The Impact of Regulation on Economic Growth in Developing Countries - Assignment Example

1. The consumption schedule helps to understand the amount of goods and services that the consumer is willing to consume from the market at different disposable income levels when keeping the other determinants like wealth, price level, indebtness, taxes and so the same. This will make the demand to change at different level of disposable income and the movement will be along the same demand curve instead of a shift in the demand curve which happens when other factors apart from the disposable income of the person changes. This is shown in the chart below Thus the consumption schedule of a household gets affected due to different factors which have been shown below (Consumption. 2012) Disposable Income: A change in the disposable income has an effect on the consumer purchasing power which thereby affects the consumption schedule. If the consumer has a negative sentiment and looks towards saving more of their income they will be left with little money to be spent on goods and services. This will thereby have an effect on the demand of goods and services as consumers will look towards consuming less of it. The reverse happens in case consumers look towards reducing their savings and increasing the amount of money to be spent on goods and services. The disposable income which the consumer has and is willing to spend on the goods and services thereby has an effect on the consumption schedule. Interest Rates: Interest rates have an influence on the purchasing power of the consumers as higher interest rates makes the consumer borrow little funds and look towards adjusting their expenditure from the income they have. This will have an effect on the purchasing power and will make the consumer purchase less of the product and will thereby have an effect on the consumption schedule as it will fall. Decrease in the interest rates makes the consumer borrow more funds and look towards increasing their expenditure on goods and services up and above their income. This will have an effect on the purchasing power and will make the consumer purchase more of the product and will thereby have an effect on the consumption schedule as it will rise (Garg, 2010). Consumer Confidence: The confidence level of consumers has a role in affecting the demand for goods and services. If the consumers perceive that the demand for goods and services will rise due to the fact that the economy is performing better and he will be able to receive sufficient income it results in a change in consumer confidence. This makes the consumer purchase more commodities and look towards ensuring that consumption schedule improves and more products are purchased at the same disposable income. If the consumers perceive that the demand for goods and services will fall due to the fact that the economy is in a recession which will affect his future income will subsquently have an effect on the demand for goods and services. This makes the consumer purchase less commodities which will reduce the consumption and affect the consumption schedule as less products will be purchased at the given disposable income. Wealth: Increase in the wealth of an individual makes the person save less of his income and spend more as wealth ensures that his bad times will be looked after. This has an effect on the consumption schedule as the demand for goods and services increases which is seen in the consumption schedule which shows more goods are purchased due to rise in disposable income. Decrease in the wealth of an individual makes the person save more of his income and spend less as he looks towards protecting his future. This has an effect on the consumption schedule as the demand for goods and services decreases which is seen in the consumption schedule which shows fewer goods are purchased due to fall in disposable income Taxes: Taxes have a role in determining the purchasing power of the consumer. Increase in taxes results in the disposable income in the hands of the consumers to fall which makes the consumer purchase less of the commodity as lesser income doesn’t permit the consumer to purchase the same commodity easily. Decrease in taxes results in the disposable income in the hands of the consumers to rise which makes the consumer purchase more of the commodity as higher income permits the consumer to purchase the same commodity easily Thus, there are different factors which have an effect on the consumption schedule of consumers and determine the purchasing power of the consumer. This thereby helps to determine the effect it will have on the consumption schedule and makes the demand curve to either move upwards or downward depending on the factors which have played there part. 2. Aggregate expenditure helps to understand the total amount of goods and services the household sector, the business sector and the government sector is willing to purchase at a given prices. The aggegrate demand models looks towards ensuring that all the different factors which can contribute towards the growth of the economy and the total demand is included (Colell, Winston, Michael & Jerry, 1995). This thereby looks towards ensuring that the measure helps in determining the GDP of an economy. The anticipated demand for the goods and services is determined on the market conditions and the confidence the consumer has in the market. Consumer confidence has a lot of role in determining the amount of goods and services that will be purchased from the market in the near future. A strong consumer confidence which shows positivity helps the market to gain the required momentum and ensures that the business is able to achieve the desired level of demand. The most important determinant here is the confidence the consumers have. If the consumers perceive and feel that in the future the demand for the goods and services is likely to fall the demand for the goods and services will fall. This is primarily due to the fact that consumers fear investing in the market and look towards postponing their consumption especially on luxurious goods. This affects the market as decrease in consumer confidence transforms into decrease in the consumer purchasing power which has an effect on the market as less goods and services are demanded which thereby makes the economic growth unachievable and reduces the expected growth level. This is clearly evident in case of the stock exchanges where a dent in consumer confidence has an effect on the purchasing power which makes the share market fall as consumer resort to selling and hoarding money (Jalilian, Kirkpatrick & Parker, 2003). This is true in the economic situation as well because the effect of consumer confidence is directly depicted in the market which has a bearing on the demand of goods and services. This might seem like a difficult proposition to believe but in reality the effect of consumer confidence has some effect but to a limited extend because of the fact that the consumer base in huge and the effect to take place a lot of consumer have to behave in a similar way. Since, human behavior is irrational this at some situations results to be threotically true whereas in other situations consumer confidence has an effect on the market but to a very limited extent. 3. Aggregate demand is the total amount of goods and services the household sector, the business sector and the government sector is willing to purchase at a given prices. The aggregate demand models looks towards ensuring that all the different factors which can contribute towards the growth of the economy and the total demand is included. Aggregate supply is the total amount of goods and services the that the suppliers are willing to sell in the market at the given price. The aggregate supply models looks towards ensuring that all the different factors which can contribute towards the growth of the economy and the total supply is included. This is shown in the graph below (Docters, Schefers, Korman & Durman, 2008) The above graph shows both the aggregate demand and aggregate supply curve which helps to determine the equilibrium level at which the demand and supply meets determining the equilibrium quantity and price. There are different factors which have an effect on the demand of goods and services and organizations have to look towards identifying those factors and ensure that they are used towards their benefit. Interest rate has an effect on the aggregate demand and aggregate supply as decrease in the interest rate has a positive effect on the overall business prospects. A decrease in the interest rate makes the financing to be cheaper which ensures that the household as well as the business sector is able to take loan at lower interest rates. This will thereby increase the demand for goods and services. It will also have a positive effect on the consumer confidence and the overall market will witness increase in sale of goods and services. This will thereby result in creating a positive effect as the overall perception will show positivity due to which the GDP will improve (Mayerhoefer, & Zuvekas, 2008). The overall developments due to reduction in the interest rate will make it possible for the business sector to produce the goods and services at a lower rate which will thereby ensure that the household sector is able to purchase more of the goods and services. This will lead towards an increase in the growth rate which will transform into better GDP predictions for the future (Shepherd, 2006). This effect will be transmitted to the other areas as increase in demand will result in the demand for goods and services to rise. This will result in the business producing more goods and services which would mean that the business will have to look towards employing more people. This will thereby lead towards an increase in employment rate and will help the economy to witness better employment and a decrease in unemployment. This will also have an effect on the general price level as decrease in the interest rate will ensure that the general price level increases gradually. This is primarily due to the fact that the flow of money or currency in the system increases due to a reduction in interest rates. This results in too much money chasing a few goods and creates a gap between the demand & supply. Suppliers as a result look to ensure that the demand is matched look towards increasing the general price level so that customers are provided with the same product at a slightly higher price. This results in the general price level to rise. Another reason which can be identified for such an act is that when consumers look towards saving little and spending more due to availability of easy finance at lower interest rates it results in fewer products being chased by a larger section of the society. This happens as certain section of the society who was previously unable to consume the same product look towards consuming those which thereby increases the demand for the product. To match the demand the suppliers look towards increasing the prices of the products and services. This thereby results in the creation of a situation where the general price level of the commodities slowly starts to rise and has an impact on the overall price level which is prevalent in the economy. The aggregate demand and supply model thereby shows the manner in which a reduction in interest rate has an effect on GDP, employment level and the general price level of goods and commodities in the economy. This thereby helps to highlight the different factors which have a role in determining the manner in which the economy will be able to perform based on it. References Consumption. 2012. Determinants of Consumption & Saving. Retrieved on October 13, 2012 from http://www.transtutors.com/homework-help/macro-economics/income-consumption-saving-relationship/consumption-saving-determinants/ Colell, M., Winston, A., Michael, D. & Jerry, R. 1995. Microeconomic Theory. 3r Edition, New York, Oxford University Press, Pearson Education Garg, S. 2010. Microeconomics: Introductory. 7th edition, Dhanpat Rai Publication Docters, R., Schefers, B., Korman, T. & Durman, C. 2008. The neglected demand curve: how to build one and benefit. Journal of Business Strategy, Volume 25, issue 5, pp. 19-25 Jalilian, H., Kirkpatrick, C. & Parker, D. 2003. Creating the Conditions for International Business Expansion: The Impact of Regulation on Economic Growth in Developing Countries – A Cross Country Analysis. Retrieved on October 13, 2012 from http://www.sed.manchester.ac.uk/idpm/research/publications/wp/depp/documents/depp_wp03.pdf Mayerhoefer, C. & Zuvekas, S. 2008. The shape of demand: what does it tell us about direct to consumer marketing. The B.E. Journal of Economic Analysis & Policy, Volume 18, Issue 2, pp. 4-8 Shepherd, G. 2006. Vertical & Horizontal Shifts in demand curve. The Econometric Society, Volume 4, No. 4, pp. 361-367 Read More