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Synergy between Health and Economics: Oil-Price-Crash or Corona-Crash

Health shocks can also cause economic shocks (ceteris-paribus). The coronavirus pandemic is one of the health shocks that might unravel another global economic shock. Why is that the case? Fact number one, health is a basic human need. Consequently, the satisfaction the health needs requires human decision-making in all economies. Decision-makers face the challenge of managing the synergies between health and economics amid a health shock. How is the Scenario? Simultaneously, economic shocks unveil themselves amid health shocks as the pattern of decision-making changes with time. The time-lagged impact of change in decision-making is revealed through market reactions and is observable. Markets not only react to consumer choice and entrepreneurial decisions but also react to government decisions.

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Macroeconomic objectives of Economic Policy

All macroeconomic objectives could be affected by health and economic shocks. The potential reactions of markets are; the increase in market price volatility, the demand and supply shocks, among others. Economists of different schools of thought may differ in their economic forecasts, but the assumptions of any approach should be tested and empirically evident. The objective of the scientific approach should be to explain the global economic impact of the coronavirus. In the coming days, we will have the chance to observe; how strong or weak the global impact of the health and economic shocks will be in different economies around the world.

What is Health Economics?

Health Economics is the scientific branch of economics that deals with healthcare provision (supply) and healthcare utilization (demand) and how society makes coordination choices to meet the healthcare needs of its population. Economics as behavioral science influences health economics as a subbranch through the contribution of economic thought to healthcare issues. For example, we may see the solution to the following question: what are the most important behavioral choices of society that would help find the first-best allocation of healthcare goods and services in a world of scarce resources. The Coronavirus-Pandemic is the current health issue that is stress-testing our healthcare systems on a global scale. How we will deal with the pandemic depends on the behavioral incentives and contingencies to be resolved. In summary, health economics is the branch of economics that deals with the decision-making of how to allocate resources to health provision in economies. European countries have compulsory social welfare systems that coordinate health risks, while some economies have a voluntary system of insurance or no backup system in place.

How did the world economies react to the coronavirus pandemic outbreak?

It all started with the coronavirus pandemic outbreak somedays before 31.12.2019 in the Wuhan province in China. The first cases of the COVID-19 were reported to the World Health Organization by the Chinese government officials. Days after the World Health Organization reported the decease outbreak to the public on 05.01.2020. Globally, the reactions remained moderate and optimistic towards the ability to resolve the emerging disease. As reality became more prevalent and the cases wouldn’t be contained in China but spread around the world, the world Governments reactions as decision-makers were divergent and showed less global coordination. China put a whole province under quarantine, while most countries continued with life, as usual, giving out mild health alerts to the public.

Belated reaction of Governments

Maybe, the governments wanted to buy time to set up contingency plans, consult with experts on how to manage the unavoidable risks. The belated plan of actions by governments might have accelerated the spread of the coronavirus.

Economic slowdown, hoard purchases and travel bans

Simultaneously, the staggering impact of economic activities due to production stops in China channeled a global slowdown on the delivery of goods, services and the global supply (value) chain. The imposed travel bans and quarantines could heavily hurt the mobility of the people, the global flow of migration and tourism around some hotspots. Public life (e.g. traveling, local transport, retailing, etc.) in affected regions had been slowed down due to quarantines imposed by Governments, leading to hoarding behavior, the closing of industries and production, travel bans and other limitations to public life.

Global oil crash or Corona-Crash in Financial Markets

As expected, the impact was still to become visible in public life. The economic pressure has slowly become visible through reactions in financial markets. Financial markets are volatile markets, which adjust their valuation of assets in very short periods.

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The oil-price-crash on 09.03.2020 agitated the global financial markets three months down the path. The reason for the price downfall was caused by the OPEC negotiations, which ended without a compromise. The over-production of oil, coupled with low demand for oil, led to the downfall of the oil price in the stock exchanges around the world.

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    Health shocks can also cause economic shocks (ceteris-paribus). The coronavirus pandemic is one of the health shocks that might unravel another global economic shock. Why is that the case? Fact number one, health is a basic human need. Consequently, the satisfaction the health needs requires human decision-making in all economies. Decision-makers face the challenge of managing the synergies between health and economics amid a health shock. How is the Scenario?

The Magic Square and Hexagon of Macroeconomic Policy Objectives

What should you understand by Magic Square and Hexagon, economic policy goals, and measures in macroeconomics? The explanation begins like this: Every economy, according to its economic order, pursues a number of quantitative and qualitative economic policy goals. Each relevant goal of the national economy requires a series of economic policy measures. The resulting economic policy measures are aimed at maximizing the common social welfare and economic welfare of an economy. The qualitative and quantitative target categories together form a hierarchy of objectives: the magic square and the magic hexagon.

The quantitative economic policy goals are grouped under the magic square, while the qualitative goals extend the magic square by two additional goals to form a magic hexagon.

“What is magic about this from the perspective of economists? It is probably the resulting goal harmonies and goal conflicts between the individual macroeconomic economic policy goals of the magic square and hexagon”.

Hypothesis to Review

The Magic Square – 4 Macroeconomic Policy Objectives

The magic square consists of four macroeconomic economic policy goals: steady economic growth $g_t$, a high level of employment $u_t$, a stable level of price $P_t$, and a steady foreign trade equilibrium $NX_t$.

Objective 1: Steady economic growth

Steady economic growth means that an economy should always have a stable and positive real growth rate of the gross domestic product (GDP). Assume that $Y_t$ is the real GDP-Level of your Country at Time $t$. The real GDP-growth rate for Period $t$ can be defined as follows:

g_t=\frac{(Y_t -Y_{t-1})}{Y_{t-1}}

Objective 2: High employment level and low unemployment rate

A high level of employment also promotes low unemployment rates. To quantify the rate of unemployment $u_t$, three variables are needed; Number of persons capable of working $L_t$, the number of employed $N_t$, and the number of unemployed $U_t$.

u_t=\frac{U_t}{L_t}=\frac{(L_t-N_t)}{L_t}=1-\frac{N_t}{L_t}

Objective 3: Stable price level and low inflation

A stable price level ($P_t$) also requires a low rate of inflation $\pi_t$ or price stability. Ensuring price stability in the European Union (EU) is the task of monetary policy. This is controlled by the European Central Bank (with the Deutsche Bundesbank as a member) in Frankfurt am Main in the Eurozone (Monetary Union). Before the foundation of the Monetary Union, each country controlled its own monetary policy. In the monetary union, monetary policy is coordinated collectively. The inflation rate can be calculated as follows:

\pi_{t}=\frac{P_t-P_{t-1}}{P_{t-1}}

Objective 4: Steady foreign trade balance and a current account surplus

Steady foreign trade equilibrium ideally results from the fact that the current account shows neither a surplus nor a deficit.

The Magic Hexagon – 6 Macroeconomic Policy Objectives

The magic hexagon is created by adding two qualitative macroeconomic economic policy goals to the magic square: the fair distribution of wealth, income, assets and resources and the sustainable use of environmental resources.

NX_t=X_t-\frac{IM_t}{\varepsilon}=0

Objective 5: Principle of equity in the distribution of wealth

The equitable distribution of wealth, income, assets and resources requires the correction of quantitative targets by means of the principle of justice in order to guarantee equal opportunities for all generations.

Objective 6: Principle of sustainability and environmental protection

The sustainable use of both natural and non-natural resources requires the correction of quantitative targets by means of the sustainability principle in order to guarantee the necessary environmental protection for all generations.

    What is Econometrics?

    Econometrics is part of economics as a science. It deals with the statistical (empirical) modelling of economic theories (hypotheses) in order to explain, confirm or disprove economic theory empirically. In economic theory, causalities between two (or more) relevant measures are assumed, e.g. the relationship between income (Y) and consumption (C) of a household. Two causalities can be suspected: (1) The consumption of a household depends on its income: C(Y) or (2) the income of a household depends on its consumption: Y(C). Both statements (theory/hypotheses) are not opposed to each other (no contradiction), but are inversely related to each other (inverse causality). Using a sample or total population of households a statistical unit of interest and econometric methods it is possible to test both hypotheses for their internal validity and external validity.

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    Scope of Econometrics

    Econometrics quantifies the theoretical hypotheses (economic theory) by testing corresponding empirical statements (empirical model). If we hypothesize that the consumption of individual households has a positive relationship with household income, the resulting empirical model should confirm or disprove the positive relationship between consumption and household income in the sample and in the household population.

    Exam preparation for Econometrics

    We offer exam preparation for econometrics as well as for other fields of economics, e.g. macroeconomics, microeconomics, business mathematics, statistics etc. Our goal is to have a positive and enriching effect on your learning process through professional support. Thus we would like to help you to understand both simple and complex economic methods in the respective subject. Book your personal appointment for exam preparation for Econometrics today. We will accompany your learning process carefully and help you to understand both simple and complex econometric methods.

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    The Bridge between Leadership and Management

    You are a leader! Leadership and management skills are the fundamentals of social and organizational behavior. Both Social and Business models rely on the behavior of those who implement them and associate directly or indirectly with them. Furthermore, in any societal arrangement there is always competition between societal or/and organizational members. Last but not least, there are those who feel much entitled to lead and sorely to manage the affairs of the society and organizations.

    Frequently asked questions about leadership and management

    1. What is management?
    2. What is leadership?
    3. What are the commonalities and differences between leadership and management?
    4. How can the paradox between leadership and management be explained?
    5. Who is the leader and who is the manager?
    6. Where should leadership be practiced?
    7. Where should management be practiced?
    8. Where do you stand between leadership and management?
    9. Are you a “senior manager” or even the “chief executive officer (CEO)”, of “just an employee”?
    10. Do you feel attached to the organizations you work for through the leadership and management?
    11. Do you feel obligated to lead or/and manage affairs of your organization?
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    13. Do you demote other organizational members to the so called “subordinates”?
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    Read More

    The Economic Concept of Opportunity Costs

    The economic concept of opportunity costs is the most fundamental issue of economics as a social science. It explains the decision-making and behavior of economic subjects. Economic subjects are private households, firms, and the government as a public household. While explaining the economic concept of opportunity costs, focus on the question: why do people choose to do, consume, or even spend time and resources on what they do? How do you make your choices and decisions?

    Definition of Opportunity Costs

    Opportunity costs are defined as costs incurred by a forgone alternative (opportunity). A foregone opportunity can either be the opportunity to incur costs, the opportunity to gain revenues, earn profits or cause losses. Economic subjects constantly get involved in decision-making processes, where choices have to be made. Take the following examples:

    • Example 1: non-monetary opportunity costs – the reason why a student would attend high school (an institution of education) is determined by the opportunity cost incurred if the student would not attend the school e.g. the impression of the parents about their daughter or son. Such opportunity cost are not measurable in monetary units.
    • Examples 2: mental accounting – whenever you act or choose not to act in certain manner, you are weighing alternative options and therefore intrinsically accounting for cost that would be incurred by alternative mode of behavior.
    • Example 3: relative costs – a job-seeker may prefer a job that pays less, but offers a better work-life balance, at the cost of a better paying job under worse work-life balance.
    • Example 4: Specialization and relative cost/benefit advantage – the opportunity cost of Germany producing autos are the cost incurred for not producing other goods that Germany prefers to import from other countries, e.g. Coffee from Kenya.
    What are opportunity costs?
    What are opportunity costs? (C) Evansonslabs

    Literature

    The following Literature will help you to expand the spectrum of knowledge in this Field:

    • Varian, H. R. (2020). Intermediate Microeconomics: A modern approach ; media update (Ninth Edition, International Student Edition). New York, London: WW Norton et Co.

    Read more about Economics

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    What is Economics?

    What is Economics, and how can students define economics as a science? Therefore, our motivation in this article is to find a general definition of economics. In much of economic literature, there is also consensus and conflict on some description of economics as a science. So how do we start? To neatly define economics in lectures, we need a broad view of the term economics.

    Consequently, Economics can be defined as an interdisciplinarysocial, and behavioral science. Therefore, economic research focuses on explaining the behavior of decision-makers. Economics also explains the implications of the behavior of the decision-makers that affect society at the microeconomicmacroeconomic, and political levels. Such an analysis of different decision-makers consequently needs an interdisciplinary approach. Decision-makers in economics are in particular private households, firms, and governments. 

    Microeconomic level

    At the microeconomic level, economics explains the human nature of making both individual rational and irrational decisions, social interactions, and behavior under risk. Individuals, organizations, and governments make allocation and distribution decisions daily, which economic subjects would like to evaluate. Economics derives the rules of determining; how efficient or optimal the decisions of economic subjects are. It, therefore, determines the necessary rules and coordination mechanisms usable in decision-making processes. Some of the coordination mechanisms include market, government, private, entrepreneurial coordination in an economy. An economy is the environmental unit of economic analysis. 

    Macroeconomic level

    Economics is also an environmental dimension of macro-environment analysis in the PESTEL-Framework in strategy management. Other PESTEL dimensions include the political, social, ecological, technological, and legal environment. At the macroeconomic level, economics discusses the aggregated effect at the level of the whole economy using the six macroeconomic objectives (magic hexagon).

    Policy Level

    At the political level, economics deals with the implication of economic decisions of different interest groups in an economy and derives policy recommendations to help maximize social welfare. Consumers, entrepreneurial, government interests are not always similar. Employees’ and employers’ political interests also differ. Therefore, economic policies are essential and help in balancing the different interests as well as maximizing the welfare of society.

    Economics deals with Rational and Irrational Behavior

    Evident in all economic literature is the issue of rational and irrational behavior as the central point of discussion. In economic theory, the economist tries to explain how people should make decisions depending on their goals and restrictions they face. Rational decisions are those decisions that respect the restrictions and goals of an individual, while irrational behavior could e.g. incur either a higher cost (not respecting restrictions) or lower utility (not respecting the goals) as compared to the rational decision. Rational decision is influence by the cost of opportunities.

    Economics is about the Maximum and the Minimum Principle

    Economists derive two principles of decision-making that drive the process of making decisions within economic subjects. The maximum principle and the minimum principle.

    The Maximum Principle

    The maximum principle suggests the following: Attain the maximum output with a predefined amount of inputs.

    What is economics?
    Photo by Artem Beliaikin on Pexels.com

    The Minimum Principle

    The minimum principle suggests the following: Utilize the minimum input to attain a predefined amount of output.

    Photo by Pixabay on Pexels.com

    How to research about Economics

    Find a detailed definition of Economics in the International Encyclopedia of the Social & Behavioral Science (2001, Pages 4158-4159) via Science Direct.

    Understanding the definition of Economics

    In order to understand Economics, it is essential to differentiate between decision-making from three different perspectives: private consumption and income decisions, public consumption and revenue generation, entrepreneurial production and supply of goods and services in an economy. As discussed above, economics is the science of rational decision-making. Firstly, economists try to explain how economic subjects make rational decisions, the limitations of rational decision-making, human interactions and their outcomes. Secondly, economists try to capture the limits of rational behavior and explain how decision-making takes place under imperfect environment conditions; e. g. information asymmetries, uncertainty, imbalance in power between decision-makers … etc.

    Economic subjects

    The concept of economic subjects is the notion of viewing people in an economy as (1) private households, (2) as firms (or organizations) and as (3) the government (also a form of organization). In general, this means that there are three economic subjects;

    • Private Households
    • Firms (private and public organizations)
    • Government (Public household and organization)

    What is an Economy?

    An economy is the analytical unit of interest for all economic analysis and includes the people, biosphere and all resources available e.g. a political unit (e.g. Germany, China, France, Ghana) or a unit specified by certain characteristics such as a continent, a supranational unit, an international coalition of nations, etc.

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