Essential Economic Concepts and Financial Principles

Understanding Earnings and Wages

Earnings refer to the remuneration an employee receives from a company for their time and labor. Wages are the economic compensation workers receive for both their work and rest periods.

The Interprofessional Minimum Wage (IMW) is the minimum wage level set annually by the government.

A collective bargaining agreement is an agreement between unions and employers that affects specific companies or sectors.

Key Types of Wages:

• Base Salary: The fixed remuneration per unit of time.
• Nominal Wages: Remuneration for work expressed in monetary terms (e.g., euros).
• Real Wages: Remuneration for work in terms of purchasing power.
• Wage Supplements: Additional compensation such as performance bonuses, overtime pay, seniority pay, or material allowances.

The Financial System Explained

The financial system is formed by the set of markets and institutions that channel resources among economic units. Its primary function is to connect those who wish to provide funds with those who seek to attract new resources.

Key Components of the Financial System:

• Financial Assets: Instruments (e.g., bonds) issued by economic units with a deficit to obtain means of payment and cover imbalances between expenditure and income.
• Financial Intermediaries: Institutions specializing in mediating between lenders and borrowers.
• Financial Markets: Mechanisms through which financial assets yield returns and their prices are determined.

The European Financial System

The European financial system comprises the European Central Bank (ECB), financial intermediaries, national central banks of each country, and financial markets.

Main Functions of the European Financial System:

• Management of foreign exchange operations.
• Ensuring the smooth operation of payment systems.
• Issuance of banknotes and minting of coins.
• Facilitating payments during liquidity issues.
• Management and maintenance of official foreign currency reserves.

Functions of the Bank of Spain:

• Puts coins into circulation.
• Promotes the functioning of the financial system in Spain.
• Acts as the depository of foreign currencies.
• Carries out active and passive monetary policy operations.
• Prepares and publishes statistics, and advises the government.

Loan vs. Credit and Other Financing

• Loan: A specific amount of money borrowed that must be repaid with interest over a set period.
• Credit: An intermediary makes a certain amount of funds available, on which interest is paid only if the funds are utilized.
• Market-Based Financing: A form of financing where the public or companies raise funds directly from investors, rather than solely from a bank.

Understanding Inflation

Inflation is a general and sustained increase in the price level of goods and services in an economy.

Key Production Cost Concepts

• Fixed Costs (FC): Costs that do not vary with the level of production.
• Variable Costs (VC): Costs that change with the level of production (e.g., (production * 300) + (workers * 500)).
• Total Costs (TC): The sum of Variable Costs and Fixed Costs (VC + FC).
• Average Cost (AC): Total Costs divided by production (TC / production).
• Marginal Cost (MC): The change in total cost resulting from producing one more unit ((TC2 - TC1) / (Production2 - Production1)).

National Accounts Formulas

• Gross Domestic Product at Market Prices (GDPmp): GDPmp = GDP at Factor Cost (GDPfc) + Indirect Taxes
• Net Domestic Product (NDP): NDP = GDP - Depreciation
• Gross National Product (GNP): GNP = GDP + Net Factor Income from Abroad
• Net National Product (NNP): NNP = Net Domestic Product at Factor Cost (NDPfc) + Net Factor Income from Abroad