Q60. Why are cartels banned in most countries?
A cartel is an arrangement between businesses in a sector, which collude to avoid competition with one another. The sellers set common prices, well above their cost bases, to extract maximum consumer surplus from customers. The cartel, jointly, wields market power, which allows them to set up barriers to entry or licensing arrangements, or to reduce product differentiation. Thus cartels turn already imperfect markets into an effective monopoly.
However, in any cartel, there is always an incentive to 'cheat' and to set lower prices to gain increased market share. Thus, stable cartels are rare, although the Organisation of Petroleum Exporting Countries (OPEC), which controls large amounts of the world's supply of oil, is an example of a long-surviving cartel.
Because of their negative effect on competition, and thus on the consumer, the organisation of cartels is illegal in many developed countries.
Q61. What is a labour market?
The average person rarely thinks of themselves as an input to productive processes. However, the person's time, their know-how, their muscles, and sometimes their creativity, is combined inside these processes with materials, energy, and the services of capital goods to produce products and services that businesses hope the public will buy. Most people allow this use of their time, skills, and talents because they are compensated for the use of their bodies and minds by a wage or salary.
The labour market is where prospective employers and employees meet. There can be a physical space for a labour market, but most of the time it is a virtual construct: in any sector, there are people who want to work at various wages, and there are people and businesses that want to hire, at different wages. 'Wage' in this context includes all types of compensation arising from work, including nonmonetary benefits to the employee like company cars or free lunches at work or extra holidays.
In theory, wages are determined by bargaining between employer and employee, with the employee's age, education, skill level, and ultimately, their productivity, as well as the employer's cost base, being the determinants of the wage they command. Models of the labour market tend to focus on the supply and demand for labour, as in the familiar supply and demand model, or on models where employers and employees search for different and better jobs to fit their preferences. Macroeconomic models focus on the stock of employed and unemployed labour, and their costs and benefits to the economy at any moment.
In reality, things are more complicated. Your socioeconomic status, your parent's professions and incomes, the types of jobs you might hold, the degree of unionisation in them and your social network all play a major role in the probability of workers finding work they will be productive in doing and they all have an influence on the wages paid.
Q62. What is the balance of payments?
A country's economic output or income is the sum of consumption, government expenditure, investment, and net exports (exports less imports).
When countries trade with one another, they trade imports and exports for cash.
There are three types of accounts between countries:
• Accounts dealing with goods, services, and income.
• Accounts recording gifts or unilateral transfers.
• Accounts dealing with financial claims, like bank deposits and stocks and bonds.
The first type of account records sales (and purchases) of goods and services from (and to) other countries. For example, if a business in Ireland sells €200,000 worth of goods to a business in China, then that export is recorded in Ireland's current account. Similarly, if the business buys €100,000 worth of goods from another business in Namibia, the import of those goods is recorded in Ireland's current account.
The second type of transaction is someone working in a different country, but sending money home to their family. This transaction is a transfer payment from abroad.
The third type of transaction is a financial one: each year, investors in every country receive billions in interest and dividends from capital investments in foreign stocks and bonds. This account details these transactions.
The balance of payments takes account of these and other transactions.
There are two main parts to the balance of payments system: the current account and the capital account. The balance of payments is the difference between (or the net effect of) the current account and the capital account.
The current account represents the balance of trade between one nation and the rest of the world. When the nation's current account is in surplus, it is earning more from the rest of the world than it is spending.
The capital account records changes of ownership of assets from abroad. The nation's reserves of foreign capital, gold, and other valuable assets are recorded in the capital account.
Countries can generate crises in their balance of payments through excessive borrowing, changing their debt: GDP ratios, or constantly importing rather than exporting goods and services.