Using Microeconomic Policies to Benefit a Country - Case Study Example

Hassan Al-BinAli Using Microeconomic Policies to Benefit a Country Fall - Econ 202-002 Dr. Martin H. Sabo Introduction This paper seeks to analyse and discuss how a country can make use microeconomics concepts to benefit in connection with macroeconomic policies. In addition, this paper will also relate microeconomics with the world economy in terms of international trade and the benefits of the latter in relation with economic targets. In particular, this will discuss how macroeconomic policies may be used by a government to influence economic growth or development. 2.1 Microeconomics and its relationship with macroeconomics Microeconomics considers details of the economic units by focusing on the individual industry, firm of house rather than on the aggregates which pertain to macroeconomics (McConnell and Brue, pg. 10). Microeconomics is interested in measuring the prices of specific product, the number of workers and employed, and the expenditure and revenues of a specific firm. Macroeconomic would more interested on the stability of prices in the aggregate level as measured in terms in inflation and the level of employment that must be maintained to keep the economy functioning under sustainable national income or output as measured by gross domestic product (GDP) (McConnell and Brue, pg. 9). Since this paper will focus on how a government may make use of microeconomic policies to attain its economic target which can be measured only in terms of macroeconomic targets, it bears emphasizing the discussion and connection with macroeconomic concepts and ideas would be necessary part of this paper Microeconomics include the law of supply and demand in determining the behavior of decisions makers while each one maximizes of utility of something out of available choices using least opportunity cost as basis for makers. When viewed graphically therefore the demanders and suppliers of goods and services would be assumed to be meeting at an equilibrium point whether the price goods and services would represent a fair value where the buyer is not compelled to buy and seller is not compelled to sell. In other words, it is the market forces that will tell how much producers are going to produce and how much customers are going to buy. 2.2 How true that microeconomics has something to do with reasons of countries to go to international trade? Since economics presupposes making rational choices because of the concept or opportunity cost (Daly, pg. 239), essentially, there is basis to choose whether it is more beneficial to trade or not to trade with another country. While it is said that no man is an island the one cannot live apart from others, there are economic reasons that would explain the realities of international trade among nations. It could be difficult for a country produce all goods and services it may need without dealing or cooperation from other countries. The different countries in the world are not endowed with natural resources equally. While some nations may have good sources of agricultural products, some countries may not have a sufficient supply of the same. History has proven that man’s unending needs and wants were the economic reasons when countries needed to go to war. Countries from the west did have their discovery or conquest on the other parts of the world for raw materials (Spielvogel, pg. 375) of their inputs to production of goods and services. At present economic realities, the Middle East countries produce large part of oil for world consumption while the countries need to buy their other need from other countries like equipments, machineries, agricultural products and even manpower. So idea of trade has its roots on the concepts of opportunity costs where it would be beneficial to trade than not to trade. Countries trade with each other because of the concept of comparative advantage and specialization. Using the concept of Adams Smith as basis of the theory it would worth recalling to say that there is basis buy when it would cost more to make (Smith, pg. 264). If a foreign country can supply the United Kingdom with commodity which would be cheaper than the latter can make, then there is reason for UK to buy from said foreign country. This should also mean that simultaneously, UK should export to other countries extra outputs because of lower opportunity cost compared to other countries. In other words, the United Kingdom or any other country in the world would end up producing anything where it has comparative advantage. The need to specialize and trade for the same reason should govern the behavior of individuals at it meant to result to greater out and income. A doctor who is also a skilled carpenter can benefit to just hire a carpenter to make some fixture his house. It is assumed that the doctor expects to earn £50 dollars per hour and that the carpenter can expect to earn a lower amount at £25 an hour. Although the lawyer is a good carpenter, he would do best have specialization in work as doctor by hiring a carpenter, as he could be saving £25 per hour. The world economy would therefore benefits by importation and exportation with one another where each is doing with comparative advantage. One cannot talk of the economy without going back to things about demand and supply of good and services. The demanders are the households, individuals and entities and the suppliers are the firms. This interaction could result to economic activities that will the cause the continuous production of needs and wants as sustained by the continuing demand. From the macroeconomic model the economy of every country is then measured by GDP growth with the necessary components of consumption, investment, government spending and net export or the result of exports after deducting imports (McConnell and Brue, pg. 340). When a country therefore imports more than it exports, the same may result to trade deficit. It could mean consuming more than that what a country can produce in the eyes of the world. Since GDP includes net export as addition, the negative export would constitute a reduction of GDP. All other things held equal, there is basis to conclude or infer that making more imports the exports could actually reduce GDP growth. In business, one’s loss is another’s gain. There are losers and winners in every exchange. So what when a country imports more than its exports, the excess consumption may actually be helping the exporting country as it would be advantageous to the economic growth of the exporting country. This could explain the effects of consistently negative trade balance of US economy. See Appendix A. The benefits from international trade could also be appreciated in terms of appreciating the concept marginal benefit and marginal cost. This is the essence of comparative advantage or making choices because of lower opportunity costs of producing a good or service. The lower opportunity cost may be caused by uneven distribution of economic resources, differences in technology and due to differentiated products due to quality and other non-price attributes; specialization among countries does happen (McConnell and Brue, pg. 708). Countries just do need to concentrate where they do best. 2.3 How microeconomic policies can be used by a government to influence its growth or development? The benefits that a country could get from its economic policies including that from international trade could be better understood with how it designed said economic policies after translating theories from the law of supply and demand. Part of these policies is better seen in its macroeconomic policies which include desired level of GDP, interest rate, inflation rate, government spending and unemployment rate. Where a country wants to have increasing GDP, it would generally mean desiring a desired level of economic growth. This it must do by having low inflation rate low-unemployment. Too much growth in GDP could mean high inflation which is bad. Low unemployment is also a sign of low economic growth since if people do not have employment, low consumption power would follow. However government normally ensures accomplishment the same macroeconomic targets with the use of microeconomic policies. Using microeconomic policies would require going back to the law of supply and demand. Since efficiency is attained under the law of supply and demand, a country would benefit most by having the said market forces to be allowed to work in individual market of products and services. In terms of industries, it would mean allowing competition to set in so that not one or few of them are favored to operate at the expense of economy. Providing the groundwork for such operation of the market could include discouraging monopoly and encouraging perfect competition as much as possible. In setting microeconomic policies, the operations of firms, industries and markets must be managed by the government in order to influence aggregate supply levels as contrasted with the demand nature of government spending, targeted consumption and level of investment allowed in the economy. One must notice that the latter are the macroeconomic policies expressed in terms of economics target that would get their full realization by the help of microeconomic policies. A country may have set its GDP targets in terms of level of consumption and government spending but since it is allowing market forces to work for an investment level of targeted GDP, the same must assume the outputs are produced at the most efficient level. There is therefore need to raise productivity by the forces of competition. This would mean allowing players industry to freely enter and go into a certain industry depending on the decision-makers assessment of the level of profitability acceptable to them. That level of profitability is of course a function of cost of capital (Torok & Cordon, pg. 103) in doing business which a government can directly influence by having a lower interest rate and stable price levels in its macroeconomic policies. Under the law of supply and demand, what can allow the demand curve and supply curve to freely move would allow the equilibrium price that should attain allocative efficiency (McConnell and Brue, pg. 55). The government does play a role in making this allocative efficiency to happen. This would include for acts by the government to discourage the setting up of fixed price for some of the goods or services produced domestically. A floor price is set above the equilibrium price for some of the goods produced as reaction of a government to protect some of its industries (McConnell and Brue, pg. 54). The need protect industries may include the need to protect the employment of its citizens or some producers in certain industries. Thus, a government may do such floor price but the effects could really be disastrous to the economy. By so doing, the government would in effect be creating quantity supplied to exceed quantity demanded (McConnell and Brue, pg. 54). Such a persistent excess in the supply of the product will tolerate producers to make and offer for sale more than want buyers or customers will be willing to but at said floor price. This had therefore the effect of disruption the rationing ability of the free market. In its desire to protect some sectors that created the excess supply, the government may end up restricting supply such by instituting acreage allotments in of case farm produce, or it may research new uses for the product. The latter choice however will entail additional cost that could also increase inefficiency. The government may in effect be reducing the difference of the floor price and equilibrium price but this would only be artificial and would be going against one the great natural forces of supply and demand. Moreover, if the government cannot succeed with the previous choices, it may end up purchasing the excess output at floor price and this would mean subsiding farmers. The government may store the excess but if the following year would be again another surplus, it would just be wastage if it has no use for the extra output. This would therefore necessarily bring into the equation the need for allowing international trade into the picture. Going into international trade would mean seeing a countrys product in relation to other countries comparable capacity to produce the same at different prices. It a country believes it has comparative advantage then it should continue producing the product, otherwise it may be just wiser to import the same. If again the government would give in to pressure to protect certain industries, it may choose use tariffs as protection to discourage the importation of products but the same would have the same effect as that of setting the floor price and which would again result to loss of allocative efficiency or simply productivity. 3. Conclusion This paper has discussed microeconomics and its close relationship with microeconomics and international trade. This has justified the validity of microeconomic theories in justifying the basis for international trade. The reasons why countries would rather to choose trade than not was found to be in favour of the need to trade because of the concept of difference in opportunity costs brought by several factors in the economy. This paper has also demonstrated the use of microeconomic policies by a country in bringing to realities it economic targets which measured macro-economically. The benefit of the law of supply and demand which is basic theory in economics was clearly demonstrated in this paper. The market forces should be allowed to work would work better in terms serving the unending needs and wants of society in view of limited and scarce resources. Appendices Appendix A – Balance of Trade of the US (“Annual Growth of US last five years.”, 2011) Bibliography: “Balance of Trade of the US” (2011) Trading Economics. 16 November 2011 Daly, H. Ecological Economics and Sustainable Development, Selected Essays of Herman Daly. Edward Elgar Publishing. 2008, p. 239 McConnell and Brue. An Introduction to Economics and Economy. The McGraw-Hill, Companies, 2004, pp. 9-800 Smith, The Wealth of Nations, Digireads.com Publishing, 2009, p.264 Spielvogel. Western Civilization, Volume 2: A Brief History: Since 1500. Cengage Learning, 2007, p 375 Torok & Cordon, Operational profitability: systematic approaches for continuous improvement. John Wiley and Sons. 2002, p. 103 Read More