Low Production and High Unemployment - Essay Example

Low Production and High Unemployment A country is said to be in an economic equilibrium if there exists no external forces causing disruption, the quantities demanded, and quantities supplied are equal. In the short run, economic equilibrium is achieved via price mechanism of demand and supply. Whereas excess supply lead to price cuts, excess demand lead to price going up to reduce the demand achieving an equilibrium point where demand is equal to supply. At this point, the aggregate demand for goods and services is equal to aggregate supply for goods and services.

A change in either the demand or the supply will cause a similar shift of the other. However, for an economy to experience sustained economic growth and equilibrium, it must step up its factors of production such as labour, capital, and land. Several economic indicators depict the state of an economy and the stage (Frenkel, Razin 29). The Growth Domestic Product (GDP) is a total market value of goods, and services produced and consumed, investments, minus government spending plus the exports minus the imports.

A GDP of a country depicts what is happening now in an economy. Rises in the GDP depicting a rise in the economy while a drop in the GDP depicting a recession. In this scenario, country A has a RGDP, which means that its GDP has fallen. Its economy has shrunk, by the amount of the GDP drop. A Second indicator of an economy is the rate of unemployment that describes an economy after it happens. An increase in the rate of unemployment depicts a lagging economy. A country is said to be in a long run economic equilibrium when no firm in the industry wants to leave or enter the market.

In this state, no existing firms make losses and those entering the market make losses. Every firm produces at the efficient cost of production and the maximum profit they can make is zero. This means that price is equivalent to average cost of production (Osborne Web). Country A is not in a long run inflationary period but it is in recessionary period. The figure below shows an economy in equilibrium, which is not making profits or losses. Where y is the efficient scale of production, p is the minimum average cost.

In a recessionary period, a country has a deficit in its budgets. This is because there is a negative inflation rate that causes a great decline in the prices. In country A, high levels of unemployment depict a recession. Country A is not in an equilibrium state, meaning that it has to undertake some fiscal and monetary policies to take it to this level. A fiscal policy is a tool used by the branches of government via either spending or taxes to attain a desired change. It is an act done with a conscious mind and geared towards effectiveness and efficiency.

For country A that is in a recessionary period, imposing taxes will make the situation worse. Therefore, first, country A will have to increase government spending in the areas it deems fit. This king of fiscal policy is called expansionary that increases the government spending and decreases the taxes. This will increase the government budget deficit to increase and lead the country to a long-run equilibrium. According to Keynes, a government can achieve a real GDP every year through market mechanisms where it influences prices and wages, which they assume to be flexible.

They believed that in a recessional economy one should not wait for the prices to go down but instead an expansionary fiscal policy can be used. The government should ensure that its spending is higher than the current tax receipts. This way the level of unemployment will fall as the unemployed persons get to work in the government projects increasing their purchasing power. Secondly, the government can engage in purchasing of bonds to release more fund to the corporate and to individuals. As people gain purchasing power, they will invest in various categories of businesses or even purchase goods increasing demand.

Price levels will go up, employment levels going up and eventually raise the RGDP. Thirdly, to achieve a long run equilibrium country A need to engage in foreign investment, which are less affected by the economic changes of the investing country. Diversification of portfolio helps a country to reduce losses during recession. This will save a country from future recession and negative RGDP. Fourthly, the government can remove taxes on consumables and other products to increase the amount of money in supply.

Different investors can use the savings on taxes to increase the capital of their businesses. This will reduce unemployment as different individuals increase their businesses. Reduced taxes will also reduce the price levels increasing the purchasing power of money. Fifth, the government of country A can engage in training its citizens on ways of investing in liquid investments, which they can sell quickly on loss of jobs or in periods of recession. Stocks of companies that deal with assorted consumer goods pay dividends since during recession most individuals avoid luxury items and concentrate on the basics.

Individuals with stocks that pay dividends will not be greatly hit by unemployment during times of recession and will not be a burden to the government to feed. The policy makers should consider the following advantages and disadvantages associated with them. First, excessive government spending will increase the demand of products against the supply and lead to inflated prices. This will affect the RGDP negatively and worsen the recession. On the other hand, a regulated government spending will lead to a larger government sector, stimulate aggregate production, boost income, and reduce unemployment levels.

Secondly, although a reduction in taxes will increase the disposable income, which if used for expenditure will stimulate aggregate production and increase employment the government should not reduce the taxes to an extent that it cannot cater for its budget. Thirdly, policy makers should ensure that transfer payments do not exceed what the government can handle. This will go to increase spending and influence aggregate production and employment positively. Works Cited Auer Bach, Allan “Fiscal policies, Lessons from Economic Research” 1997.

USA: Massachusetts Institute of technology. Print. Frenkel, Jacob & Razin, Assaf. “Fiscal policies and Demand in the World economy” 2002. USA: Massachusetts Institute of technology. Print. Osborne, Martin. “Long run competitive equilibrium in an economy with production.” Economics Utoronto 1997, Web 1 May 2012