Indonesia's Economy, Natural Rate of Employment, Ways to Stabilize the Economies - Assignment Example

Topic: Econs Question In economic analysis the current balance refers to the difference between total value of goods, transfers and services imported by a given country at given period and the total exports of goods, transfers and services (Arnold, 2008). The current account balance can be obtained using the mathematical formula below; CAB = X - M + NY + NCT (Krugman & Wells, 2008). Where CBA is the current account balance X – Represents exports M – Represents imports NY – Represents Net income from abroad NCT – Represents current transfers A budget balance occurs where there is either a deficit or a surplus. A deficit arises where government expenditure exceeds the revenue, while a surplus occurs where the budget revenue exceeds the government expenditure (Krugman & Wells, 2008). In this question will carry out a trend analysis of both the current account balance and the budget balance in United States of America, Australia and Indonesia, for a period starting 2007 to 2010. A table showing the both the current account balances over the four years. countries USA Australia Indonesia Years Current account balance Current account balance Current account balance 2007 -710,298,754,000 -58,031,516,121 10,492,590,000 2008 -677,140,573,000 -47,786,269,399 125,240,090 2009 -376,554,079,000 -43,890,735,442 10,628,489,686 2010 -470,902,198,000 -31,990,465,673 5,653,912,732 Source: TradingEconomics.com A Table to show the budget balance over the four years. countries USA Australia Indonesia years Budget balance Budget balance Budget balance 2007 -307,890,000,000 595,665,600,000 -4,321,050,000 2008 -757,741,000,000 787,874,900,000 -1,530,681,000 2009 -1,474,620,000,000 -914,601,600,000 -9,168,984,000 2010 -1,458,200,000,000 -1,617,496,600,000 -4,380,659,600 Charts to showcase the above trend Chart (1.0) Current account balance; Chart 1.1 showcasing the trend of the budget balance. From the above visual representation it can be observed that over the four years, Indonesia has had a surplus in its current account balances, this means that Indonesia is saving most of its resources than investing those resources. For the case of Australia and USA, both countries experienced a deficit in their current account, but Australia has gradually improved it current balance. This implies that, these countries are investing more than they are saving and thus, they are utilizing resources sourced from other economies in order to finance domestic consumption. Question 1b. Twin deficit refers to a situation a deficit in national budget leads to expanded deficit in the current account. Twin deficit proposition, argues that large budget deficit have negative impact on the national saving of the country, this in turn leads to souring the current account deficit. Although, some economist that this proposition is so weak in explaining this phenomenon (Hansen, 2003). A twin deficit exists in the case of the United States of America where the budget deficit has lead to expanding the current account deficit. This implies that United States acts as net debtor to other global economies. Therefore, the United States is investing extra resources to other world economies than saving and in return use resources from world economies to fund the domestic consumption. Question2. Indonesia has the largest economy in the south east of Asia, this economies is characterized by major development in the information technology sector thus having comparative advantage over countries in the region. Indonesia was worst hit by the recent global financial crisis that hit the world giant economies like the United States. Thus the Indonesia is put up measures so to try and shield its citizen from the financial crisis souring economic conditions in the country. The national government of Indonesia has embarked in various fiscal policy stances so to stabilize the economy. In the effort to stabilize the economy the government has decide to increase its expenditure, in this case the government has decided to offer subsidy to the citizen so as shield them from the souring commodities prices. Indonesia government will more spend in the current year in subsiding the fuel prices. This increases the recurrent expenditure of the country and may also acts stimulus to the economy. In applying the aggregate supply and aggregate demand, the action of the Indonesia government to increases its expenditure increases the aggregate demand (Auerbach, 2003). As shown in the figure below, equilibrium is achieved when the aggregate demand is equal to aggregate supply. Prices AD2 LRAS AD SRAS AD2 AS AD E1 E2 Income When the government increases its expenditure the aggregate demand curve shifts upward this gives rise to a new equilibrium national income, when the government of Indonesia increase its expenditure this triggers investment and increase the level of income in the economy. This also increases the demand of goods as consumers now have higher purchasing as compared to before, thus there is increase in prices due to increased demand this in turn triggers the level of investment to increase the level of investment, this increase the aggregate supply thus matching the aggregate supply with aggregate demand. In addition to these the government of Indonesia has embarks on encourage foreign direct invest which will also increase aggregate demand, since this fosters the level of investment in the country and also increase the capital inflows to the country. This is an indirect fiscal policy stance, which would also have the same impact on aggregated demand as illustrated above. Indonesia government is employing discretionary measure to move from recessionary gap it facing the economy. In respect to this government is reducing taxes on the various commodities. This an effort to reduce the rising rate of unemployment. If the market responds to this action the nominal prices will decrease in the long run. This would make the aggregate supply (short run) to shift outwards thus achieving the equilibrium output (Cahuc & Zylberberg, 2004). Question three a. The natural rate of employment refers to combination of frictional unemployment and structural unemployment. One of the main causes of natural rate is the employment benefits, workers will value the job according to the benefits they derive from undertaking such jobs. Thus if the proportion of benefits derived from engaging in paid employment is lofty then the members of the country has little or incentive to take the job. The second cause of this kind unemployment is immobility of labor. This economies are characterized by immobility of labor geographically and occupational, therefore in this economies there is mismatch of skills thus causing the unemployment rate to escalate. This kind of unemployment can be reduced through retraining the workers so as to enable occupational mobility. Also natural unemployment can be delineated through hysteresis hypothesis. In this cases when unemployment rises during the time of recession, financial crisis there is a tendency that the unemployment rate will at that level for a substantial period of time. This cause the workers to lose hope or ever getting a job that offers some security, thus de-motivating the workers on inspiring to get another job. Question three b. Trade unions are association of workers so that they welfare is considered. Trade unions will always fight for a wage increment, thus this will always increase the cost of productions on the side of the manufacture as the labor now becomes more expensive if the manufacture cannot be able to pass on the increased to the consumers inform of increased price. The manufacture will result in lowering the number of employees him or her hires this implies reduced output thus lowering the national output as by the graph below. This in turn decreases the aggregate supply thus increasing the level unemployment in the economy (Arnold, 2008). A graph showing the effect a wage rate increase Wage rate Ns W1 w0 Nd E1 E0 Employment In the diagram above if the trade unions advocate for higher wages this would in turn cause the wage rate will increase from W0 to W1. This leads to reduced level of employment from E0 to E1 thus increase unemployment in the economy. Question four. Ways to stabilize the economies. So as to stabilize the economy the government of the economies should aim at reducing the rate of unemployment through encouraging education since education and retraining leads to innovation which will in turns lead to advancement in the level of technology. The economies also need to use the proper tools stabilizing the economy to avoid the wrong diagnosis of the economy which leads to implementation of the wrong tool of correcting market imperfections. Thirdly the economies needs to attract foreign direct invest so as to increase the level investment in the country thus reducing the level of unemployment. This will also improve the balance of trade for the respective economies. Also for the economies to stabilize this economies they encourage consumption so as to increase the aggregate demand of the country and this will in turn increase the national output, and also induce the supply to increase the achieving high level of employment. In conclusion the economies need to have adequate regulatory authorities so as to monitor closely all the sectors of the economy and issued corresponding advice to the relevant parties. This would ensure that the situation where countries are faced by financial crisis without proper understanding of the crisis is eradicated. Works Cited Arnold, R. A. (2008). Economics. New York: Cengage Learning. Auerbach, A. J. (2003). Fiscal policy: lessons from economic research. Masssachusetts: MIT Press,. Cahuc, P., & Zylberberg, A. (2004). Labor economics. Massachusetts: MIT Press. Hansen, B. ( 2003). The Economic Theory of Fiscal Policy, Volume 3. Lodon: Routledge. Krugman, P., & Wells, R. (2008). Macroeconomics. Richmond: Worth Publishers. Indonesia Current account balance in percent of GDP. (n.d.). TradingEconomics.com - Economic Data for 196 Countries. Retrieved November 10, 2011, from http://www.tradingeconomics.com/indonesia/current-account-balance-in-percent-of-gdp- imf-data.html Read More