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Political Economy - Essay Example

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In this essay,I am going to look at some of the major economic theories and their assumptions especially on the need and role of government action or involvement in the economy.This analysis is based on a review of the Australian car manufacturing industry.
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Political Economy
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INTRODUCTION: In this essay, I am going to look at some of the major economic theories and their assumptions especially on the need and role of government action or involvement in the economy. This analysis is based on a review of john Freebairn of the Australian car manufacturing industry.
Markets are generally a system of social arrangements that allow people to gain information regarding goods and services. In addition, markets provide a framework where people voluntarily exchange their goods and services for an agreed compensation.
ANALYSIS:
In analyzing the Australian manufacturing industry, Freebairn uses a combination of the Keynesian and the neoclassical theories to drive his point home. The Keynesian theory, which is based on the works of the British economist john Maynard Keynes, is an economic theory that advocates for a system of a mixed economy. According to Keynesianism, the state as well as the private sector has their own roles to play in order to hasten the process of economic development. According to Freebairn, the government has the duty of providing a stable macro economic environment as well as the provision of conducive fiscal and monetary policies. On the other hand, the private sector is charged with the duty of carrying out research and development in order to come up with less labor-intensive modes of production as well as the use of less carbon intensive processes. In so doing the government will compensate for what the private sector lacks in the production systems. In addition, since the government is well equipped to increase aggregate demand, especially at the macro level then the government through increased spending will indirectly increase the demand for industrial goods within the economy.
Freebairn also borrows a leaf from neoclassical economics, since he does concede to the fact that the car manufacturing industry will definitely have to be influenced by the global forces of demand and supply. On top of this Freebairn also observes that the industry's output as well as the distribution of income not only within the industry but also within the entire economy will have to be influenced by the forces of demand and supply. These assumptions are all some of the core assumptions of the neo classical theory of economics.
Concerning markets Freebairn assumes that markets are inherently competitive. In addition to this Freebairn also assumes that pursuing businesses in an area where an economy has comparative advantage will always end up profitable. In addition, Freebairn overlooks the role played by tariffs, quotas and other barriers to trade on determining the volume and extent of output in all sectors of production. The assumption that the incomes flowing from the mining sector, the increasing foreign investment, as well as the increasing global growth of economies will lead to an increase in the demand for Australian agricultural and tourism is not based on a conclusive survey. This is because as globalization takes it tolls more and states that are more industrial are emerging. These countries have huge populations that have provided industries with a skilled workforce that is very cheap as compared to Australia. This cheap labor compounded by high technological advancements will lead to the reduction of production costs. This will in turn lead to the production of highly competitive industrial and agricultural commodities that will compete with Australian goods.
Freebairn also assumes that consumers are always rational. In normal practice, consumers are not always rational. Thus, his assumption that the shift to the production of smaller and more fuel-efficient motor vehicles may be one way out cannot be an optimal solution. This is because if the Australian car manufacturing industry in Australia is targeting the global economy there is need to carry out a global market survey and come up with a detailed report on the different tastes from different market sectors.
Classical economics advocates for a system of free trade. Through free trade the role of government regulation in the forms of tariffs, quotas, the use of subsidies is prohibited. This is due to the fact that, as classical economists point out will lead to a form of indirect transfer payment since all these regulations lead to an increase in the domestic price of goods. Thus, classical economists would propose for the role of government action in the production processes especially in the field of trade to be minimized.
CONCLUSION:
Many economists consider the concept of comparative advantage as well as absolute advantage to be very principle in mainstream economics. What economists fail to realize is that a country can be comparatively and absolutely disadvantaged. On top of this, it is necessary to realize that, there are some industries that governments will inherently support from a political standpoint although the state is comparatively disadvantaged. This is because those industries provide some sense of security to the political regime.
REFERENCES:
John Freebairn 'Protectionism a short-sighted response to change' the Australian Financial Review: 20 July 2007.
Alan Coddington (2003) Keynesian Economics: The Search for First Principles:
Rout ledge, U.K.
Donald Rutherford (1996), Classical Economics: The Critical Reviews, 1802-1815:
Rout ledge, U.K.


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