Contemporary practical view

Contemporary practical view

Smith argued that the Wealth of a Nation are the goods available to citizens while Mercantilists considered it was the amount of gold and silver. The wealth of a nation is defined as the sum of a nation’s assets minus liabilities. It is land, natural resources, infrastructure, buildings, machinery, computers and other electronic devices, vehicles, household appliances, gems, gold, silver, money etch. Attention should be given so that there is no double counting. If land, buildings, machinery of a company are already counted, shares can not be counted because that will be double counting. Scientific knowledge and expertise is also a non measurable wealth of a nation. This is a simple explanation that is enough for now.

We count not only what belongs to citizens but also what is common. Saint Thomas Moore described in Utopia the perfect society with common land ownership, religious tolerance and high educational level. In a communist system everything belongs to the state while in anarchism they belong to producers and consumers through production and consumption cooperatives.

Even in the most capitalistic society, there is common ownership. Land, natural resources, parks, airports, roads, harbors, stadiums, schools, hospitals belong to municipalities, prefectures, counties, states or federations. A misunderstanding is that the owner is the administrative agency because very often they act like they are. The owners are the people of the municipality, prefecture, state or federation and the agency is the administrator.

The goods and services produced in a year is the income (GNI) or product (GNP) of a nation. They are not the same but equal. Wealth and income are interdependent. It helps to make analogies with a person or a household so that some economic concepts are better understood.

In a household, wealth depends on a) income and b) the percentage that is not consumed which is invested. If a household invests a lot of money, it will have additional income from those investments. How much a houshold invests depends on how much it makes and how much it consumes. The more it consumes the less it is left for investments. Investment increases a household’s wealth which in turn increases income and that again increases wealth. It is a virtuous cycle and applies to people, companies and countries.

In contemporary economic theory, price is determined by supply and demand. For each price, a quantity is requested and offered. Equilibrium is reached at the intersection point where the quantities offered and demanded are equal. The lines can shift for a variety of reasons.

Smith, Ricardo and Marx used the term value. A differentiation between cost and price makes things clearer. A product's cost is the sum of all costs, including interest paid to loans. In practical terms, a company does not put a product out in the market without a price and let supply and demand determine the price.

They company’s executives put a mark-up on top of cost. They have the market mechanism in mind which is valid and the competitors’ prices. In reality, it is not one market but many smaller interdependent markets. In the automobile market we have many smaller markets. Luxury car market is different than economy car market but they behave somewhat like communicating vessels.

A mark-up or profit is the return on investment for the shareholders. A company’s value is not the sum of assets minus liabilities. Market value is determined in stock exchange, if the company is traded. Some sophisticated methods are used to determine real (intrinsic) value which may be different than market value. The same methods are used to determine the value of an investment. These will be examined shortly towards the end of the book.

Economics should incorporate more business finance and marketing because this is where the real economy is. In this book there is an effort to combine economic with business theory and take into account reality. Economic theory is useful to explain economic reality but theory can never be reality.

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