why nations trade

            Turning to Deardorff and Stern (2011), one finds that countries trade with one another so as to benefit from resources produced in the other country. Furthermore, the countries trade to sell the surpluses to gain the products or services they require. Deardorff and Stern (2011) state that countries trade to increase employment opportunities especially in the production sectors. Different nations trade to increase the welfare among countries, to benefit from economies of scale. The nations also trade to increase diversity of choices and to benefit from factor endowments.

Comparative advantage

            Deardorff and Stern (2011) define comparative advantage as the ability of an individual, company or country to produce a commodity or service at a considerable low opportunity cost as compared to other countries, individuals or companies. Deardorff and Stern (2011) argue that a country cannot be economically efficient by practicing isolated policy because the nation cannot possess the advantage in the production of all the goods and services.

Problems of negative trade balances

Castro, Rui, and Koumtingue (2011) state that negative trade balances eliminates many manufacturing jobs in a country. For example, almost 2.5 million opportunities were eliminated by the trade balance around 1979 to 1994 in the United States. Most of the jobs lost were mainly in the manufacturing sector. Negative trade balances increases the level of unemployment in the country thereby facilitating poverty increment among households. Adversity results in high level of crimes in a country. Negative trade balances depress the wages of the employed people. Castro et al., (2011) postulate that trade deficit affect the competitiveness of a country in the long run.

Policies to control imbalance

            The work of Castro et al., (2011) shows that application of supply side policies can help improve the competitiveness of a country. The country facing trade deficit should control the situation by increasing the interest rates. The nation can also make use of deflationary policies to reduce the demand of the product. Also, the government can manage the phenomena by raising protectionism through increased tariffs on imports.

Determination of exchange rates

            Floyd (2010) states that the exchange rates are determined by demand and supply in the market using the equilibrium of demand and supply. Moreover, the exchange rates can also be determined by banks for example the people’s bank in China.

Significance of currency devaluation

            Turning to the work of Owen (2005), one finds that devaluation of currency boosts the exports of a country. Currency devaluation improves a nation’s competitiveness. Moreover, the phenomena reduce trade balances or deficits of a country as well as the sovereign debt burdens.


Castro, Rui, & Koumtingue, N. (2011). Essays in open economy macroeconomics with borrowing frictions. N.p.

Deardorff, A. V., & Stern, R. M. (2011). Comparative advantage, growth, and the gains from trade and globalization: A festschrift in honor of Alan V. Deardorff. New Jersey: World Scientific. N.p.

Floyd, J. E. (2010). Interest rates, exchange rates and world monetary policy. Berlin: Springer.

Hlasny, V., Verme, P., Hlasny, V., & World Bank. (2013). Top Incomes and the Measurement of Inequality in Egypt. Washington, DC: The World Bank.

International Labour Conference, & International Labour Office. (2012). The youth employment crisis: Time for action. Geneva: International Labour Office.

Owen, J. R. (2005). Currency devaluation and emerging economy export demand. Aldershot, Hants: Ashgate.

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