Economic Policy and Personal Decisions - Research Paper Example

 Explain how an increased federal budget deficit resulting from a recession can help stabilize an economy? Budget deficits are one way to determine the state of the economy of a given government. In some cases, it is possible for a given economy to have massive deficits yet the economy is doing well. In a sour state of the economy, most budgets tend to go from surplus to the deficit, and a case of the deficits becoming large is common. During an economic contraction, many workers lose their jobs, and a number of co budgets deficits arise that result in a reduction, in the corporate profits, as a result, the flow of income tax revenue to the federal government becomes less. Similarly, there is less corporate income tax revenue. The loss of jobs will cause the government to invest in programs such as unemployment insurance. The government spending does rise in an effort to provide for its citizens during tough times. The government spending rises due to the increased use of available programs and the formulation of new programs to help the citizens. According to Cashell, this increase in government spending and the additional spending that is due the additional programs created the economy then grows at a faster rate enabling a stable economy to be achieved (2005). This increase in government expenditure is usually during a time that the government has no matching rise in tax receipts. It is possible for the economy to rise by more than the initial increase in government spending. This form of government spending does have a multiplier effect (Cashell, 2005). Describe how adjustment in prices and the wages transform the economy from the short run equilibrium to the long run equilibrium? In the long run equilibrium, the economic growth is dependent on three factors the growth in labour force, amount of capital available to the work force, and the rate of technological advance. If we consider, an economy where the aggregate demand is due to an increase in spending, Cashell observes that this demand can be satisfied by either raising the prices or increasing real production. If the economy is operating at a full employment, and the stock is at a full capacity then an increase in demand is met by an increase in the prices of available goods and services. Cashell states that, for a fully employed economy, an increased government spending does yield an increase in the nominal GDP (2005). Let us consider wage. This forms a main element of cost in the economy of any country. A higher wage rate does translate into a higher cost this means a less profit will be incurred at any given price. A squeezed profit for any company means a cut back on production. A wage increase in any economy would mean a decrease in the quantity of goods and services supplied at a constant price. During a recession, the economy is at short run equilibrium. In such an environment, it is difficult for the wages to be increased; however, this can be counteracted by a fall in prices, and thus the recessional gap can be seen as shrinking. This led the economy to equilibrium at full employment. Cashell concludes that if wages and prices fall unusually slowly then it is possible for the economy to endure a prolonged period of production below potential GDP (2005). Explain why a system of Marketable pollution leads to less costly pollution abatement and a higher concentration of polluted areas than a command and control system. The use of the marketable pollution system is cost effective when compared to the command and control approach. The command and control approach demands that all drivers have a pollution permit and be able to track the amount of pollution he or she emitted. In addition to this condition, the command, and control system requires that lead be eliminated from gasoline and all vehicles have catalytic converters. These conditions all are in an effort to reduce air pollution from cars. However, it is in the use of marketable pollution permits is more cost effective than the command and control systems. This is because all cases of pollution are taken care of together, and the cost incurred for the general cases of pollution is less when compared to the individual cases of pollution. Another approach of handling all cases as one is that it does not require many inspectors to check on compliance. The command and control system has so far proven to be effective in reducing air pollution but too costly for the current economy. Clearly, identify three factors that should be included in GDP calculations explain, and show how they will help in improving the GDP as an element for analysing the economic state of a country? GDP is a measure of the value of goods and services available in a given country at a given time. In order to obtain the GDP of a country they consider the capital consumption, the income that goes to foreigners and they subtract the items that cause damage such as pollution. What remains from the addition and subtraction determines the well-being of the country. However, GDP does not represent the non-economic dimension of well-being, which includes the non-quantifiable elements, which also indicate the well-being of a country this include, good health, education, security, clean environment. These elements need to be an addition to the determinants of a country’s economic indicator. In order for the GDP, to be a reliable indicator of a country’s economy it should be used to calculate the income people in a country receive; however, we see that what the GDP produces is the income produced by a country. Reason for looking at the income that people receive is in order to have a reliable figure of the amount that goes to foreigners. Lastly, GDP does not include all forms of economic production. Addition of own account production such as the housing services own occupiers could provide a clear figure of the country’s. The impact of these services on the economy can be assumed; however, its significance the well-being of individuals cannot be limited hence it is a fundamental economic indicator. In order to improve the GDP as a measure of economic indicator, the economists should try to satisfy the principles of accounting. These means that a clear distinction between cost and benefits should be should be presented in the GDP calculations. The GDP of a country should consider the consumption view rather than the production view. It is in this view that other forms when in utilization will obtain the ideal economic indicator such as the Gross national happiness index, and the Human Development Index, among others. In conclusion, we can say that economic indicators form a base for a country to come up with economic policy and personal decisions. The GDP of a country is vital for coming up with monetary policies that aim at keeping the rate of inflation low; however, other indicators will help to enable economic policy makers to come up with reliable strategies that aim at improving the country’s economy. Economic indicators, therefore, make a useful tool for determining whether a country is faring well. Reference Cashell, B. W. (2005). The Economics of The Federal Budget Deficit. Congressional Budget Office , 1-15. Read More