What are Economic Resources?

Economic resources, also called factors of production, are the resources used to produce
goods and services. These resources are, by nature, limited and so, command a payment that
becomes the income of the resource owner (Dinio & Villasis, 2017, p. 3).

1. Land - soil and natural resources that are found in nature and are not man-
made. Owners of lands receive a payment known as rent
- these resources consist of gifts of nature which include:
 Soil
 Rivers
 Lakes, oceans
 Forests
 Mountains
 Mineral resources
- land is considered an economic resource because it has a price
attached to it.

2. Labor - physical and human effort exerted in production.

- also called “human resources” or all human efforts, be it mental
or physical, that help to produce satisfying goods and services.
- it covers manual workers like
 Construction workers
 Machine operators
 Production
workers As well as
professionals like
 Nurses
 Lawyers
 Doctors
The terms also include
 Jeepney drivers
 Farmers
 Fishermen

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 In return, he earns an income in the forms of wages and salaries.

3. Capital - man-made resources used in the production of goods and services like:
 Machinery
 Equipment

Two (2) economic definitions of capital:

A. Capital - can represent the monetary resources use to purchase
natural resources.

Example:
Companies use capital to buy land and other goods
B. Capital - represents the major physical assets individuals
and companies use when producing goods and
services

Example:
Buildings, vehicles, equipment

4. Entrepreneurs -organizers and coordinators of other factors of production:

land, labor, and capital.
-someone who uses his initiative, talent and resourcefulness to
create economic goods and services

5. Foreign Exchange -refers to the dollar and dollar reserves that the economy has.
-foreign exchange is part of economic resources because we
need foreign currency for international trading and buying
materials from other countries.
- International medium - dollar

Figure 1. Factors of Production (Pinterest, n.d.).

This central problem gives rise to four basic economic problems, and in this module,
we will look at these basic problems in detail.
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The Four (4) Basic Problems of an Economy

The central economic problem of scarcity of resources is broken down into four basic
problems of an economy (Toppr, n.d.).

1. What to Produce?
What happens when a society's resources are limited? It chooses which goods and
services to produce. Furthermore, it establishes the required quantity. Should we make
more firearms or more butter, for example? Do we prefer capital items, such as
machines and equipment, or consumer products, such as cell phones? While it may
appear simple, society must choose the type and quantity of each and every
commodity or service to be produced.

2. How to Produce?

A variety of ways can be used to create a product. Cotton cloth, for example, can be
made on handlooms, power looms, or automatic looms. Automatic looms, on the
other hand, demand more power and capital investment than hand looms.

As a result, society must select between different methods of producing the item.
Similarly, identical decisions are required for all goods and/or services. Furthermore,
the choice is based on the availability of various production factors as well as their
pricing. Typically, a society chooses a method that makes the best use of its resources.

3. For whom to Produce?

Consider this: can a civilization satisfy all human desires? Definitely not. As a result,
it must determine who receives what proportion of the overall production of goods
and services generated. In other words, society determines how goods and services are
distributed among its members.

4. What provision should be made for economic growth?

Is it possible for a society to consume all of its resources in the present? Yes, it is
possible. However, this is unlikely to happen. The reason is straightforward. A
society's productive potential will never increase if all of its resources are used for
current consumption.

As a result, a member of society's standard of life and income will remain consistent.
As a result, the level of living will deteriorate in the future. As a result, society must
decide how much of its resources it wishes to set aside for future advancement.

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Examples of the Economic Problem

Consumers

Households have a finite amount of money to spend, and they must pick how to spend
it. For example, a household with a yearly income of P84,000 may need to spend P30,000 on
rent and P10,000 on electricity bills each year. This leaves P44,000 (or P 3,666.67 a month)
to spend on other food, clothing, transportation, and other necessities.

Workers

Households will also have to decide how much they want to work. Working overtime
on weekends, for example, will provide them with additional cash but less leisure time to
enjoy it. A worker could also want to devote more time to developing new skills and
qualifications. This may reduce their earning potential in the short term, but it will allow
them to earn more in the long run. For example, at the age of 18, a student might either go
directly to work or attend university in the hopes of receiving a degree and increasing their
earning potential in the long run.

Producers

A producer must maintain a profit margin (revenue higher than costs). As a result, it
will need to manufacture high-demand goods and adjust to changing consumer expectations
and purchasing behaviors, such as shifting to online sales as the high street diminishes.
Producers will have to constantly ask themselves what is the best approach to produce goods.
Purchasing new machines, for example, can boost production and allow businesses to create
items at a lesser cost. This is critical in industries that are constantly changing and where new
technology is continually lowering manufacturing costs. Firms can become unprofitable if
they do not alter their production methods.

Firms may also be required to make long-term investment decisions in new products
and production methods.

Government

The government has restricted resources, and its spending authority is constrained by
the amount of revenue it can raise. The government must first determine how it will collect
taxes, and then it must choose how it will spend those funds. For example, the government
may decide to reduce subsidies for low-income people in order to encourage them to work.
Cutting benefits, on the other hand, will exacerbate inequality and relative poverty.

Opportunity Cost and the Economic Problem

The concept of opportunity cost can be used to highlight the economic problem.
according to Economicshelp.org, n.d.

Opportunity cost is the next best alternative foregone. When land is dedicated solely
to rice cultivation, we forfeit an output of bananas or mangoes that could have been planted

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on the same plot of land. A producer who decides to turn all of his leather into shoes foregoes
the opportunity to make bags out of it. A school teacher who could have worked at a bank
foregoes the salary she would have received if she had worked in a bank. A manager who
resigns from his position to pursue a master's degree forfeits his compensation as a manager.
His opportunity cost is his pay. A person does not need to make decisions if there is no
scarcity because he or she can have anything they desire.”

Individuals, corporations, and even a community can all benefit from the concept of
opportunity cost. There are trade-offs to be made while making a decision. The opportunity
cost of going to the movies is the worth of other things you could have purchased with that
money, such as a pint of ice cream, a fast food combination meal, or a basic t-shirt for PE
class. Another example is giving up work in favor of a recreational activity, such as going on
a vacation to Boracay for a week without pay. Then you’re giving up money you would have
made if you hadn’t decided to go on the trip.

Government in the concept of opportunity cost

A government may have options when it comes to allocating limited resources. They
have a choice whether to spend between health care and military. If they spend more on the
military, they will have less money to spend on health care.

How these questions are answered depends on the nature of the economic system in
place. The economic system is the means by which society answers the basic economic
problems.

Economic Systems
The economic system is the mechanism through which society determines the
solutions to the aforementioned basic economic issues. The factors of production, such as
land, capital, labor, and physical resources, are regulated by economic systems. An economic
system is made up of a variety of organizations, agencies, companies, decision-making
processes, and consumption patterns that make up a community's economic structure.

Any of the four economic systems, or perhaps a combination of them, can govern a
country:

1. Traditional economy

Traditions and customs that have been passed down from generation to generation are
used to make decisions. Methodologies are stale and so unprogressive. Traditional
communities can be found in both advanced and primitive cultures.

Traditional economies rely on agriculture, fishing, hunting, gathering, or a

combination of these activities. Instead than using money, they use barter. Emerging markets
and developing countries are home to the majority of traditional economies.

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 Figure 2. Five Traits of a Traditional Economy (Amadeo, 2021).

2. Command economy

This is a centralized decision-making system in which the government or a planning

committee makes decisions. People who do not have a say in what things are created are
forced to make decisions. This economics applies to authoritarian, socialist, and communist
countries alike.

A crucial aspect of any communist society is the command economy. Countries with
command economies include Cuba, North Korea, and the former Soviet Union, while China
had a command economy for decades before shifting to a mixed economy with both
communist and capitalist aspects.

Figure 3. Characteristics of Command economy, Economicshelp.org, n.d.

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3. Market economy

This is the most democratic economic system available. Decisions about what
commodities and services to manufacture are made based on the workings of demand and
supply. People's preferences are reflected in the prices they are prepared to pay in the market,
and as a result, producers' judgments on what goods to produce are based on their
preferences.

Figure 4. Features of an Open Market Economy (Learn.Robinhood, 2020)

Market economies can be found in the United States, England, and Japan. A
command economy, on the other hand, is run by a centralized government that owns most, if
not all, firms and directs all production components.

4. Mixed Economy

A mixed economy is a system that blends market, command, and traditional economic
elements. It has the benefits of all three while only having a few of the downsides.

Three of the following characteristics of a market economy are present in a mixed

economy. For starters, it safeguards private property. Second, it allows pricing to be
determined by the free market and supply and demand laws. Third, it is driven by individual
self-interest motivation.

Economic Utility
Economic utility must be considered in the midst of our society’s limited resources to
determine the usefulness or value that consumers derive from a product or service, and can
be judged based on the form, time, place, and possession; these factors aid in assessing
purchase decisions and the factors that drive those decisions.
Economic Utility gives a relative measure of a product’s satisfaction. The product’s
utility may be assigned based on the customer's requirements. It is entirely dependent on a
customer's requirements and preferences.

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 Utility increases only if
the customer possesses a
product

Different forms Introducing a

of a product particular product
may possess at the time when a
customer is in its
(or create)
need will increase
different levels
utility
of utility

A product’s utility is
maximum only at such a
place where its
requirement is created.

Figure 5. Four Types of Economic Utility.

From an economic standpoint, it is critical to comprehend a product's or service's

utility. It may vary depending on the situation, but it still provides a general acceptance or
rejection of the products. The economic utility of a product also refers to the needs and
expectations of buyers, as well as any flaws in its characteristics (if any). A decrease in the
utility of a product in the market could imply the introduction of new technology or improved
versions. Existing businesses will benefit from this.

Measuring the Economy

It is beneficial that students get to learn first how the growth of the economy is
actually measured. One way to measure economic growth is to account Gross Domestic
Product (GDP) and Gross National Product (GNP).

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 Gross domestic product (GDP) is the value of a nation’s finished domestic goods and
services during a specific time period, while the Gross National Product (GNP), is the value
of all finished goods and services owned by a country (Seth, 2021).

From the standpoint of what the economy has been, every government aims for a
stronger economy. The future of the economy is being shaped through shifting past and
current perspectives into the future. Looking ahead, in particular, is based on the economy’s
past and present performance and health. Production is at the center of the economy, and its
value reflects both resource input and human output.

How to Calculate the Gross National Product?

According to Corporate Finance Institute, “Personal consumption expenditures,
government expenditures, private domestic investments, net exports, and all income made by
residents in foreign countries, minus income gained by foreign residents within the domestic
economy, are all added together to compute GNP. The value of imports is subtracted from the
value of the country's exports to determine net exports.”

Unlike Gross Domestic Product (GDP), which measures the value of goods and
services based on where they were produced, Gross National Product measures the value of
goods and services based on where they were owned. It is calculated as the value of a
country's GDP plus any income earned by citizens from overseas investments, minus income
earned by foreign residents inside the country. Because these entries are included in the value
of the final products and services, GNP eliminates the value of any intermediary commodities
to avoid double counting.

The official formula for calculating GNP is as follows:

Y = C + I + G + (X - M)
Where:
C – Consumption Expenditure
I – Investment
G – Government Expenditure
M – Imports (Value of imports minus value of exports)
Z – Net Income (Net income inflow from abroad minus net outflow to foreign countries)

Alternatively, the Gross National Product can also be calculated as follows:

GNP = GDP + Net Income Inflow from Overseas – Net Income Outflow to Foreign
Countries
Where:

GDP = Consumption + Investment + Government Expenditure + Exports – Imports

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 Manufacturing of physical commodities such as vehicles, agricultural products,
machinery, and so on, as well as the supply of services such as healthcare, business
consulting, and education, are all included in GNP. Taxes and depreciation are included in
GNP. Because the cost of services utilized in the production of items is included in the cost of
finished goods, it is not computed separately.
To produce real GNP, Gross National Product must be adjusted for inflation for year-
to-year comparisons. GNP is also expressed per capita for country-to-country comparisons.
There are challenges in accounting for dual citizenship when computing GNP. If a producer
or manufacturer is a dual citizen of two nations, his productive output will be considered by
both countries, resulting in double counting.

Importance of GNP
The Gross National Product (GNP) is one of the most important economic
indicator used by policymakers. GNP provides vital data on manufacturing, savings,
investments, employment, significant company production outputs, and other economic
indicators and this data is used by policymakers to create policy papers that legislators use to
pass laws. GNP data is used by economists to solve national issues such as inflation and
poverty.

GNP becomes a more trustworthy statistic than GDP when assessing the amount of
income earned by a country's citizens independent of their location. Individuals in the
globalized economy have various options for earning money, both domestically and
internationally. GNP gives information that other productivity measurements do not
incorporate when measuring such wide data. If a country's citizens were limited to domestic
sources of income, GNP would be equivalent to GDP, and it would be less valuable to the
government and policymakers.

GNP information is also useful for examining the balance of payments. The
difference between a country's exports to foreign countries and the value of the items and
services imported determines the balance of payments. When a country has a balance of
payments deficit, it indicates it imports more goods and services than it exports. A surplus in
the balance of payments means that the value of the country’s exports exceeds the value of
its impor

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