Economics Guidelines PDF

Factors of Production & its Rewards Land - all natural resources in an economy ○ Reward - rent ○ As land in existence stays the same, supply is fixed ○ Quality of land depends upon soil type, fertility, weather ○ Geographically immobile as it can’t be moved aroun...

Factors of Production & its Rewards Land - all natural resources in an economy ○ Reward - rent ○ As land in existence stays the same, supply is fixed ○ Quality of land depends upon soil type, fertility, weather ○ Geographically immobile as it can’t be moved around ○ Occupationally mobile as it can be used for a variety of economic activities Labor - all human resources available in an economy (mental and physical efforts of workers) ○ Reward - wages ○ Supply of labor depends upon number of workers available and number of hours they work ○ Quality of labor depends upon skills, education, etc. ○ Labor mobility depend on various factors Occupational mobility achieved if they have the right skills and qualification Geographical mobility can be achieved depending on transport facilities and costs Capital - all man-made resources available in economy ○ Reward - interest ○ Supply depends upon demand for goods and services, how well businesses are doing, and savings in economy ○ Quality depends on how many good quality products can be produced using given capital ○ Mobility depends upon nature and use of capital (like pen is geographically and occupationally mobile) Enterprise - ability to take risks and run a business venture or firm ○ Reward - profit ○ Supply dependent on skills, education, corporate taxes, regulations ○ Quality depends on how well it is able to satisfy and expand demand in economy The Law of Demand An increase in price leads to decrease in demand, and decrease in price leads to increase in demand Extension in Demand Increase in demand due to changes in price Contraction in Demand Decrease in demand due to changes in price Factors that cause Shift in Demand Curve Consumer incomes ○ ↑consumers’ incomes ↑ demand right curve shifts ○ ↓ consumers’ incomes, ↓ demand left curve shifts Taxes on incomes ○ ↑ income tax ↓ demand left curve shifts ○ ↓income tax ↑ demand right curve shifts Price of substitutes ○ Substitutes are goods that can be used instead of a particular product ○ ↑ substitute price ↑ demand for product right curve shifts Changes in consumer tastes ○ Demand for DVD ↓ as people watch more Netflix ○ Curve shifts left for DVD The Law of Supply Increase in price leads to a increase in supply, and a decrease in price leads to an increase in supply Extension in Supply Increase in supply due to changes in price Contraction in Supply Decrease in supply due to changes in price Factors that cause Shift in Supply Curve Changes in cost of production ○ When cost of factors to produce good ↓, produces supply more, supply curve shift right ○ Subsidy would cause curve to shift right ○ When cost of factors to produce rise, supply falls, supply curve shift left Changes in quantity of resources available ○ When amount of resources available rises, supply rises Tech changes ○ Introduction to new technology increases ability to produce more products causing right curve shift Shortage & Surplus When price above equilibrium price, a surplus is experienced When price below equilibrium price, a shortage is experienced PED formula PED = % change in quantity demanded/% change in price Inelastic Demand When % change in quantity demanded is lesser than % change in price Elastic Demand When % change in quantity demanded is more than % change in price What affects PED No. of substitutes ○ If a product has many substitutes it will have an elastic demand as a change in price will have a greater effect on its demand (if price rises, consumers move quickly to substitutes and vice versa) Time period ○ Demand for product likely to be elastic in long run (the more time consumer has, the more likely they can find cheap substitutes) PED & Revenue & Producers If product has elastic demand, producer can lower prices to increase revenue If product has inelastic demand, the producer can raise prices to increase revenue PES formula % change in quantity supplied/ % change in price What affects PES Production time ○ If product quickly produced, it will have price elastic supply as it can be supplied quickly at any price ○ But products which take long time to produce, like cars, has price inelastic supply Resource availability ○ More resource will make way for elastic supply ○ If not enough resources, it will be difficult to adjust to price changes and supply will be price inelastic Features of Free Market Economic System All resources owned and allocated by private individuals Government refrains from regulating markets and tries to create very business-friendly environments and any intervention is mostly limited to protecting private property The most demanded goods is what is produced (leads to motive – high profit) Cheapest efficient combination of resources is how it is produced Producing for people who are willing and able to pay for goods Advantages of Free Market Economic System Wide variety of quality goods and services ○ Produced by firms and will compete to satisfy consumer wants and make profit Firms respond to consumer changes in demand ○ When demand changes, resources allocated quickly to satisfy demand to maintain profits High efficiency ○ As producers want to maximise profits, resources used efficiently Disadvantages of Free Market Economic System  Only profitable goods and services produced (may not include public and merit goods), effects economic development Only produce for consumers who can pay for them Demerit goods may be produced Causes of Market Failure When social costs exceed social benefits Over-provision of demerit goods (may be overproduced) Under-provision of merit goods (schools, hospitals may be underproduced) Features of Mixed Economic System Both public and private sector exists Planning and final decisions made by government and market system can determine allocation of resources owned by it Advantages of Mixed Economic System Government provides public goods, merit goods, necessities. Private businesses can provide luxury goods and more profitable goods. Everyone is provided for Government keeps externalities, monopolies, harmful goods in control Government can increase job security by providing jobs in public sector Disadvantages of Mixed Economic System Taxes imposed, raise prices and also reduce work incentive Laws and regulations can increase production costs and reduce production Ways to correct market failure Legislation and regulation Direct provision of merit and public goods Taxation on products (with negative externalities, discourage its production) Subsidies Drawbacks to government intervention in an economy Political incentives ○ Clash between politics and economics Lack of incentives Welfare effects of policies Money - medium of exchange of goods and services Why do we need money To exchange goods and services with one another Functions of money Medium of exchange Measure of value Store of value Means of deferred payment What makes good money Durable Uniform Divisible Portable Banks - Financial institutions that act as an intermediary between borrowers and savers Commercial and central bank - Commercial - banks that have any retail branches located in most cities and towns Central - governs all other commercial banks in a country Functions of commercial bank Accept deposits in the form of savings Aid customers in making and receiving payments via their bank accounts Give loans to businesses and private individuals Provide financial planning advice Functions of central bank Issues notes and coins of the national currency Manages all payments relating to the government Manages national debt  Lender of ‘last resort’ to commercial banks Disposable income - Income of a person after all income-related taxes and charges have been deducted Consumption - Buying of goods and services Consumer expenditure - Money spent on consumption Factors affecting consumption Disposable income (the more, the more consumption) Wealth (more wealthy more consumption) Consumer confidence (high confidence spending high) Interest rates (if high interest rate, more saving, consumption falls) Saving - Income not spent (or delaying consumption until some later date) Factors affecting saving Saving for consumption - people save to consumers later to make bigger purchases Disposable income - if high disposable income, more saving Interest rate - people save so they get higher savings thru interest rate added Consumer confidence - if consumer not confident, higher saving Borrowing - Borrowing of money from a person/institution Factors affecting borrowing Interest rate - when interest rate is high, people reluctant to borrow Wealth - banks more willing to lend to wealthy people as they are more likely to pay back Spending patterns between income groups  Rich people spend, save and borrow more than poor Poor spend higher proportions of their disposable income on necessities Poor save lesser proportions of their income Payments for labor Time-rate wage - wage given based on no. of hours employee has worked ○ Overtime wages given to workers who have worked extra no. of hours Piece-rate wage - given based on amount of output produced ○ More output produced, more wage earned Salary - monthly payments Performance-related payments - payments given to individual workers who have performed very well What affects individual’s choice of occupation Wage factors - wage conditions of job (like pay rate) considered by individual before choosing Non-wage factors - like hours of work, promotion prospects, holiday entitlements Labor demand - Number of workers demanded by firms at a given wage rate (higher demand for product, more labor producers will demand) Labor supply - Number of workers available and ready to work in an industry at a given wage rate When wage rate increases, supply of labor extends Backward bending labor supply curve Factors that cause shift in labor demand curve Consumer demand for goods and services - higher product demand, higher labor demand Labor productivity - the more productive labor is, more labor demand Price and productivity of capital - capital substitute for labor; if capital price lower and productivity high, firms demand more capital and labor demand will fall Factors that cause shift in labor supply curve  Advantages of an occupation - different advantages a job offer to employees will affect supply Availability and quality of education and training - if quality training lacks, labor supply low. If new education opens, labor supply will rise Demographic changes - labor supply curve shift right when more people come into country (immigration) and when birth rate increases Why would person’s wage rate change overtime? Overtime, as worker’s experience increases and skills develop, earn higher wage rate When they near retirement age, wage rate likely to decrease as productivity and skills weaken Why do different jobs have different wages? Different education - when job requires more qualifications, higher wage rates Risk involved - risky jobs gain higher wage rate to compensate for risks Unsociable hours - jobs that require night shifts are paid more Lack of information about other jobs - sometimes people work for less wage rates because they do not know about other jobs with higher wage rates Why do wages differ between people doing same job? Regional differences in labour demand - if demand in an area for accountants is high, wage rate would be high there whereas in an area of low accountant demand, wage rate would be low ○ High supply of accountants will cause wages to be low, low supply cause wages to be high Fringe benefits - some firms pay fringes, pay less wages, while firms in same industry pay lesser fringe benefits and higher wages Discrimination - workers doing same work may be discriminated by race, gender, religion, age Length of service - some firms provide extra pay for workers with experience in the firm, while others do not Equilibrium wage rate - Other wage differentials Division of labor - Concept of dividing production process into different stages enabling workers to specialize in specific tasks (help increase efficiency and productivity) Advantages to workers Become skilled - workers get skilled and experienced in specific task Better future job prospects - as they receive skill and training and workers in the future will be able to get better jobs in the same field Disadvantages to workers Monotony - doing same task repetitively might make it boring and lower worker’s morale Margin for errors increase - as job gets repetitive, mistakes may arise Increased chance of unemployment - when division of labor introduced, many excess workers laid off. If one loses job, harder for them to find other jobs that require the same specialisastion Advantages to firms Increased productivity - when people specialize in particular tasks, total output increase Increased quality of products Faster production Disadvantages to firms Increased dependency - production may come to halt if workers doing specific task is absent Danger of overproduction - as division of labor facilitates mass production, product supply may exceed demand and cause excess stocks of finished goods. Firms make sure there isn’t too much being produced if demand does not match. Advantages to economy Better utilisation of human resources - as workers do the job they are best at, economy achieves maximum output Establishment of efficient firms - higher profits from division of labor attract entrepreneurs to invest and produce Disadvantages to economy Labor immobility - occupational immobility may arise as workers can only specialise in specific field Reduces creative instinct as workers only do one task repeatedly and previous skills acquired die out Trade union - Organizations of workers that aim at promoting and protecting the interest of their members Types of trade unions Functions of trade unions Improvements in non-wage benefits Defending employees’ rights Improves working conditions Improving pay and other benefits Collective bargaining - Process of negotiating over pay and working conditions between trade unions and employers When can trade unions argue for better wages and working conditions? Prices rising (inflation) - cost of living increases when prices increases so workers want higher wages to consume products Sales and demand of firm increased Workers in other firms payed higher Members productivity increases Industrial disputes Overtime ban - workers refuse to work more than their normal hours Go-slow - workers purposely slow down production so firm’s sales and profits go down Strike - workers refuse to work and may protest outside workplace to stop deliveries and prevent other non-union members from entereing. Halt all production of firm Advantages to workers Workers benefit from collective bargaining power by establishing better terms of labor Sense of unity and feel represented Lesser chance of being discriminated Disadvantages to workers Workers may get less wage if they go on strike Advantages to firms Time saved in negotiating Can help organize workes efficiently (trade unions) Unions and firms relationship good for business morale and increases productivity Disadvantages to firms Decision making may be long Trade unions may make demands that firm may not be able to meet Businesses will have high costs and low output if unions organize agitations Advantages to economy Ensures labor force in economy not exploited and interests represented Disadvantages to economy Impact total output Firms may decide to substitute labor for capital if can’t meet trade unions demands, unemployment may rise Classification of Firms Primary - all economic activity involving extraction of raw natural materials (agriculture, mining, fishing) Secondary - all economic activity dealing with producing finished goods (construction, utilities) Tertiary - all economic activity offering intangible goods and services (retail, leisure, transport) Private/Public Firms Public - firms owned and run by government ○ Dont have a profit motive ○ Provide essential services to economy Private - firms owned and run by private individuals ○ Aim at making profits and so products are highly demanded Small firm - Independently owned and operated enterprise that is limited in size and revenue Relative size of firms Advantages to small businesses Independence - owners free to run business Control - full control over business Flexibility - adapt to quick changes as owner more involved Disadvantages to small businesses Higher costs - cannot exploit economies of scale Lack of finance - struggles to raise finance Difficulty attracting experienced employees - unable to afford wage and training required for skilled workers Why do small firms still exist in the economy? Market size – when only small market for product, no point expanding. Market small because ○ Local market ○ Final product may be luxury expensive item ○ Personalized services only given by small firms (like wedding cake makers) Capital access limited Owners prefer to stay small Types of firm growth (and advantages & disadvantages for each) Internal growth  ○ Expanding scale of production of firm’s existing operations (done by purchasing more machinery, opening more branches, etc.) External growth ○ Involves two or more firms joining together to form larger business (integration) Merger - occurs when owners of two or more companies agree to join together to form a firm Takeover - happens when company buys enough shares of another firm that they can take full control Merger - Horizontal integration - integration of firms engaged in the production of same type of good at same level of production Advantages ○ Exploit internal economies of scale - bulk buying, technical economies ○ Save costs - when merging, duplicate assets ○ Reduces competition - merging with key rivals increase market share Disadvantages ○ Risk of diseconomies of scale - lot of managerial and operational issues leading to higher costs ○ Reduced flexibility - addition of more employees means need for more transparency and more accountability and slow down rate of innovating and producing new products Vertical integration - integration of firms engaged in production of same type of good but at different production levels ○ Forward - firm integrates with firm at later stage of production ○ Backward - firm integrates with firm at earlier stage of production Advantages ○ Assured supplies for products ○ Can prevent other firm supplying materials or selling products to competitors Disadvantages ○ Risk of diseconomies of scale - larger business bring managerial issues leading to higher costs ○ Reduced flexibility ○ Difficult process - firms enter Lateral integration - occurs when firms producing different type of products integrate at different or same stages of production to help diversify firm’s operations Advantages  ○ Diversify risks – allows businesses to have activities in more than one market and allows firms to spread their risks (in case one market declines, other is still there for source of profit) ○ Creates new markets - merging with firm in different industry will open firm to a new customer base ○ Transfer of ideas - there could be a transfer of ideas and resources between two businesses even though in different industries; could improve quality and demand of products Disadvantages ○ Inexperience can lead to mismanagement - if firms are in entirely different industries, cooperating and managing the two industries may be difficult ○ Lose focus - could cause firm to lose focus of its core product ○ Culture clash Economies of scale - Cost saving from a large-scale production Internal economies of scale - Decisions taken within firm that can bring about economies Types of internal economies of scale Purchasing economies – large firms buy raw materials and components in bulk because of their large scale of production ○ Supplier will offer price discounts for bulk purchases, cut purchasing costs for firms Marketing economies - large firms can afford their own vehicles to distribute their products, cheaper than hiring other firms to distribute them ○ Costs of advertising is spread over a much large output in large firms when compared to small firms Financial economies – banks more willing to lend money to large firms as they are more financially secure than small firms to repay loans ○ Also could get lower rates of interest ○ Ability to sell shares to raise capital; get more capital at lower costs Technical economies - large firms more financially able to invest in good technology, skilled workers, etc.; very efficient and cut costs Risk-bearing economies - large firms with high output sell into different markets and able to produce variety of products (diversification) and this means risks are spread over wider  range of products; even if market or product unsuccessful, other products and markets to continue business in External economies of scale - When firms benefit from entire industry being large Types of external economies of scale Access to skilled workers - large firms recruit workers trained by other firms, who are more efficient and productive, cut costs Ancillary firms - firms that supply and provide materials to large firms ○ When ancillary firms locates close to company, company cut costs by using their services more cheaply than other firms Joint marketing benefits - when firms in same industry locate close to each other, may share enhanced reputation and customer base Shared infrastructure - development in infrastructure of industry can benefit large firms (more roads by govt cut transport costs for firms) Types of diseconomies Management diseconomies - large firms have wide internal organisation with lots of managers and employees ○ Makes communication difficult and decision-making slow ○ Inefficient running of firms and increase costs Too much output ○ Require large supply of raw materials ○ Lead to shortage and halt production, increasing costs Use of capital ○ Workers operating these machines may feel bored in doing repeated tasks and become demotivated and less cooperative, workers may leave or go on strikes, stopping production and increasing costs Agglomeration diseconomies ○ Occurs when firms merge too many different firms producing different products, managers and owners can’t coordinate and organize all activities, leading to higher costs Lot of large firms can face diseconomies when products become too standardised and less of a variety in the market Increasing returns to scale - When a firm experiences that doubles all its inputs (resources) and is able to more than double its output as a result Diminishing returns to scale - A firm that doubles all its inputs and fails to double its output as a result Factors that determine demand of factors of production Product demand - if more goods and services demanded by consumers, more factors of production demanded by firms to produce and satisfy demand ○ Demand for factors of production is derived demand Availability of factors ○ Firms will also demand factors that are easily accessible ○ If firm located in region where lot of skilled labor, demand more labor as opposed to capital Price of factors ○ If labor is more expensive than capital, firms demand more capital, reduce costs and maximize profits Productivity of factors ○ If labor more productive than capital, then more labor demanded Labor-intensive production Where more labourers are employed than other factors, like capital (production mainly dependent on labor) Advantages of labor-intensive Flexibility - labor meets changing levels of consumer demand (part-time workers) Personal services - labor can provide personal touch to customer needs and wants Personalized services - laborers can provide custom products for different customers (tailored) Gives feedback - labor can give feedback provides idea for continuous improvement in firm Essential - in case of machine breakdowns Disadvantages of labor-intensive Relatively expensive - in long term, compared to machinery, labor has higher per unit costs due to lower levels of productivity Inefficient - compared to machinery, labor less efficient and tends to be inconsistent with productivity Labor relation problems - firms have to put up with labor demands (could stage overtime ban or strike if demands not met) Capital-intensive production Where more capital is employed than other factors Which requires relatively high level of capital investment compared to labor cost Advantages of capital-intensive  Less likely to make errors – machines mechanically programmed so they won’t make mistakes laborers will More efficient – machinery doesn’t need breaks, no demands, no mistakes Consistent – consistent in output produced as they won’t have human problems Technical economies of scale – increased efficiency can reduce average costs Disadvantages of capital-intensive Expensive – initial costs of investment high, as well as possible training costs Lack of flexibility - machines do not need to be flexible as laborers are to meet changes in demand Machinery lacks initiative – don’t have intuitive power than human labor can provide the business and improve production Production - Transformation of raw materials (input) to finished goods and services (output) Factors that influence production Demand for product - more demand from consumers, more production Price and availability of factors of production - if production factors cheap, more production Capital - more capital available to producers, more investment in production Profitability - more profitable producing and selling product is, more production of product will be Government support - if governments give money in grants, subsidies, etc., more production take place in economy Productivity formula Total output produced per period/total input used per period Productivity increases when More output or revenue produced from same amount of resources Same output or revenue produced using fewer resources Factors that influence productivity Division of labor - when tasks divided among laborers, each laborer specializes in particular task, increase productivity Skills and experience of labor force - will be more productive Workers’ motivation - more motivated workforce, more productive they will be; better pay, working conditions, reasonable working hours, etc. can improve productivity Technology - more technology introduced into production increases productivity Quality of factors of production - replacing old machinery with new ones, increase productivity Fixed costs - Costs that are fixed in short-term running of a business and have to be paid even when no production is taking place Average fixed cost = total fixed cost/total output Variable costs (and formula) - Costs that are variable in short-term running of business and paid according to output produced (wages, electricity bill, etc.) Average variable cost = total variable costs/total output Total cost = total fixed cost + total variable cost Average cost - Cost per unit of output Average total cost = total cost/total output Average cost = average variable cost + average fixed cost Revenue - Total income a firm earns from the sale of its goods and services Total revenue = no of units sold * price per unit Average revenue = total revenue/no of units Break even - Firms objectives Survival - new or small firms have survival as primary objective ○ Firms in highly competitive market will also be concerned ○ Firms could lower prices, forsaking other objectives such as profit maximization Profit - income of a business from its activities after deducting total costs from total revenue ○ Private sector firms have this as primary objective as profits required for further investment and payment of return Growth – measured by value of sales or output; a larger business ensures greater job security and salaries for environment; can also benefit from higher market share and economies of scale Market share - defined as sales in proportion to total market sales achieved by a business; increased market share can bring about many benefits to the business Service to society - social enterprises do not aim for profits and prefer to set more social objectives and aim to better society Price competition - Competing to offer consumers the best possible prices of a product Non-price competition - Competing on all other features of product (quality, warranty, etc.) other than price Informative advertising - Providing information about product to consumers (advertising of phones which include specific information about technical features) Persuasive advertising - Designed to create consumer want and persuade them to buy product in order to boost sales Pricing strategies Price skimming - when new unique product enters market, producers charge very high price for it initially as consumers willing to pay more for it ○ As more competitors launch similar products, producers may lower prices Penetration pricing - when producers set very low price, encourages consumers to try product, helping expand sales and increase loyalty ○ Product able to penetrate a market, useful when lot of existing rival products Destruction/predatory pricing - prices kept very low (lower than cost of production per unit) in order to ‘destroy’ sales of existing products, as consumers will turn to lowest priced products ○ Once product success, it can raise prices and cover costs ○ Illegal in many countries as it creates non-competitive business environment, encourages monopoly practices Price wars - when competing firms continually trying to undercut each other’s prices Cost-plus-pricing - involves calculating average cost of producing each unit of output and adding mark-up value for profit ○ Price = (total cost/total output) + mark-up What can influence price that producers fix on a product? Level and strength of consumer demand Amount of competition from rival producers in market Cost of production and level of profit targeted Perfect competition - Many sellers and many buyers - lots of firms compete to supply identical product Neither producers nor consumers can influence market price - they are all price takers If any firm try to sell at high price, lose customers to competitors If price too low, may incur loss Advantages of perfect competition  High consumer sovereignty - consumers have wide variety of goods and services to choose from of similar products ○ Products likely to be high quality, to attract consumers Low prices - fierce competition, producers will try and keep prices low to attract consumers and increase sales Efficiency - to keep profits high and lower costs, firms very efficient ○ If not efficient, less profitable ○ Cause them to raise prices, discourage consumers from buying their product ○ Inefficiency could also lead to poor quality products Disadvantages of perfect competition Wasteful competition - in order to keep up with other firms, producers duplicate items; considered waste of resources Mislead customers - gain more customers and sales, firms might give false and exaggerated claims about product, disadvantage both customers and competitors Monopoly and what they do - Dominant firms who have market power to restrict competition in the market Pure monopoly - single seller Able to influence prices to generate abnormal profits Disadvantages of monopolies Less consumer sovereignty - no other firms selling product; low output and little consumer choice May not respond quickly to customer demands Higher prices Lower quality - little competition, monopolies have no incentive to raise quality as consumers buy anyway (because of abnormal profits, may invest a lot in research and development and increase quality) Advantages of monopolies As only single producer exists, produce more output than what individual firms in competition do, thus benefit from economies of scale Face competition from overseas firms Could sell products at lower price and high quality if they fear new firms may enter market in the future Role of government as different stakeholders Producer  Provides merit goods (health, education), public goods (parks, etc.), welfare services (pensions, unemployment benefits), public services (police stations), infrastructure Employer Provides at all levels of govt, employment to large population Provider Pays for provision of goods and services direct to certain groups of people in their economies May pay for research facilities to support private sector firms Consumer Public expenditure – accounts for large share of total spending in many economies Current expenditure - recurrent government spending on goods and services that are consumer within each financial year Capital expenditures - government investments in long-lived productive assets and have a lasting impact on an economy Government macroeconomic aims Economic growth - refers to increase in GDP (amount of goods and services produced in economy over a period of time) ○ More output means economic growth ○ Output falls over time (recession) can cause: Fall in employment, incomes, living standards Fall in tax revenue govt collects from goods and services and incomes, in turn lead to cut in govt spending Fall in revenues and profits of firms Low investments, people won’t invest in production as poor economic conditions and they will yield low profits Price stability - inflation is contitnous rise in average price levels in economy during a time period ○ Governments target inflation rate of 3% ○ If prices rise too quickly, can negatively affect economy because it; Reduces people’s purchasing powers as people will be able to buy less with money they have now than before Causes hardship for poor Increases business costs as workers demand higher wages to support livelihood  Makes products more expensive than products of other countries with low inflation and this makes exports less competitive in international market Full employment - if high level of unemployment in country, the following will happen: ○ Total national output (goods produced) will fall ○ Government have to give out welfare payments (unemployment benefits) to unemployed, increasing public expenditure while income taxes fall, causes budget deficit ○ Large unemployment causes public unrest and anger towards the government BOP stability – economies export (sell) many products to overseas residents, receive income and investment from abroad, also import (buy) goods and services from other countries and make investment in other countries ○ exports>imports = surplus in BoP ○ exports