Markets and the Economy - Admission/Application Essay Example

? Markets and the Economy ID Number: of School Word Count 240 of Submission: August 18, 2011 Markets and the Economy Introduction The world financial market is in great turmoil today, as shown by the wild fluctuations in the major stock markets during the past few weeks. There is a lot happening today that can be confusing to some people and this paper tries to explain the reasons behind these major events. A few of these are the first-time ever credit downgrade of the United States of America, the crises in sovereign debts of some European nations and the worst-ever riots in London in recent history due to unemployed youths and economic disparities brought about by drastic budget cuts. These are just some of the events which may seem so far away but yet affect our lives in some ways. Discussion The following paragraphs take a close look at the connections between economic actions and the results it bring to ordinary citizens; these try to help explain the reasons behind them too. Federal Budget Deficits – the recession that started sometime in 2007 still has lingering effects on the economy even now. The current administration of President Barack Obama has the worst of it, much of the problems with the deficit and debt being merely inherited and yet it gets blamed for these continuing fiscal and financial problems. Many people see these twin problems for their negative effects on the nation's economy by depriving people of their employment that had also reduced consumer confidence to their lowest levels in recent memory. The deficit in the nation's budget is seen as purely a negative event, caused by profligacy and ill-advised policies. However, deficit spending can also help stabilize the economy and here's how that happens. Deficit spending by the Federal government is the money being spent that is over that of any expected revenues (a negative budget); this type of fiscal policy is designed to counteract all the negative effects of a shortfall in the aggregate economic demand. This is where government can do its part of stimulating the economy whenever the private sector fails the duties of leading the economy by increasing overall demand. The approach using deficit spending had been used to a marked effect before, during the Great Depression of the 1930s. When Big Business failed during those turbulent times, the government stepped in by providing a needed shot in the arm to the economy by undertaking massive public infrastructure projects. A failure of capitalism allows the government to take up the slack by its deficit spending. It is vital the Fed does not monetize these deficits; otherwise, it can lead to inflation because the tendency is to make the interest rates rise if deficits are large and persistent (Baumol & Blinder, 2011, p. 712). However, there must be a distinction between having a large budget deficit and having an intentional deficit spending policy. The first situation can lead to a deterioration in government's finances over the long term; while the second event (deficit spending) should only be temporary. Persistent budget deficits had led to the credit rating downgrade recently and has serious negative consequences. The country cannot just continually borrow money forever and keep spending the money it does not have. On the other hand, deficit spending is a temporary measure designed to revive the economy when it falls into a slump or recession. The New Deal economic programs of Franklin Delano Roosevelt were intended to achieve the three Rs, namely: relief for the millions of jobless people, revive the economy and reforms (political, social and financial). The financial stimulus package of Pres. Obama was designed almost the same way with the same objectives. Adjustments in Prices and Wages – market equilibrium (balance) is achieved whenever the demand and supply forces are equal to each other. The tendency is to maintain this balance unless external forces disrupt it. In classical economics, the state of equilibrium is achieved by a free market in which wages and prices help to equalize demand and supply. Any adjustments to the state of equilibrium can introduce distortions that will unbalance the short-term equilibrium; examples of adjustments are government interventions through a mandated wage hike or a union coercion to increase wages above the equilibrium wage (Tucker, 2010, p. 109). There is a close and sticky relationship between prices and wages; any increase in one will increase the other too. The pricing mechanism in a free-market capitalist economy will allow wages and prices to adjust to each other more or less automatically; from a short-run (temporary) equilibrium to a long-run (permanent) equilibrium. There is a co-movement of both prices and wages in which each reacts to increases in demand and eventually to aggregate price levels (Blanchard, 1989, p. 372). This is a self-adjusting and mutually-reinforcing process that takes the market to a higher equilibrium. Marketable Pollution Permits – this newly-devised scheme in fighting the environmental pollution is a market-based system designed to encourage polluting industries and firms to help in minimizing damage to the environment through the use of a pricing mechanism. This costing process is intended to make it expensive or costly to pollute the environment and entice the firms to use alternative or cleaner, renewable forms of energy. This is an alternative to the government regulations of environmental protection which do not work all the time; marketable permits work on the so-called “polluter pays principle” or PPP (Ascher, 2001, p. 203). This is actually a form of tax and considered a legitimate and less expensive way to reduce pollution. A firm that pays this tax will endeavor to reduce pollution by reducing the costs involved as long as the tax rates are set to a level that is commensurate to the pollution damage. However, this system can lead to a higher concentration of polluted areas because as long there is a market demand for the products that cause pollution, paying the tax is justified from a business point of view than a government-imposed or a command-and-control (centralized) system of controls. An example of a higher concentration of pollution will be in areas where mining is very viable. GDP as an Economic Measure – the gross domestic product is the quickest measure to an economist's assessment of how well an economy is doing. However, contemporary views support additional factors which are not factored into the present GDP as measured today. The economic factors alone do not properly reflect the overall well-being of a nation as suggested by its critics. Some factors that need to be included are political, social and environmental factors that affect a nation's well-being in terms of citizen contentment and happiness index. Some suggestions to be included in an ideal “Well-being Index” are life expectancy rates (health), leisure spending and a median income of an ordinary citizen (economic inequality). These three factors have the added advantage of being easily measurable while other equally relevant factors such as environmental depletion (damage or degradation) and desirability of spending (example is between investment spending or disaster-relief spending) are hard to measure accurately. Additional examples can be monies spent for crime prevention or pollution control which affect GDP (Sexton, 2010, p. 319). Conclusion A knowledge of economics can help an individual prepare for financial shocks that will substantially affect his standard of living or lifestyle. It is highly recommended that anybody try to understand even some of the basic principles in economics in order to lead a good life. Reference List Ascher, W. (2001). Guide to sustainable development and environmental policy. Durham, NC, USA: Duke University Press. Baumol, W. J. & Blinder, A. S. (2011). Economics: principles and policy. Mason, OH, USA: South-Western Cengage Learning. Blanchard, O. (1989). Lectures on macroeconomics. Hoboken, NJ, USA: Massachusetts Institute of Technology Press. Sexton, R. L. (2010). Exploring macroeconomics. Mason, OH, USA: South-Western Cengage Learning. Tucker, I. B. (2010). Economics for today. Mason, OH, USA: South-Western Cengage Learning. Read More