Economic Events Occur around Us Every Day - Assignment Example

Economic Events Occur Around Us Every Day Table of Contents Introduction 3 Discussions 4 Economic Problems Encountered by Countries 4 Causes of Economic Problems 4 Impact of Economic Downfall on Economy, Society and Political Stability 5 Government Policies to Solve the Above Problems 5 Demand Side and Supply Side Policies 5 Labor Market Policies 8 Comment on Effectiveness or Outcomes of the Different Policies Implemented By the Government 9 Conclusion 10 References 11 Introduction The article, “Uncertainty Is the Enemy of Recovery” by Bill Mcnabb emphasizes the uncertainty associated with the economic development of a country. The major issues such as the slow growth rate associated with Gross Domestic Product (GDP) and the sluggish investment decisions by major business organizations have been more prevalent in the recent times. The article entails the economic uncertainties related with regulatory policy, monetary policy, foreign policy and most important all the US fiscal policy (Mcnabb, 2013; Herrero, 1997). Accordingly, it can be ascertained that slow GDP growth rate of a country and sluggish investment decisions have accorded significant attention of many economists. Despite the availability of adequate monetary resources, many industries are unwilling to make significant investments due to the fear of recovery constantly imposed by prevailing economic uncertainties. The paper would be mainly divided into two parts, the first part would include headings consisting of “economic problems faced” which would mainly describe what are the problems, causes of the problem and what are their impacts on the society, politics and how could these issues be resolved. The second part would mainly be focused on “government policies” along with evaluating the current demand and supply side and the ways in which they can be brought into effectiveness. Correspondingly, this paper in the light of the selected article “Uncertainty Is the Enemy of Recovery” intends to identify the various economic problems encountered by the different countries particularly the US economy and further determines to ascertain the consequences of economic downturn and responses from government to resolve these problems effectively. Discussions Economic Problems Encountered by Countries According to the article, “Uncertainty Is the Enemy of Recovery” by Mcnabb, it is apparent that the problems of economic uncertainties have given rise to recovery related economic challenges to most of the countries encountered with economic downturn. The fluctuating GDP and the uncertainties in the various policies initiated by the government have largely affected the general public and big business organizations as well. Accordingly, many organizations in spite of ample financial resources are largely hesitating in increasing their level of services or creating new job opportunities. The spending on goods by the general public has also reduced significantly owing to the decrease in their disposable income (Leone, 2010). Causes of Economic Problems Lately, the ambiguity in the monetary strategy has plunged many nations with severe economic downfalls. Consequently, companies are constantly faced with the significant challenges for raising requisite credit for their operations. Such adverse effect has led these companies to ascertain extra consciousness towards their investment decisions. Additionally, these companies have been significantly involved in continuously reducing the cost associated with their production processes as well as it has led the companies to execute severe employee layoff activities in order to maintain adequate capital for their business operations. The implications of such events have contributed towards slow GDP growth rate accompanied by an increasing unemployment within the country. The increasing unemployment has further resulted in the reduction of disposable income held by them which has ultimately facilitated in the high mortgage rate. At the same time, industries relaying on jobs and tax revenue were burdened with increasing municipal taxes which have dramatically limited their expansion strategies. The unfavorable economic conditions have been accompanied with increasing liability for state and home government which has also contributed towards reducing employment rate. The augmenting unemployment and rising price of commodities along with reducing personal income have led towards rising dependencies on credit payment and have ultimately contributed towards increasing overall debt rate (UW Board of Regents, 2012; Boccia, 2013). Impact of Economic Downfall on Economy, Society and Political Stability The rigorous economic downturn encountered by different countries across the world has created the urgency for the government of these countries to formulate and implement strategies in order to deal with and resolve the problems associated with economic uncertainties (United Nations, 2008). In light of the US economy, it has been reported that economic problem is one of the most prominent challenges currently faced by the country. Accordingly, it was reported that the severity of economic problem in the US was 55% during the end of the year 2009 while it has currently increased to 57% (Jones, 2013). It can be firmly ascertained that the impact of economic downturn associated with US has not been limited to the country only; it has significantly impacted the other nations across the world as well. Contextually, the US Dollar is considered to be international reserve currency and any fluctuation in the value of US Dollar has a significant impact on the overall international trade and investment. Owing to the economic downfall witnessed by the US in the recent times, it has resulted in many multinational firms to curtail their investment on various projects. At the same time, the fall in the investment rate by these companies has dramatically influenced the employment potentiality leading towards lesser opportunity for generating employment in the country. During the first quarter of 2013, the GDP of the US has attained a growth rate of 2.5% against the estimated growth rate of 3.5%. The issue of the national debt, the increasing rate of economic uncertainty related with the US economy has resulted in slow growth rate of the overall GDP (OECD, n.d.). The decision taken by the US government to reduce the total funding by US$85 billion in 2013 has significantly affected the economic development of the country (Mcnabb, 2013). Government Policies to Solve the Above Problems Demand Side and Supply Side Policies Demand side policies are often applied to boost the aggregate demand for commodities. These policies are usually preferable in situations such as recession and during the period of unstable economic growth. Furthermore, government undertakes such policies to pace up the rate of the economic growth. The various policies and measures adopted by the government in order to effectively cope up with the economic challenges and mitigate the consequences arising from the unfavorable economic conditions are duly explained below: Monetary Policy Monetary policy is an important measure undertaken by various governments in order to control inflationary as well as deflationary situation. In order to boost the aggregate demand for certain commodities, the government decreases the interest rate and borrower’s interest rate in order to increase the level of disposable income held with the general public (ONB, n.d.). Quantitative Easing The policy of quantitative easing is applied in a particular situation when the lower interest rate fails to increase the level of aggregate demand. Concerning the policy of quantitative easing, the central bank of a country increases the supply of money and involves in buying bonds to keep interest rates low. The primary reason behind such activities is to boost investment within the economy (Mathai, 2012). Devaluation Policy The policy of devaluation helps in re-establishing competitiveness and boosting domestic demands. A fall in exchange rate makes exports cheaper and import expensive (University of Oxford, 2010). Fig1: Aggregate Demand Curve (University of Colorado Boulder, n.d.) Illustration: The above figure is an aggregate demand curve where the horizontal axis measures the “total economic output” or GDP, and the vertical axis represents the overall price level for the economy as a measure of price. The curve depicts the relation in between the price level and output. Supply side policies are said to be the substitute strategies that are crucial for improving the overall economic growth. The main focus is to increase productivity and efficiency of the economy. The different policies under supply side include: Lower Income Tax It is said that lower income tax can increase labor supply. It is often said that decreasing income tax may encourage people to work more. Thus, government often takes measures related with reducing the income taxes in order to boost the supply (OECD, n.d.). Flexible Labor Market High regulated labor market with excessive regulations discourages firms to provide employment opportunities to people. Therefore, the government often strives to promote flexibility in the labor market in order to boost investment for creating prospects for people to get employed (OECD, n.d.). Privatization Privatization is another measure commenced by the government in order to improve the poor performance of the public sector. In relation to this, government often enforces new Acts for private industries to provide job opportunities and perk up the overall economic progression of the country. Fig 2: Aggregate Supply Curve (University of Colorado Boulder, n.d.) Illustration: The above figure represents the aggregate supply curve. The horizontal axis depicts the sum of the output by the producers of all goods as well as services in an economy while vertical axis shows the price level at the given market condition It has the same measure as aggregate demand on the horizontal and vertical axis. The potential output or full employment is denoted as Yf. Labor Market Policies The different policies adopted by the government to reduce the rate of unemployment are: Passive Labor Market Policies Unemployment benefits comprise the bulk of passive labor market policies. Unemployment benefits are intended to provide income supports to people who are unemployed (International Labour Organization, 2013). The most common benefit is the unemployment insurance which is paid to workers who have certain experiences is any work field. The another important benefit is the unemployment assistance which involves payment made to workers who are near the age of retirement and are looking for new jobs (McGraw-Hill, Inc, 2013). The main aim of providing passive labor market policies is to offer a transitory form of financial benefits. Active Labor Market Policies The prime motive of active labor market policies is to increase the chances of employment for unemployed workers. It mainly emphasizes five vital categories, which are needed to uplift the skills needed to get employment, including training programs, job-search assistance, employment incentives, supported employment and direct job creation among others. Training programs mainly focus on vocational training for those employees who are at the pick of losing their jobs. Job search assistance creates opportunities for the unemployed to connect to different employers helping them to find a job. Employment incentives are temporary payments to facilitate the unemployed individuals into job (Nie & Struby, n.d.; Compston, 1997). Comment on Effectiveness or Outcomes of the Different Policies Implemented By the Government The implementation of the different policies has not only helped the country in recovering from the economical downfall through decreasing the interest rate but has also created opportunities for the public to spend on commodities rather than saving their incomes. The implementation of the demand side policies such as quantitative easing has given opportunities to people to make considerable investments. The policy of devaluation not only helps the country in exporting its goods creating high demand in other countries but also facilitates in restoring the economic development through the inflow of foreign currency. Regarding the implementation of supply side policies, it has helped the country in resolving many economic challenges. The implementation of policies such as lower income tax has created opportunities for people to work more, as they get to save a bit more than the prevailing amount. In addition, the elastic labor market has created chances for both organizations as well as public to work freely owing to the liberty enjoyed by the organizations from the elimination of many regulations. On the other hand, the implementation of privatization has not only given opportunities for people in the form of increasing employment but it has helped organizations to increase their productivity and contribute towards the economic development of the country. The implementation of labor market policies such as passive labor market policies has also resulted in decreasing the unemployment rate as well as it has provided better facilities to people in expanding their way of living their life. The execution of active labor policies has significantly benefitted the overall economy by creating opportunities for people to upgrade their skills resulting in greater performance which has directly contributed towards increasing the growth rate (The Financial Crisis Inquiry Commission, 2011). Conclusion The economic downfall encountered by a country not only affects the prosperity of the nation but often citizens of the country are also significantly affected as well. The decrease in the GDP and the economic uncertainties have radical impact on the business organizations resulting in a significant fall in the demand of commodities and increasing unemployment which ultimately lead towards the fall in the GDP growth rate. With reference to the above discussion, it can be concluded that the implementation of different policies such as demand side policies, supply side policies, labor market policies are extremely crucial for resolving many economic problems and for ensuring adequate economic development through positive GDP growth. References Boccia, R., 2013. How the United States’ High Debt Will Weaken the Economy and Hurt Americans. The Heritage Foundation. [Online] Available at: http://www.heritage.org/research/reports/2013/02/how-the-united-states-high-debt-will-weaken-the-economy-and-hurt-americans [Accessed June 25, 2013]. Compston, H., 1997. The New Politics of Unemployment: Radical Policy Initiatives in Western Europe. Routledge. Herrero, A. G., 1997. Monetary Impact of a Banking Crisis and the Conduct of Monetary Policy. International Monetary Fund. International Labour Organization, 2013. Skills for Improved Productivity, Employment Growth and Development. Report V. pp. 1-174. Jones, J. 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