ECONOMICS FOR POLICY MAKERS Certain key economic decisions taken by organizations and indeed countries are often not made by economists but by businessmen, trade unionists, politicians and policy-makers.Those who employ people, those who represent workers, those who make laws and those who elect them need economics but may have little time or desire to study it This book makes economics easily available to everyone The author’s use of simple language and avoidance of technical jargon provides non-economists with a better understanding of economic reasoning and the tools “to know and to decide” The author achieves this through introducing key concepts in short presentations and arming the reader with selected press articles and recent research using these concepts An analysis of these demonstrates how a general concept can be derived from a specific context and highlighted questions provide the basis for further debate The reader can then focus on the parts most relevant to their own needs This book will have great appeal to employers, trade unionists and public officials attending courses organized by international institutions, professional training providers, as well as graduate students of courses where economics is an important element, especially in relation to its policy implications Finally, it is invaluable for anybody who has wanted to learn the basics of practical economics but has been deterred by its technicalities Gustavo Rinaldi, Ph.D., is a lecturer in economics at the University of Turin, Italy, and an ILO consultant “This book is easy and clear reading, rich in practical examples and case studies of the issues decision makers in the private and the public sectors face daily The book is full of ideas, tools and thought-frameworks that are crucial for business leaders who wish to influence policies that foster businesses to flourish and countries to develop.” – Deborah France-Massin, Director, Bureau of Employers’ Activities, International Labour Organization (ILO) Geneva “Economics for Policy Makers is a must-read for business leaders and trade unionists, but also for any development practitioner who is ‘daily in contact’, but not familiar or even ‘scared’ by macro and micro economics With a very practical approach highlighting the applications of economic principles to real situations, the book helps in better understanding which are the different policy options for decision makers and in explaining the impact of government policies and business strategies on economic growth and social development.” – Paolo Salvai, Senior Programme Officer, International Training Centre of the ILO “Prof Rinaldi’s book is an excellent introduction into economic analysis for practitioners in the field of collective bargaining Clear and concise it provides a broad overview of the topics that drive today’s economies and policy debates, including financial crises, globalization and income inequality It discusses both conceptual issues and concrete policy challenges and the way they have been addressed, helping the reader to understand possible consequences for the environment in which firms operate At the same time, it offers a great deal of statistical background and discusses the underlying concepts to help the reader grasp the evolution of productivity, living standards and wages, essential to successfully conduct social dialogue I am certain that this book will become an essential reading for anybody trying to prepare for collective negotiations, be it at the level of an individual company, in sectoral or occupational representations or at the level of national tripartite institutions.” – Ekkehard Ernst, Chief, Macroeconomic Policy and Jobs Unit, Research Department, ILO ECONOMICS FOR POLICY MAKERS A Guide for Non-Economists Gustavo Rinaldi First published 2019 by Routledge Park Square, Milton Park, Abingdon, Oxon, OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2019 Gustavo Rinaldi The right of Gustavo Rinaldi to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988 All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers The designations employed in publications of the International Training Centre of the ILO, which are in conformity with United Nations practice, and the presentation of material therein not imply the expression of any opinion whatsoever on the part of the Centre concerning i.a the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers The responsibility for opinions expressed in signed articles, studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the Centre of the opinions expressed in them Reference to names of firms and commercial products and processes does not imply their endorsement by the International Labour Office, and any failure to mention a particular firm, commercial product or process is not a sign of disapproval Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book has been requested ISBN: 978-1-138-38880-2 (hbk) ISBN: 978-1-138-38881-9 (pbk) ISBN: 978-0-429-42432-8 (ebk) Typeset in Bembo by Apex CoVantage, LLC CONTENTS List of figures x xii List of tables Forewordxiv Acknowledgementsxv Author’s note xvi Microeconomics PART I Introduction3   Economic profit 1.1 The value of the best foregone alternative: the opportunity cost 5 1.2  Sunk costs vs recoverable costs  1.3  Accounting profit  13 1.4 The economic profit: comparing two scenarios  14 1.5  Different objectives of the firms  16   Value added 2.1  Intermediate consumption and value added  21 2.2 Value added and vertical integration  25 21 vi Contents PART II Production and costs 29   Production and productivity 3.1  Rigid and flexible production techniques  31 3.2 The measurement of efficiency  35 3.3 Marginal productivity 38 3.4 The cornerstone of industrial negotiations: unit labour cost  41 31  4 Costs 4.1  Fixed costs and variable costs  48 4.2  Marginal and average costs  49 4.3 Types of costs  52 4.4 The Supply: is the firm ready to sell a certain quantity? At what price?  54 4.5  A special cost: the cost of using the market or transaction cost 57 48   Economies of scale 5.1  Reducing the average cost of a firm  63 5.2 The causes of economies of scale  65 5.3 The limits to economies of scale  67 5.4 The minimum efficient size and concentration  68 63 PART III Customers and competitors 73   Demand for the products of an industry and of a monopolist 6.1  An industry and the demand for its product  75 6.2  Demand and supply  76 6.3 Total revenue and marginal revenue  78 6.4 Price-elasticity 82 6.5 The effects of income on demand: income-elasticity  88 6.6  Price cross-elasticity: complements and substitutes  89 75   Market environments 7.1 Monopoly 94 7.2 Perfect competition 97 7.3 Oligopoly 99 7.4 Monopolistic competition 103 94 Contents  vii Macroeconomics PART IV Introduction to macroeconomics 109   Key words of national accounts 8.1  Supply (sources) of goods: production (GDP) and imports 112 8.2  Uses of goods: household consumption, private investment, government spending and export  113 111   Money and prices 9.1  Money and other financial assets  120 9.2 The demand for and supply of money and the interest rate 125 9.3  Money supply and prices  128 9.4  Banks are special  129 9.5  How much inflation is “too much”?  135 120 PART V Foreign economic relations 141 10 The foreign trade of goods: exports and imports 10.1 The quality of goods  143 10.2 The (nominal) exchange rate and the exchange rate regimes 147 10.3 The real exchange rate  152 10.4 The determinants of imports  152 10.5 The determinants of exports  154 143 11 Financial movements 11.1  Main types of financial movements  159 11.2  Advantages and disadvantages of foreign portfolio investments 161 11.3  Advantages and disadvantages of foreign direct investment (FDI)  166 11.4 The freedom of movement of capital  169 159 12 International accounts 12.1 The current account of the balance of payments  174 174 viii Contents 12.2 The capital account of the balance of payments  180 12.3 The financial account of the balance of payments  181 12.4 The international investment position (IIP)  183 PART VI Fiscal policy 191 13 Monetary transfers: taxes, benefits, subsidies and social contributions193 13.1  General taxation: taxes not earmarked to fund specific expenses 194 13.2  Earmarked monetary transfers between private subjects and government: social contributions, pensions and benefits  197 13.3 The macroeconomic effects of taxes (and social contributions) 201 14 Government spending on goods and services 14.1 Public employment 211 14.2 Public procurement 213 15 Public spending on education, training, research and development (R&D) 15.1  Education and training  222 15.2  Public expenditure in R&D  224 15.3  Government expenditure in education and R&D and its macroeconomic effects  226 16 Public deficit and public debt 16.1 The public budget and the public deficit  231 16.2 The public debt and the market for sovereign bonds  238 16.3 The sustainability of a public debt  240 211 222 231 PART VII Private demand 17 Household consumption: the main destination of goods and services 17.1 The main features of household consumption  257 17.2 The determinants of consumption  259 17.3  Disposable income which is not consumed: savings  261 255 257 Contents  ix 18 Private investment: supplying the private sector with new capital 265 18.1 The net present value (NPV) method for firms’ investment decision 265 18.2 The main features of investment  267 PART VIII The labour market and inequality 271 19 The labour market 19.1  A basic description of labour market stocks and flows  273 19.2  Key indicators of the labour market (KILM)  277 19.3 The determinants of salaries  279 19.4  Economic growth and unemployment  281 19.5  Unemployment and prices  283 273 20 Income distribution and its effects 20.1 The nature of inequality  288 20.2 The change of inequality and its effects  293 20.3  Causes of and remedies for inequality  300 288 306 Appendix – indexes of competitiveness A)  Global Competitiveness Index (GCI)  306 B)  World Competitiveness Ranking (WCR)  310 C)  Doing Business Indicators (DBIs)  316 D) Discussion 318 Index326 ... International Labour Organization (ILO) Geneva Economics for Policy Makers is a must-read for business leaders and trade unionists, but also for any development practitioner who is ‘daily in... institutions.” – Ekkehard Ernst, Chief, Macroeconomic Policy and Jobs Unit, Research Department, ILO ECONOMICS FOR POLICY MAKERS A Guide for Non-Economists Gustavo Rinaldi First published 2019... Jorge Illingworth, Programme Manager, Programme for Employers’ Activities, ITCILO AUTHOR’S NOTE Economics for Policy Makers presents economic reasoning for those who face economic decisions whether