MACRO AND MICRO ECONOMICS - Research Paper Example

? MACRO AND MICRO ECONOMICS By: Presented (Due Command/ Centrally-planned Economy Introduction A command economy one in which the coordination of economic activities (supply and price) are controlled through administrative means rather than market mechanisms. The economic agents particularly the production organizations operate as directed by the governments in place; the government decides which goods are produced the amount, as well as distribution. Advantages of Command Economy 1. Facilitates the realization of an economy’s long term goals and objectives hence rapid development Central to the command economy is “a central planning authority” (Fernando 2011, p.115). In this kind of economy, the state establishes development goals and targets, which the planning authority plans, executes, supervises, and evaluates. The authority establishes targets and administers control aimed at realization of the overall development and economic growth objectives. The objectives usually include stability of prices, faster economic growth, and reduction of inequalities of income to avoid market failure. 2. Reduction of income and wealth inequality Command economy ensures equitable wealth distribution, which cushions any market failure in the economy. The health and education standards are also relatively higher in a command economy (“Guiding development” n.d.). For instance, in 1980s China and India had similar per capita incomes but China had higher primary education levels and life expectancy (“Guiding development” n.d.). Disadvantages of Command Economy 1). Misplaced Incentives- The producer’s and investors are discouraged since their efforts do not pay off well as they should. In planned economy, the state often rewards the hardworking people only with fame and honors rather than the kind of incentives any investor looks for which is profits. The planned economy focuses on equitable wealth distribution which and therefore the workers and producers are less motivated to put efforts in what they do. 2). Failure of co-ordination- Planned economies try to co-ordinate the entire economic decisions regarding production, investments, consumption, and trade made by producers and consumers. The efficiency of such regulations lacks particularly where mismatch occurs between the supply of products and the demand by consumers. Bottlenecks in production lead to a shortage of some goods. This happens since planners may not necessarily know most essential needs to consumers at every point in time. A good example of the failure in co-ordination is what happened to Soviet Union in the late 1980s- there was a shortage in food storage and transportation while the supply of TV sets was ample (Lipsey & Chrystal 2007, p.3). 3). Slow decision making and wastes of resources- Command economy often needs many planners to run the control system which leads to slow decision making. This single control authority is charged with decisions about allocation of production means among different sectors, branches, and uses as well as the distribution of all goods. Slow decision and action about perishable goods often results in wastes. 4). Less dynamic technology economy- Few incentives to innovate leads to limited innovations. Planned economies remain behind in most of their technology with the exception of military and rocket science. This was seen in Soviet Union, which was using the West’s 1930s technology in 1950s and in China which later borrowed the outdated technology from Soviet Union 5) Political repression- Governments in planned economy own the means of control and dictation of economic production and therefore civil liberties cannot be enjoyed. Conclusion The command economy has very many disadvantages and just a few advantages. Command economy is infamous and has been observed to be unstable in countries like the former Soviet Union and China where it was practiced. Trade between nations Introduction Trade between nations has the benefits for all participating countries. To some extent, all countries rely on its trade with other nations for survival and in most countries; it represents a significant share Gross Domestic Product (GDP). Trade between nations, commonly referred as international trade, is the exchange of goods, services, and capital across international borders.). International trade has been in existence throughout history; its economic, political, and social importance, however, has been on the rise in the recent centuries triggering debates of whether it should be restricted or not. Since the time of Adam Smith, economists have maintained that non-restricted trade between nations benefits those taking parts (Baron and Kemp 2004). Free trade has, however, not always been free of counter-arguments especially among non-economists (Bazerman, Baron, & Shonk 2001). Several arguments have been put forward in support for restricted trade. Arguments for restricting trade 1). Protecting infant industries- Some industries require sufficient learning curves before they can attain efficient production. Efficiency of such industries increases rapidly in time they are in business. Unrestricted trade presents unfair competition to the infant industries when international “mature” companies are allowed unrestricted access to the industry. The infant industry lacks the opportunity to grow and be competitive. 2). Domestic Jobs arguments- Lower cost international competitors put domestic producers out of the market and consequently the employees of these industries lose their job. 3). the national security argument- Unrestricted trade may lead the country to depend on hostile bent countries for key goods and services. There is also a risk of foreign-based monopolies being established which may lead to “loss of power to implement national policies to protect the environment or the rights” (Baron and Kemp 2004, 566). This argument is valid, and a country should protect certain industries in the interest of national security. 4). The unfair competition argument -The proponents of restricted trade argue that some countries benefit more in the international trade resulting into exploitation of others. More specifically the developed nations benefit at the expense of the developing nations because countries cannot enjoy equitable production costs Counter arguments for not restricting trade 1). Economists argue that instead of against infant industries protection. The infant industries should be ready to absorb short-term losses presented by international competitors if the long-term benefits are substantial. Where infant companies are liquidity constrained such that they cannot weather the eminent short-term losses, government may provide liquidity through loans rather than restrict trade. 2). Whereas it is true that unrestricted trade may force domestic producers out of the market and hence loss of jobs, economists argue that creates much more jobs. Unrestricted trade turns some domestic producers into exporters, which increase employment. The increased income going to foreign investors who benefit from unrestricted trade is partly used to purchase domestic goods; this increases employment and adds to GDP. Whereas domestic jobs are lost, unrestricted trade is also coupled with a reduction in consumer goods prices. 3). Free trade enhances national security. The proponents of free trade argue that non-restricted trade yields optimal economic advantage, which translated into more military and economic power, as well as technological innovation. Economists argue whereas trade needs to be restricted in certain areas to ensure national security, the restriction should not be applied broadly to hinder benefits from other areas. 4). The unfair competition plays to avail low-priced imports which benefits the country’s consumer. Most often, the benefits to consumers far outweigh the losses to domestic producers. Conclusion Trade between countries generally benefits the countries participating in it. Restriction of trade may be desirable in certain parts of the economy; non-restricted trade has far more advantages to the economy of the country. We have identified that the typical arguments made for restricting trade are not convincing enough and can be countered with the arguments for non-restricted trade. Reference List “Guiding development” (n.d), Markets versus Controls, Viewed 4 December 2013, http://www.econ.brown.edu/fac/Louis_Putterman/courses/ec151/Chapter_05.pdf Baron, J, & Kemp, S (2004), Support for trade restrictions, attitudes, and understanding of comparative advantage, Journal of Economic Psychology, Vol. 25, 565–580. Bazerman, MH, Baron, J, & Shonk, K (2001). You can’t enlarge the pie: The psychology of ineffectiveGovernment, New York, Basic Books. FERNANDO, A. C. (2011), Business environment, New Delhi, Pearson. LIPSEY, RG, & CHRYSTAL, KA. (2007), Economics, Oxford, Oxford University Press. Read More