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PNG and
Global Economies
2
CHAPTER CHECKLIST
When you have completed your
study of this chapter, you will be able to
1 Describe what, how, and for whom goods and services
are produced in the PNG Economy
2 Describe what, how, and for whom goods and services
are produced in the global economy.
3 Use the circular flow model of the PNG economy and
of the global economy.
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PNG Economy
CHAPER CHECKLIST
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PNG Economy
• Majority of the population living below
CHAPER the
CHECKLIST
poverty line
• Dominated by agriculture, forestry, fisheries,
minerals and energy
• Most of the export earnings come from
natural gas, oil, gold and copper
• Despite rich in natural resources, it is a high
cost economy
• Receives large aid support from Australia
and multilaterals such as ADB and World
Bank
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PNG Economy
CHAPER CHECKLIST
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PNG Economy
CHAPER CHECKLIST
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2.1 WHAT, HOW, AND FOR WHOM?
What Does PNG Produce?
We divide the vast array of goods and services produced
into:
• Primary Goods – oil, gas, gold, copper , coffee,
palm oil, vanilla timber
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2.1 WHAT, HOW, AND FOR WHOM?
Primary goods are goods that are sold for production
or consumption just as it was found in nature.
Primary goods include – crude oil, copper, coffee, palm
oil, gold, gas, fish, timber
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2.1 WHAT, HOW, AND FOR WHOM?
Consumption goods and services are goods and
services that are bought by individuals and used to
provide personal enjoyment and contribute to a person’s
standard of living.
Examples are rice, PMV services, clothes, polices
services
Capital goods are goods that are bought by
businesses to increase their productive resources.
Examples are machines and trucks…note the difference
in the use of capital in economics & accounting/finance!
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2.1 WHAT, HOW, AND FOR WHOM?
How Do We Produce?
Factors of production are the productive resources
used to produce goods and services.
Factors of production are grouped into four categories:
• Land
• Labor
• Capital
• Entrepreneurship
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2.1 WHAT, HOW, AND FOR WHOM?
Land
Land includes all the “gifts of nature” that we use to
produce goods and services.
Land includes all the things we call natural resources.
Land includes minerals, water, air, wild plants, animals,
birds, and fish as well as farmland and forests.
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2.1 WHAT, HOW, AND FOR WHOM?
Labor
Labor is the work time and work effort that people
devote to producing goods and services. It is human
labor.
The quality of labor depends on how skilled people are—
what economists call human capital.
Human capital is the knowledge and skill that people
obtain from education, on-the-job training, and work
experience.
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2.1 WHAT, HOW, AND FOR WHOM?
Capital
Capital consists of tools, instruments, machines,
buildings, and other items that have been produced in
the past and that businesses now use to produce goods
and services.
Capital includes semi-finished goods, office buildings,
and computers.
Capital does not include money, stocks, and bonds.
They are financial resources.
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2.1 WHAT, HOW, AND FOR WHOM?
Entrepreneurship
Entrepreneurship is the human resource that
organizes labor, land, and capital.
Entrepreneurs come up with new ideas about what and
how to produce, make business decisions, and bear the
risks that arise from these decisions.
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2.1 WHAT, HOW, AND FOR WHOM?
For Whom Do We Produce?
Factors of production are paid incomes:
Rent Income paid for the use of land.
Wages Income paid for the services of labor.
Interest Income paid for the use of capital.
Profit (or loss) Income earned by an entrepreneur for
running a business.
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2.1 WHAT, HOW, AND FOR WHOM?
Functional distribution of income is the distribution of
income among the factors of production.
Personal distribution of income is the distribution of
income among households.
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2.1 WHAT, HOW, AND FOR WHOM?
Figure 2.1(a) shows the
functional distribution of
income in 2014:
Wages 63%
Rent, interest, and
profit 37%
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2.1 WHAT, HOW, AND FOR WHOM?
Figure 2.1(b) shows
the personal
distribution of
income in 2014 in
USA:
The poorest 20%
earned only 3% of
total income.
The richest 20%
earned 50% of total
income.
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2.2 THE GLOBAL ECONOMY
The Economies
Advanced Economies
The richest 29 countries (or areas).
Almost 1 billion people (15 percent of the world’s
population) live in advanced economies.
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2.2 THE GLOBAL ECONOMY
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2.2 THE GLOBAL ECONOMY
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2.2 THE GLOBAL ECONOMY
Emerging Market and Developing Economies
Emerging market economies are the 28 countries of
Central and Eastern Europe and Asia.
Almost 500 million people live in these countries.
Developing economies are the 119 countries in Africa,
Asia, the Middle East, Europe, Central and South
America, & the Pacific that have not yet achieved high
average incomes for their people.
More than 5.5 billion people live in these countries.
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2.2 THE GLOBAL ECONOMY
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2.2 THE GLOBAL ECONOMY
Some Differences in What Is Produced
Developing economies have large and growing
manufacturing industries, which produce textiles,
footwear, sports gear, toys, electronic goods, furniture,
steel, and even automobiles and airplanes.
Food production is a small part of the U.S and other
advanced economies and a large part of the developing
economies such as Brazil, China, and India.
But the advanced economies produce about one third of
the world’s food.
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2.2 THE GLOBAL ECONOMY
Some Similarities in What Is Produced
Retail industries in advanced economies are similar, but
so are the structure of what they produce.
Agriculture and manufacturing are smaller percentages
of total production and are shrinking, whereas services
are a larger percentage and growing.
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2.2 THE GLOBAL ECONOMY
How in the Global Economy?
Human Capital Differences
The quality of labor depends on human capital.
The differences in human capital between the advanced
economies and the developing economies is enormous
and it arises from:
• Education, on-the-job training, and experience
• Physical ability and state of health.
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2.2 THE GLOBAL ECONOMY
Physical Capital Differences
The physical capital available for producing goods and
services differentiates an advanced economy from a
developing economy:
• Transportation system—advanced economies are
more developed.
• Technologies used on farms and in factories—
advanced economies use more capital-intensive
technologies.
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2.2 THE GLOBAL ECONOMY
For Whom in the Global Economy?
Who gets the world’s goods and services depends on
the incomes that people earn.
Figure 2.3 (on the next slide) shows the distribution of
incomes around the world.
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2.2 THE GLOBAL ECONOMY
In 2015, U.S.
average income
was $153 a day.
In the European
Union it was
$104 a day and
in Russia $65 a
day.
In China it was
$39 a day; in
India $17, and in
Africa $11.
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2.3 THE CIRCULAR FLOWS
Circular flow model is a model of the economy that
shows:
The circular flow of expenditures and incomes that result
from decision makers’ choices and …
the way those choices interact in markets to determine
what, how, and for whom goods and services are
produced.
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2.3 THE CIRCULAR FLOWS
Households and Firms
Households are individuals or people living together as
decision-making units.
Firms are institutions that organize production of goods
and services.
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2.3 THE CIRCULAR FLOWS
Markets
A market is any arrangement that brings buyers and
sellers together and enables them to get information and
do business with each other.
Goods markets are markets in which goods and
services are bought and sold.
Factor markets are markets in which factors of
production are bought and sold.
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2.3 THE CIRCULAR FLOWS
Real Flows and Money Flows
In factor markets:
• Households supply
factors of production
• Firms hire factors of
production.
In goods markets:
• Firms supply goods
and services produced.
• Households buy goods
and services.
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2.3 THE CIRCULAR FLOWS
Real Flows
These are the real flows
in the economy.
Money flows run in the
opposite direction to the
real flows.
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2.3 THE CIRCULAR FLOWS
Money Flows
Firms pay households
incomes for the services of
factors of production.
Households pay firms for
the goods and services
they buy.
These are the money flows.
• Blue flows are incomes.
• Red flows are expenditures.
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2.3 THE CIRCULAR FLOWS
Governments
We divide governments into two broad levels:
• National government
• Provincial and local government
National Government
The National government’s major expenditures are to
provide
1. Goods and services
2. Social Security and welfare benefits
3. Transfers to provincial and local governments
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2.3 THE CIRCULAR FLOWS
The national government finances its expenditures by
collecting taxes.
The main taxes are
1. Personal income taxes
2. Corporate (business) taxes
3. Social Security taxes
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2.3 THE CIRCULAR FLOWS
Local Governments
State and local governments expenditures provide
1. Goods and services (roads, tourism)
Local governments finance these expenditures by
collecting taxes.
The main taxes levied are
1. Community services taxes (rubbish collection, parks)
2. General trading license fees
3. Fees for small scale logging
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2.3 THE CIRCULAR FLOWS
Governments in
the Circular Flow
Households and firms
pay taxes and receive
transfers.
Governments buy
goods and services
from firms.
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2.3 THE CIRCULAR FLOWS
Circular Flows in the Global Economy
Households and firms in the economy interact with
households and firms in other economies in two main
ways:
They buy and sell goods and services and they borrow
and lend.
We call these two activities:
• International trade
• International finance
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2.3 THE CIRCULAR FLOWS
International Trade
Many of the goods that you buy were not made in the
PNG―your phones, cars and shoes.
The goods and services that we buy from firms in other
countries are PNG imports.
Much of what is produced in PNG doesn’t end up being
sold here― most of the gas produced is sold to Asia
The goods and services that we sell to households and
firms in other countries are PNG exports.
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2.3 THE CIRCULAR FLOWS
International Finance
When firms or governments want to borrow, they look for
the lowest interest rate available.
Sometimes, that interest rate is outside PNG
Also, when the value of PNG imports exceeds the value
of PNG exports, PNG must borrow from the rest of the
world.
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2.3 THE CIRCULAR FLOWS
Households and firms in
the US economy interact
with those in the rest of
the world in goods
markets and financial
markets.
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2.3 THE CIRCULAR FLOWS
The red flow shows
the expenditure by
Americans on imports
of goods and services.
The blue flow shows
the expenditure by the
rest of the world on
U.S. exports (other
countries’ imports).
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2.3 THE CIRCULAR FLOWS
The green flow shows
U.S. lending to the
rest of the world.
The orange flow
shows U.S. borrowing
from the rest of the
world.
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2.3 THE CIRCULAR FLOWS
These international
trade and international
finance flows tie
nations together.
Global booms and
slumps are transmitted
through these flows.
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Boeing wants to
manufacture the
Dreamliner at the
lowest possible
cost.
Boeing achieves
this goal by having
more than 400
firms on 4
continents make
its components.
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Boeing and the
400-plus firms
make decisions
and pay their
workers, investors,
and raw material
suppliers to play
their parts in
influencing what,
how, and for
whom goods and
services are
produced.
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All these decisions
are made in self-
interest and the
Dreamliner is
produced at the
lowest possible
cost.
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