Why and how does the circular movement of goods take place?
All goods created by people continuously make a cyclical (circular) movement. Such movement must be non-stop in order to constantly support people's lives. It is difficult to even imagine what catastrophes will occur in society if the circulation in question stops for even a few weeks.
What is the cycle of useful products?
In its simplest form, the movement of economic goods can be depicted as an unbroken chain consisting of four links (Fig. 1.3).
Rice. 1.3.
Let us consider the circulation of created goods using a specific example of a peasant farm. The producer first grows, for example, vegetables. Then he distributes them: he keeps some for his family, the rest goes for sale. At the market, excess vegetables are exchanged for products needed on the farm (for example, meat, shoes). Finally, material goods reach their final destination – personal consumption.
It may seem that the circulation of economic goods forms a vicious circle. In this case, people's lives are firmly held at a constant level of their needs. But people are decidedly different from the animal world in this respect. Animals are characterized by the desire to satisfy only natural biological needs; humans have no such limitation.
Under favorable economic and other conditions, two trends in increasing needs appear: towards limitless qualitative and quantitative changes - in the vertical and horizontal directions.
Increasing vertical needs means a transition from a comparatively low level to a higher one. Figure 1.4 illustrates how, for example, in the 1920s–1990s. over short periods of time, motorists' assessments regarding the quality and purpose of passenger cars changed significantly.
Rice. 1.4.
Increasing needs horizontally occurs when an increasing number of residents of the country use new and socially familiar benefits.
This change in the needs and consumption of the Russian population can be judged, in particular, from the data in Table. 1.3.
Table 1.3. Availability of durable goods among the Russian population, pcs. for 100 families
The rise of needs vertically and horizontally exacerbates the contradiction between what people would like to have and what production gives them. Only production can resolve this contradiction.
Who and what drives production?
Production has creative capabilities thanks to its factors (lat. factor– producing).
The first factor is human. It is people who have the necessary knowledge and skills that are the primary creative force of production.
Work in production it is an expedient and useful human activity. During it, people transform objects and energy of nature, adapting them to meet their needs. True, we are not talking here about a simple expenditure of physical, muscular strength of a person. The extremely important role of man in the economy is scientific, technical and intellectual creativity.
Labor directs the movement of the material elements of production (means of production).
Second factor ( real) – means of labor. These include those material things with the help of which people create wealth.
The means of labor include natural resources (for example, waterfalls used for economic purposes). The main place here is occupied by technique- artificial, man-made means of labor. In turn they include tools(tools, machines, equipment, chemical production devices, etc.), thanks to which the original natural substance is converted into useful goods, as well as general material working conditions(industrial buildings, canals, roads, etc.).
Third factor ( real) – subject of labor. This is a thing or a set of things that a person modifies using means of labor. Objects of labor are divided into natural matter to which no labor was applied (for example, a coal seam in a mine, ore in a mine), and raw materials (raw materials) that have undergone the impact of human labor (coal and ore knocked out of the seam and sent for further processing ).
The structure of production factors is clearly presented in Fig. 1.5.
Rice. 1.5.
All factors are connected to each other through technologies– method of manufacturing products.
Depending on the degree of impact on production improvement, it is important to distinguish between two types of factors:
- traditional (from lat. traditional– transmission) – historically established customs and rules of behavior passed on from generation to generation;
- progressive (from lat. progressus– movement forward) – development from lower to higher, more perfect.
What kind of factors are characteristic of the economy?
Of the 100 centuries of human economic history, 95 centuries are spent using traditional factors of production. This probably shouldn't be surprising. Indeed, in this historical era, production workers for the first time began to manually use the simplest tools.
But from the XIV–XVI centuries. With the widespread development of private entrepreneurship and the use of the labor of legally free workers, the need and opportunity arose to accelerate and update production. Progressive factors of production prevailed. There was such additional chain economic dependencies: increased needs – qualitative updating of production technology – increasing application of achievements Sciences to improve the quality of production factors.
Traditional factors make it difficult to improve the economy. Only scientific and technological progress causes a qualitative renewal of the economy and improves people's living standards.
It can be assumed that thanks to scientific and technical achievements it is possible to completely overcome the gap between production and increased needs. Success in improving production always has limits depending on the achieved stage of development of science and technology. However, such successes accelerate the further growth of society's needs. The transition to the spiral movement of elevated needs and production striving to satisfy them takes place in new stage economic development.
A person always strives to ensure that his entire life is connected with the availability of a wide variety of benefits. Goods can exist independently of a person ( natural benefits– soil, climate, water and forest resources, etc.) and depend on its activities ( economic benefits, the quantitative and qualitative expression of which is determined by human effort, his physical and mental activity, and the technical equipment of labor).
Economic benefits are very diverse. Firstly, this is due to the diversity of people’s needs, which are formed under the influence of various factors and situations - economic (income level), social (lifestyle), natural (differences in climatic zones), which can operate in conditions when the country is experiencing economic growth, decline, crisis.
Secondly, the multiplicity of benefits is associated with the influence of the demographic factor (the population on earth at the beginning of the third millennium is 6 billion people and continues to grow).
Economic benefits can be in material form And in the form of services. If we talk about material form, we mean means of production and consumer goods created by man, between which there must be a certain proportion.
Now let's consider the question of what value such an economic good as a service has for society. Despite the many interpretations of the term “service” in economic literature, it can be said that service- an action aimed at satisfying a person’s need, in the process of which a new, previously non-existent material product is not created, but the quality of an existing, created product changes.
In Soviet economics, the role and importance of the service sector was downplayed for a long time. This was explained by the fact that work in the service sector was classified as non-productive activity. Only activities in the sphere of material production were considered productive. This has left its mark on the presentation of economic theory in many textbooks, which deal with the problems of creating a material product rather than providing services.
In our country there is such classification service industries:
Services included in material production (freight transport, communications for production services, warehousing, etc.);
Services related to intangible production (education, medicine, art, sports, etc.).
Economic benefits can be interchangeable(butter and margarine, tooth powder and toothpaste, etc.) and complementary(car and gasoline, housing and utilities).
Economic benefits are divided into long-term, involving reusable use (car, book, electrical appliances, videos, etc.), and short-lived, disappearing during one-time consumption (bread, meat, drinks, matches, etc.).
Economic benefits can also be divided into real And future, direct (consumer) And indirect (production).
In each of the cases considered, attention should be paid to maintaining certain proportions between these benefits. Otherwise there may be negative economic and social consequences.
Economic goods are constantly in motion and take the form of a cycle. When we talk about the circulation of goods, we mean not only the movement of goods in space and time. Circulation of goods- this is their economic movement, starting from the production phase, implying a constant return to the original phase. But this return must differ from the original act of production by higher quantitative and qualitative characteristics of both the production process itself and the result obtained.
The need to repeat the production process is caused by the fact that there is a gradual physical disappearance of material goods (machines wear out, food products are consumed, etc.). There is also obsolescence of previously produced material goods (production requires more advanced machines, materials, machines, mechanisms, and people require new consumer goods).
Thus, the circulation of goods occurs according to the following phases:
1) production (the initial phase of the movement of an economic good);
2) distribution (determines the movement of the product to the exchange phase);
3) exchange (links production and distribution on the one hand and consumption on the other);
4) consumption (gives a signal to production what needs to be produced and in what volumes).
The entire circulation process is associated with the activities of various subjects eq. relations - households, enterprises and organizations and is regulated by the state through prices, taxes, interest rates. It is in the interests of the state to accelerate the process of environmental circulation. benefits, but in such a way as not to undermine the stability of economic and social systems.
This model can be refined by including turnover within sectors. Emphasizing the main point, the simple circulation model somewhat idealizes reality. Firstly, it does not take into account the accumulation of both economic goods and monetary resources, as well as the fact that some resources may fall out of the turnover process. For example, if consumers begin to save part of their income, the impact of aggregate demand decreases. Such circumstances can subsequently significantly modify the elementary circuit model. The most important of their consequences is the development of the credit system.
Secondly, the scheme somewhat abstracts from the role of the state. The role of the state in the modern world is very diverse, since it influences both the agents of the market economy and the markets for products, factors of production, credit, etc. At the same time, the state uses various methods: economic, administrative, political, etc. It is not possible to show this on the diagram. Third, the circular model can be refined by including international trade.
Economic goods do not move on their own. They act as means of communication between economic agents.
Economic agents( economic agent ) subjects of economic relations, studyingexisting in production, distribution, exchange and consumptioneconomic benefits. The main economic agents are individuals (households), firms, the state and its divisions. In turn, among firms, primarily individual business enterprises, partnerships and corporations are distinguished. Modern economic theory is based on the assumption of rational behavior of agents. This means that the goal is to maximize results for a given cost or minimize costs for a given result. Individuals strive for maximum satisfaction of needs at given costs, the state strives for the highest increase in social welfare for a certain budget. Trade unions, for example, also act as economic agents, the goal of which is to increase wages and improve the social conditions of life of their members, the means of which is to fight for favorable conditions for concluding collective agreements.
Economic agents
In modern theories that develop the principles of classical liberalism, the individual is recognized as the only real economic agent. All other agents are seen as derivative forms of it: firms as legal fictions, and the state as an agency for the specification and protection of property rights. The traditional dichotomy in microeconomics into the theory of individual behavior and the theory of the firm is thereby overcome, and the principle of utility maximization acquires universal significance. In the theory of property rights, a firm is viewed primarily as a certain form, a network of contracts under which bundles of powers are transferred. The firm emerges as a necessary reaction to the high cost of market coordination, as a unique way of minimizing transaction costs,
In public choice theory, the principles of methodological individualism are taken to their logical conclusion: the state is viewed solely as a collection of individuals pursuing personal goals. Therefore, public policy, according to supporters of this theory, is determined not so much by public needs as by the endlessly changing leapfrog of private interests. Voter absenteeism is explained by the principle of rational ignorance, decision-making in the interests of the minority is explained by lobbying, the corruption and unscrupulousness of deputies is explained by the practice of logrolling, and the corruption of the bureaucracy is explained by the search for political rent (for more details, see Chapter 14).
Economic agents communicate with each other using economic goods. Their movement forms a kind of circulation.
Economic cycle
Economic circuit (circular flow) – This circular motion of real economic blag, accompanied
Fig.2-3. Circulation of supply and demand
counter flowcash income and expenses.
The main subjects of a market economy are households and firms. Households present demand for consumer goods and services, while also being suppliers
economic resources. Firms demand resources and, in turn, offer consumer goods and services. The behavior of the main economic agents can be expressed by the cycle of supply and demand (see Fig. 2-3),
Despite all the conventionality of the circuit diagram, it reflects the main thing - in a developed market economy there is a constant interaction between supply and demand: demand creates supply, and supply develops demand.
The circulation of supply and demand can be specified taking into account the movement of resources, consumer goods and income. Household demand is expressed in expenditures made in markets for consumer goods and services. The sale of these goods and services constitutes the firms' revenue. Purchasing the resources needed to do this incurs costs for the firm. Households, by supplying the necessary resources (labor, land, capital, entrepreneurial abilities), receive cash income (wages, rent, interest, profit). Thus, the real flow of economic benefits is complemented by a counter cash flow of income and expenses (see Fig. 2-4).
This model can be refined by including turnover within sectors. Emphasizing the main point, the simple circulation model somewhat idealizes reality.
Rice. 2-4. Simple Circulation Model
may fall out of the turnover process. For example, if consumers begin to save part of their income, the impact of aggregate demand decreases. Such circumstances can subsequently significantly modify the elementary circuit model. The most important of their consequences is the development of the credit system.
Secondly, the scheme abstracts from the role of the state. The role of the state in the modern world is very diverse, since it influences both the agents of the market economy and the markets for products, factors of production, and credit. If we abstract from the role of credit, then the functions of the state in the circuit can be represented as follows (see Fig. 2-5).
Households and firms pay taxes to the government, receiving in turn transfer payments and subsidies. In addition, the government carries out large purchases of both consumer and industrial nature in all markets.
Third, the circular model can be refined by including international trade.
The economic circulation model is important not only for understanding the mechanism of functioning of a market economy, but also for studying the specifics of the functioning of various economic systems. To approach their analysis, let us briefly dwell on the main economic goals that individuals, firms and society as a whole strive for.
Economic agents are subjects of economic relations involved in the production, distribution, exchange and consumption of economic goods. The main economic agents are individuals, households (families), firms (enterprises), the state and its divisions. In turn, firms can act as sole proprietorships, partnerships, and corporations.
Modern economic theory assumes that each economic agent is guided in its activities by rational behavior, which means the desire to achieve maximum results with minimal expenditure of limited resources.
Economic agents communicate with each other through the movement of economic goods along the chain: production, distribution, exchange, consumption, which represents a kind of circulation.
Economic circuit – This is the movement of economic goods, accompanied by a counter flow of monetary income and expenses of agents.
Let us imagine abstractly that the main subjects of the economy are households, firms and the state. Households place demand for consumer goods and services and at the same time act as suppliers of economic resources such as labor, land and capital. And firms demand (demand) for all resources and at the same time offer goods and services to households.
In the circuit shown in Fig. 2.7., the flows of supply and demand are specified, replaced by their resources, income, expenses, goods and services.
In any economic system, a household acts as the main supplier of resources, a consumer of goods and services, and a link in the formation of human capital.
The budget of the household (family) plays a major role in the movement of the circulation of goods (Table 2.9.)
Table 2.9.
Formation of a household (family) budget
Human capital - it is capital embodied in people in the form of ability to work, qualifications, knowledge and experience. By its nature, it is comparable to physical capital, since its formation requires the expenditure of funds and money to the detriment of current consumption, and also serves as a source of increasing labor productivity and earnings in the future. Requires “depreciation expenses” in the form of rest, recovery and updating of qualifications. However, human capital, unlike physical capital, is more risky and the investment period is much longer. If the investment period of physical capital reaches up to 5 years, then this form of investment in a person, like education, can last more than 20 years.
Household demand is expressed in spending, which is paid in cash in markets for goods and services. Household expenditures constitute the revenues of firms for the sale of these goods and services. The purchase of resources needed by firms constitutes costs in monetary form - the costs of firms. In turn, households, supplying firms with the necessary resources (capital, labor, land), in return receive income in cash (salaries, rent, interest).
Thus, the real flow of demand in kind is absorbed by the counter flow of supply in monetary form (Fig. 2.7.).
Households and firms pay taxes to the state, in turn, from the state they receive transfer payments and subsidies, respectively. In addition, the state is a major customer of raw materials, goods and services for the maintenance of the army, healthcare, education and social protection of the population.
Production resources and their remuneration
The economic circuit diagram (circulation of product and income) is a model that allows you to see the main directions of material and cash flows in the economy and show the relationships between economic agents and markets.
There are two main types of economic agents: households (families) and firms. The former own all the production resources of society, the latter use them in the production process. Resources are extremely diverse, but they can be grouped into groups called. There are four such factors: labor, capital, natural resources, entrepreneurship.
Labor - This is the intellectual or physical activity of a person carried out in the production process.
Capital represents means of production created by people. These include buildings, structures, machines, machinery, equipment, vehicles, stocks of raw materials, materials and semi-finished products, etc. It is necessary to distinguish physical capital from financial capital (money invested in a business).
Natural resources usually go under the code name “land”, but, in essence, here we are talking about all natural resources that are not the result of human labor (land, forests, subsoil, water).
Entrepreneurship - This is a special type of labor activity aimed at coordinating the use of other factors. A distinctive feature of entrepreneurship is the assumption of risk, since entrepreneurial income is in no way guaranteed.
When the owners of these four factors come together, a firm emerges. Company - This is an association of owners of production resources for joint production activities.
The four factors of production correspond to four types of their remuneration:
- remuneration for labor is called wages;
- capital remuneration is called percentage;
- the reward of land is called rent;
- the reward of entrepreneurship is called profit.
A very important circumstance follows from the latter: in contrast to ordinary consciousness, economic theory interprets normal profit not as a surplus of revenue over costs, which arises incomprehensibly from where, but as a necessary reward for special entrepreneurial labor. Thus, normal profit is part of the economic cost.
Economic circuit diagrams
They sell their factors of production to firms through resource markets. Firms turn these inputs into finished products—goods that they then sell to households in product markets. The circle is closed. This is the “material flow” within the economic circular model.
Cash flow is in the opposite direction. By purchasing factors of production from households, firms pay them money, which is household income in the form of wages, interest, rent and profit. Farms spend this money on commodity markets, buying the goods and services they need from firms. The second round is completed.
So, in economics, two rivers - resource-commodity and money - always flow towards each other. All this is shown schematically in Fig. 1.
This scheme simplifies reality, since it assumes that households spend all income received on current consumption. In reality, people usually save part of their income.
Rice. 1. Economic circulation
This can be done in different ways. But a market economy is characterized by a situation where people buy shares of enterprises with their savings or place their savings in banks, which then issue loans to companies. Both stock exchanges and banks are financial market institutions. Thus, through financial markets, household savings reach firms as capital investments or investments. Firms, in turn, use these funds to increase capital - purchase machines, machinery, equipment, etc. As always, one flow is met by another. In this case, firms pay households a percentage for using their money (Figure 2).
Rice. 2. Economic circulation with the participation of financial markets
An important conclusion follows from the above: investment is impossible without household savings. Investments, in turn, being directed towards the acquisition of new capital, represent an indispensable condition for long-term economic growth. The higher, therefore, the share of savings in household income, the higher, other things being equal, the growth rate of the economy of a given country.
This is clearly illustrated by the example of modern China, where a very high share of savings in national income leads to significant investments, and they, in turn, lead to rapid economic growth.
It also happens, however, that the share of savings in household income is relatively small, but investments in the country and the entire economy are growing quite quickly. This is possible if the country attracts the savings of the whole world coming from abroad. In Fig. 2 we see that a country’s financial markets can receive both its internal and external savings.
An example would be the USA. The good investment climate in the country and the confidence of foreign investors in the American economy attracted financial capital from all over the world until the financial crisis that began in 2007. Significant foreign investment in the American economy stimulated its growth.
The state plays an important role in the economy. Its specific functions will be discussed in the next topic. Now it is only necessary to characterize the main flows in the economic circuit that the state diverts to itself (Fig. 3).
The main source of government revenue is taxes collected from households and firms. Some of these taxes are returned to families and firms in the form of various benefits, subsidies, etc. The difference is made up by the so-called net taxes, the flows of which are recorded in the diagram.
Rice. 3. Economic circulation with state participation
Having collected net taxes, the state purchases the goods and resources necessary for its activities in the relevant markets (see flows in Fig. 3). For example, the state hires a policeman and buys a patrol car for him.
Through purchased goods and resources, the government provides services to both households and firms. Examples of such services are national defense, law enforcement, basic science, development of standards in various fields, etc. The flows of these services are also shown in the diagram.
Often government expenditures turn out to be more than revenues, i.e. is formed . Once taxes and other revenues have already been approved, the deficit can only be covered through borrowing. At the same time, there are two sources of borrowing: loans from the Central Bank and loans on financial markets that accumulate savings of households in this country and abroad.
Loans from the Central Bank mean additional money emission and thus lead to inflation. When borrowing on financial markets, additional emission may not occur when the savings of households in a given country are directed to the purchase of government bonds (see Fig. 3) and until their maturity the money temporarily changes hands. Therefore, this source of deficit financing is called non-inflationary.
However, this method of covering the budget deficit has another very negative consequence - displacement effect. Its essence is that the state, trying to attract financial resources to cover the deficit, increases the interest rate on loans. As a result, many firms find themselves unable to borrow at the new rates, i.e. remain without investment and cannot purchase new equipment. Government spending thus crowds out private investment.
This picture can be represented figuratively as follows. Rivers of household savings flow into the fields of firm investments. Suddenly, a dam and a diversion canal appear on their way, where the water mostly goes, and pitiful drops fall on the investment fields. In the long term, this slows down economic growth. The investment situation can only be improved by attracting financial capital from abroad.