Economic Indicators - Case Study Example

The world is composed of over 200 countries which operate in a global economic system. Some nations are doing better than others; the top nations such as the United States and Japan are categorized as developed nations. The next category of economic systems is referred too as developing or emerging economies which nations such as Jamaica and Argentina. The last category are underdeveloped countries where the best example of is the Sub-Saharan African nation. Independent of their status within the global economy each nation’s governmental institution can affect the country’s overall output knows as its gross domestic product (GDP) and other key economic indicators utilizing fiscal and monetary policy mechanism. This paper discusses the subject of fiscal policy based on the simulation Evaluating Fiscal Policy Alternative in which the player plays the role of president of the nation of Erehwon. The gross domestic product of a nation measures the overall output of the economy. The most commonly used method to calculate GDP is the expenditure approach which is the sum of four variables: consumption, investment, governmental spending and net exports (Quickmba, 2009). One of the objectives of any economic system is to achieve the higher possible gross domestic product which determines economic growth. The reason a higher gross domestic product in general terms is a favorable condition is because it raises the standard of living of the population. An economic metric that better illustrates the actual wealth of the inhabitants of a nation is GDP per capita which takes into consideration the population variable (GDP) population). As the president of a country with a low GDP per capita of $1,300, a figure comparable to the economic condition of Sri Lanka in 2006, my fiscal policies decisions are going to be tough (Finfacts, 2009). The aggregate demand / supply framework will be needed to facilitate my decision making process. The simulation starts me governing Erehwon in the year 2003. Two of my executives are proving me with recommendation and advice along the way. The country is currently facing a recession. My first and top concerns based on the principles of the aggregate demand and supply framework is too pay close attention to the twin evil of macroeconomics which are unemployment and inflation. The two biggest problems the economy is facing is a rising unemployment rate and low levels of consumer confidence. Problems with these two macroeconomics variables at Erehwon are similar to what is occurring in the US economy right now which is in the middle of a recession in 2009. My fiscal policies decisions have to be made based on the characteristics of my nation with emphasis being in the aggregate demand side of the equation right now. My country has a composition of 70:30 unskilled to skilled workers. The job demand in of the unskilled workers is fulfilled mostly by agricultural jobs, a sector that generates 40% of the overall economic activity of Erehwon. The three variables that I can change are infrastructure spending, educational spending, and taxes. An important consideration in my decisions is the overall governmental budget which is currently in deficit and no point in can deficit become higher than 5% of the nation’s GDP. The country before the implementation of any fiscal policies had a budget of negative one billion. The employment in the agricultural sector was stable. I need to improve employment among the skilled labor force which in our country is composed of construction, design, and manufacturing. The labor force of Erehron is limited in scope due to the fact that the educational system is poor and has been able to generate other types of skilled workers. My decision was to raise spending infrastructure and education by $200 million each and reduce the tax rate by 0.5%. The decision I decided to reduce taxes was to raise consumer confidence and increase the money supply so that people will continue to spend in order to take the nation away from recession. In the United States right now president Barack Obama has made similar decisions such as his tax cut plan which provides tax cuts to 95% of the population and the recently signed economic incentive package. The increase in educational spending will provide more teaching jobs as well as provide long term results by improving the abilities, skills and knowledge of the workforce. The results of my initiatives in 2005 were a reduction in unemployment from 6.32% to 3.77%, an increase in GDP from $39.7 billion to $41.80, and an overall increase in inflation of 1.69%. The second of the simulation takes place in 2007. The nation is facing three key economic problems: inflation, rising foreign debt, and higher budget deficit. People are happy due to the low unemployment rates. The inflationary forces are troublesome because the level of inflation has reached 11.22% which is 6.22% higher than when I took over in 2005. I have to make fiscal decision that affect the supply side equation in order to reduce inflation. The aggregate supply is the sum of all planned goods and services in the economy at different price levels (Evaluating Fiscal Policy Alternatives, 2009). There are big infrastructure projects taking place to improve the roads of the country. Despite the fact that these are important projects right now we have to control the governmental spending to reduce the deficit. Also to control prices an increase in taxes is going to help to deal with the inflationary forces, while at the same time increasing the income which reduces the deficit. My decision was to reduce infrastructure spending by $200 million and increase the tax rate by 1%. Raising taxes might not be a popular move, but it is an imperative to control the inflation and reduce the deficit. The results of my decision were a reduction to 7.65% while keeping the GDP and budget deficit at the same levels. The third round takes place in the year 2008. The country inflation problems have continued and the situation has gotten much worse. My top advisors have told of the need to contract the economy. The business community has been growing too fast based on erroneous governmental information which misled population and created a false illusion of the economic state of the nation. Inflation is back too double digits numbers at 10.44%. I’ve given information that our educational programs geared towards low income families is not working properly and many middle income families which afford to pay for their own education are receiving benefits. My decisions were to reduce educational spending by $200 million and more aggressive tax increase of 2% to reduce the population’s spending and send a clear message the economy is not doing as well as everyone thought. The results were a reduction in inflation to a 5.56% level, a 0.65% increase in unemployment and a popularity index change from 2.30 to 3.35 which means the population is not as happy as before. The gross domestic product changed from $42 billion to a lower aggregate level of $41.46 billion. Four key concepts that were discussed in the simulation that I have discussed in the class readings and forum discussions are gross domestic product, multiplier effect, inflation and unemployment. The gross domestic product was seen as a measure of the country wealth and it’s movement were viewed in graphical form within the aggregate demand / supply curves. The multiplier effect of an economy is based on the marginal propensity to consume of the economy (Evaluating Fiscal Policy Alternatives, 2009). In the case of Erehron the multiplier effect of governmental spending impacted the economy more that changes in taxing policies. Inflation was key metric considered in the final two rounds. Inflation reduces the purchasing power of the population which lowers the standard of living of the people. The simulation taught me that by keeping unemployment rates low other problems within an economy can be monitor better because this variable low is very influential in keeping the population satisfied with the governmental economic policies. The concepts learned and discussed in this simulation have many applications in the work place. The corporate world must consider the fiscal policies of a nation in its business planning. A government that spends a lot on improving its education is a nation that is attractive to outside investors because businesses in the 21st century are in need of skilled laborers. The global economic system has shifted toward an economy driven by knowledge. Inflation affects business pricing policies. If the overall inflation increases by 20% a business must adjust their prices accordingly because if they keep the prices at the same level they would be losing money due to the loss of purchasing power. The simulation illustrated lots of realistic economic scenario that could be occurring in nations across the world. It was a fun and useful academic exercise. I thing I noticed that could be applied in this hypothetical country in the future to improve its economic framework is changing the composition of its agricultural buyers. The nation depended too on the agricultural economic trade with one nation. The high dependence on a single country caused Erehwon to enter into a recession from 2001-2003 due to external factors. The other country’s economy was doing badly and they stopped buying agricultural products from Erehwon. It is important to have a diversified clientele to prevent these things from happening. The knowledge I gained from this simulation will help me better understand current economic events. This is great because everyone in the US is keeping a close eye on economic news and the fiscal and monetary policies being implemented by Barack Obama. The new president probable won the election because he had a superior economic platform than his opponent. References Evaluating Fiscal Policy Alternatives Simulation (2009). University of Phoenix. Retrieved March 11, 2009 from https://ecampus.phoenix.edu/secure/aapd/vendors/tata/UBAMsims/economics1/economics1_fiscal_policy_alternatives_simulation.html Finfacts.com (2009). Global income per capita. Retrieved March 11, 2009 from http://www.finfacts.com/biz10/globalworldincomepercapita.htm Quickmba.com (2009). Gross Domestic Product. Retrieved March 12, 2009 from http://www.quickmba.com/econ/macro/gdp/ Read More