PRINCIPLES OF BUSINESS

SECTION 9
SOCIAL ACCOUNTING AND INTERNATIONAL TRADE

Standard of Living:
This is the level of material well-being of an individual or nation. It may also be
known as the quality of life which the people of a country have.

The Bottom Line

The main difference between standard of living and quality of life is that the
former is more objective, while the latter is more subjective. Standard of
living factors such as gross domestic product, poverty rate and
environmental quality, can all be measured and defined with numbers, while
quality of life factors like equal protection of the law, freedom from
discrimination and freedom of religion, are more difficult to measure and are
particularly qualitative. Both indicators are flawed, but they can help us get a
general picture of what life is like in a particular location at a particular time.

Factors Influencing the Standard of Living & National Income

1. National/Natural Resources
The availability of resources such as fertile land and climate and how effective it is
used can affect output.
2. Industrial Development
As technology improves/increases and there is better equipment, commerce can
increase.
3. Quality of labour
The size, health and skill level of the labour force can affect output as well as
standard of living. Poor health, education and skills will lead to poor output and
hence standard of living.
4. Economic Stability
This is the extent to which economic activity is spread across a wide range of
industries. The wider the spread, the greater the level of stability.
5. Political Stability
A stable government encourages investment which then can be used to develop
industries, education and other facilities which will encourage output and improve
standard of living
6. Life expectancy
As this rises due to factors such as improved health facilities, sanitation etc. so will
the standard of living.
7. Literacy Rate or Education
With greater levels of education, individuals produce more and are even encouraged
to become entrepreneurs, improving their standard of living as well as that of any
employees.
8. Infant Mortality Rate
As more children are surviving pass the age of two, the likelihood of the labour
force being larger in the future will increase. As the labour force increases, so
should output. Infant mortality will also be reduced due to better health services,
both prenatal and antenatal.

9. Pollution
This can lead to negative effects on health and an unhealthy population will not be
able to be productive in making goods and services. This therefore can adversely
affect output if it continues to increase.

Other Indices or Indicators of Standard of Living:

1. Gross Domestic Product
GDP measures the total output within a country regardless of whether the factors of
 production are owned locally or not.
2. Gross National Product
The GNP is the value of output created by nationally owned factors of production
whether at home or abroad.
3. Per Capita Income
The national income of a country divided by its population. The higher the value,
the higher the standard of living.

PQLI
The Personal Quality of Life Index which is a measure of the standard of living and
economic development which measures infant mortality rater, literacy level and life
expectancy.

National Income and Its Variants

National income is the total output of a country for a given period of time, measured
in terms of the money value of total production of goods and services. Its variants include
 GDP
 GNP
 NNP: Net National Product is GNP minus depreciation of capital goods
 DI : Disposable Income is PI minus personal taxes
 PI : National Income (NI) minus taxes, profits, social security
contributions and transfer payments

Methods Of Measuring National Income (NI)

1. Income Approach
The sum of all incomes earned by households(individuals/labour), profits of
firms( & entrepreneurs), rents, interest/dividends etc.
2. Expenditure Approach
 Sum of value of all expenditure on final goods and services produced in the
economy during the accounting period. This includes:
 Household consumption ©
 Government Expenditure (G)
 Investment Expenditure (I)
 Net exports (X-M)
Y = C+I+G+(X-M)
3. Output Approach
The sum of the value of the final output of all sectors

Uses of National Income Statistics

1. To indicate changes in the standard of living.
A decrease in N.I may indicate a drop in the standard of living.
2. To be used to make comparisons with other countries
3. To indicate economic growth
Comparisons are made over different years to show any changes.
4. Instrument of economic planning
Many governments use this information to assess effectiveness of past policies,
planning of
futures policies and development implementation of the methods for the
redistribution of wealth.

Growth verses Development and Their Relationship

Economic growth refers to a quantitative increase in the level of income or output of
a country and is measured by GDP. Negative growth indicates that a country is doing
worse that the previous year. Zero growth indicates that there has been no change from the
previous year.
 However, economic development refers to changes in the economy and
improvements in the quality of life. It includes the provision of facilities that enable
growth to take place e.g. education, machinery, skills, utilities, housing, health facilities
etc. Economic development leads to economic growth e.g. highly developed countries
such as USA, Canada, England etc. are better able to exploit their resources thus resulting
in economic growth and better standards of living.

SOCIAL ACCOUNTING AND INTERNATIONAL TRADE

International Trade
This is the exchange of goods and services between countries. It includes
 Visible Trade: Import and export of tangible goods.
 Invisible Trade: Import and export of services e.g. banking

Reasons For & Importance of International Trade

1. Countries can acquire goods and services it does not produce.
2. Countries can sell goods to earn foreign exchange.
3. International trade exposes local firms to greater competition which forces them to use
resources more efficiently.
4. It can promote political links between countries through the signing of trade agreements.
5. It can promote economic growth.
6. The size of a producer’s market is increased which can lead to economies of scale.
7. The quality of products should increase.
8. Increase in competition can lead to lowering of prices for the consumers.
Theory of Comparative Advantage
As international trade increases, the theory of comparative advantage may come into
play. If two countries are producing the same good and allocating the same amount of
resources, then the country which produces the most is said to have absolute advantage.
However, the countries may still be able to trade if one country has a comparative
advantage in the production of one good while the other has comparative advantage in the
production of another good. In other words, each country will produce the goods
which the others cannot produce as well as they can, then they will trade the different
products.

Balance of Trade verses Balance of Payment

The Balance of Trade is the trade in visible exports and imports. It is also known as
the merchandise balance. It is shown as part of the current account on the Balance of
Payment.
The Balance of Payment is the record of the financial transactions between on
country and its trading partners over one year. It include the following information
 Current Account
a) Visible exports – Visible imports
b) Invisible exports – Invisible imports
 Capital Account
Records the inflow and outflow of short, medium and long term investment
 Official Financing
Indicates how the deficit (debt) of the Balance of Payment is financed.

N.B. A favourable B.O.P exists when there is a net inflow of capital i.e. the country
has earned more than it has spent.
Impact of Balance of Trade, Balance of Payments and Devaluation on the Country
and Individual
When there is a Balance of Trade deficit, it means that the total value of imported
goods is greater than that of exported goods. This results in a net outflow of foreign
currency in order to pay for the imports. It is also showing that the country is spending
beyond its means.
Balance of Payment deficits can eventually have adverse effects on the economy.
Since there is a net outflow of funds, the country would need to use valuable foreign
exchange in order to finance its debts. If the problem continues, the country may have to
borrow money from lending agencies such as IMF. These institutions may have certain
requirements attached to the loan e.g. devaluation, wage cuts/freezes etc. which can
adversely affect the population.
Devaluation means the lowering of the value of a country’s currency in relation to
other currencies. This has the effect of making imports more expensive and exports
cheaper. If the country exports more (because they are cheaper for foreigners), it may then
cause an improvement on the current account of the B.O.P. However, if the country is
importing more, it now has to use more money to pay for the same amount of goods. To
keep the foreign exchange, the country may decide to reduce imports by various methods
(e.g. import quotas, negative lists etc.). This means that fewer products are available to
consumers. Devaluation can also make prices of goods higher for consumers.

Internal Measures to Deal with an Adverse Balance of Payment

Short Term Measures
 Exchange controls such as changing the exchange rate
 Use reserves of foreign exchange
Medium Term Measures
 Tariffs (taxes) to make imports more expensive and less attractive.
 Licenses which limits the number of firms or people operating in a certain trade.
  Quotas which limit the amount of a good which can be imported into the country.
 Bans are placed on good which would no longer be permitted into the country.
Long Term Measures
 Promoting the buying of local products to reduce imports.
 Subsidising of export oriented businesses. This allows producers to be more
competitive with other countries to increase exports.
 Ensuring industrial peace. This should reduce the amount of strikes, protests etc.
which can affect of reduce levels of production.
 Improve the tourism product which brings in foreign exchange.

External Measures to Deal with an Adverse Balance of Payment

Short/Medium Term Measures
 Borrowing from other central banks
 Borrowing from the IMF
 Accepting gifts from other countries
 Importing on credit
Long Term Measures
 Government negotiated trade agreements to increase exports
 Promoting tourism through overseas agencies

Savings verses Investment

Saving is not spending part of one’s income or the postponement of present
consumption.
Investment refers to funds or money spent on producing capital goods e.g.
machinery, plant and equipment etc.
Saving and investment interact with each other in an effort to cause growth. As
individuals save money with financial institutions, the money is used by other firms for
investment purposes. Individuals can also invest by purchasing shares issued by firms,
government bonds and treasury bills. The government then uses the money to invest in
improving the country’s infrastructure ( roads, health, schools, electricity, communications
etc.)
Therefore, the more money that is saved, the greater the pool of funds available for
the investment in capital goods which can then lead to an increase in growth an
development of the country.

PRINCIPLES OF BUSINESS
SECTION 9: REVISION
SOCIAL ACCOUNTING AND INTERNATIONAL TRADE

1. What is the standard of living?

2. What is the cost of living?
3. How does the following affect the standard of living?
a) Political Stability
b) Quality of Labour
c) Industrial development
4. How is the Per Capita Income calculated?
5. What is GDP?
6. What is the difference between the GNP & National Income and why is this distinction
important?
7 List the methods used to measure National Income.
8. Give TWO uses of National Income statistics.
9. Explain how economic development can lead to economic growth.
10. Give TWO reasons why international trade is important.
11. What is the difference between Balance Of Trade and balance Of Payment?
12. What are the THREE elements/sections of the Balance of Payment statement?
13. What is the significance of a Balance of Trade surplus?
14. What is devaluation?
15. Explain how a devaluation can negatively affect a country?
16 State THREE internal and THREE external measures which are used to deal with a
Balance of Payment deficit.