Principles of Economics
Principles of Economics
Lets first start with a question that although is trivial, but will help us understand the answer to this question, a little better. What is economic growth? Economic growth is the increase in the inflow of money within the economy. In other words, it is also the increase in the government’s holding of money. Now, there are a lot of ways an economy can be boosted in order to make the country more efficient. Some people mistake the growth and the stimulation of the economy as the increase in taxes. It is not incorrect to say that the increase in the government’s revenue is highly based on the increase in the tax rate through out the country.
This increase in the tax rate is not only on the products of the government-based organizations or factories, but even the private investors and the citizen-owned company’s products have to undergo the same tax rate. This increase in tax-rate, no doubt increases the government tax revenue, making them more capable of spending and investing more on the country’s infrastructure and to work on the areas that might boost the economy. But there is something very important that happens while they are at the point of increasing the tax rates.
They overlook the fact that the increase in the tax rate reduces the consumer investments. This reduction in the consumer investments decreases the demand of the products. By this I mean that their purchasing power is decreased, not directly, that is their salary is not decreased, but the prices are increased due to the increase in the tax rates. This reduction in the consumer demand then allows the economic growth to go in the negative direction. This is just one approach that most people have about the economy. Some people mistake the economic growth’s key factor to be consumption.
Well, they are highly incorrect. The economic growth of any country is not dependent upon how many products and goods have been consumed in the market. But, instead it is dependent on the production of those goods and services. It is the production that helps the economic growth. The manufacturing of the cars on the streets is not something made by nature and given to us to use. Instead it is the workings of both, the businesses and the individuals that is the production and then the consumption of the manufactured cars to make the transportation system of the country more efficient.
Hence, by this we can conclude that, the economic growth of a country is not the consumption, but the result of the production that increases the consumption of the goods in the economy, thereby increasing the demand of the products and hence, boosting the economy. This misperception that has been described above is what is wrong in the economy. The Bush administration focuses more on the consumption landing it in spending deficit of over $ 100 billion. Although this can be looked over from a different perspective, for example, we talk about an unemployed man who spends and buys his household necessities by using credit cards.
This does not allow the spending to increase, because the consumers are using their credit cards and not a liquid asset (money). The Bush administration as mentioned above focuses more on the consumption and not the spending, this in turn reduces the budget that is allocated for the production, if the government is interested more in how much is consumed in the market. Although this is the wrong approach, but is still being followed in the country. The production has been slowed and so has the consumption in the economy. Until and unless there is not enough production, there is no way that the consumption can increase. Sacks, 2001) Well, just like any other problem, there is a solution to this problem too. The government does not restrict the production directly by stopping the factories to produce more, instead, the raise in the taxes increases the prices of the raw materials, hence increases the prices of the raw materials, increases the prices of the goods. The then increased prices of the goods reduces the purchasing power of the consumers, thereby reducing consumption. The increase in taxes is one way of how the production is reduced.
The government needs to decrease the number of restrictions on the private / public owned organizations and liberate them. (Giplin, 1987) The private sectors not only have to go through these restrictions what to produce when, but they also have a lot of trade restrictions. For example, if a computer Software Company in a state in USA wants Indian programmers to help them out to design new software, they can not get them. The law restricts them to get people from abroad to help them out. The above mentioned are just few problems and misperceptions of the people of as to what really is economic growth.
Also mentioned above are the things that hinder economic growth. Now, we will be talking about how the economy can be boosted. Following are just few ways of what the government can do to stimulate the economy. We will then be discussing what the individuals can do as citizens to help in the growth of the economy. There are a lot of things that the government can do to make the economic growth faster. But in every idea that will be laid down, we have to keep in mind that this is not a perfect world and we can not expect everything to work out in reality, the way we want it to.
There is always a room for improvement. One of the options to boost the economy is to create more jobs. More people being employed would mean more production and more production allows the consumption to increase and ultimately the demand for consumer goods would also increase. The aggregate demand for goods when increased boosts the economy. It is an entire circle that goes clockwise that is boost the economy when there are more people hired and under stimulate it when there is a high unemployment rate in the country.
This option can also be looked from a different perspective. A high unemployment rate of the country would mean that there are more people fired from work. This means that the people who are employed will only be the ones with good salary. This in turn means that they will be the only ones in the economy who can buy goods because their purchasing power is not affected. Now, because not a lot of people are employed, the rate at which the products were being consumed before the raise in the rate of unemployment would fall.
This decrease in the rate of consumption allows the companies fire more workers in order to increase their revenues, that is, if the consumption is low, their revenues will be low and they would have to fire more people so that they do not end up in losses. Hence, the unemployment rate would be even higher. (Giplin, 1987) Hence if the government starts to spend more on the various projects and infrastructure, that is focus more on the production and not just the spending, then this would definitely allow more people to be hired and thereby reducing the rate of unemployment.
These artificially produced jobs do not directly increase the consumption of the goods but increase the level of employment in the country, increases the purchasing power of the employees and make them more efficient to buy various goods and services. There is one more thing that can be done to boost the economy of the country. That is through reduction in the tax rates. This reduction in the taxes allows the increase of the purchasing power of the individuals allowing them to buy more.
This increase in the consumption of the goods then helps the aggregate demand curve shift to the right that is increasing the demand of the goods and services. Let’s take an example. If the tax charges for a particular product is 80 cents and before the increase in the tax rate was 50 cents, then I am more likely to buy more of that product when the tax rate was 50 cents. This increase in the consumption would then increase the demand. Hence, boost the economy. The tax revenue which adds to the revenues of the government might not be really high if the tax rates are high, as much as if it were low.
By this I mean that, when the tax rates are high, people tend to buy less of the products. This increase in the tax rate although allows a high revenue for the government, but that is the narrow outlook of this perspective. Because, if the taxes are high, the purchasing power of the people decreases and instead of maybe 5 pieces of the same product that they used to buy with lesser tax rate, they may now buy just one piece of the same product. Hence the increase in taxes might not increase the revenue as much as the decrease in the taxes would. (Sacks, 2001)
While the economists are dealing with the country’s economy, as in how is the economy to be improved, there are a lot of things that they have to consider. It is not just the tax rate or just the employment rate that is to be considered. Hence, it is important to know the problem, the solution to the problem and the most important thing is the timing. When the decision that has been made is implemented is very important. Hence, by the time the decision has been made and the economists are ready to implement the new policy, the economic conditions by then would have changed dramatically.
It is good to leave the economy the way it is, at times. Before we make matters even worse, we should take a break, leave the economic activities of the country alone for a while and let them be just the way they are. There is a growing inflation in the economy, and not a lot is being done to decrease the rate of inflation. The upper class people are not the ones that suffer and undergo spending money from mortgage. It is the middle class and the lower class people who have to go through all the agony to have means to earn more in order to cover up the loans they have been borrowing.
Now, in this very scenario, there are two things that are to be considered. One is the interest rate and the other is the inflow of money in the wrong hands. (Richards, 2007) The inflow of money in the wrong hands means that, the rich keep on getting richer, and the poor get poorer. The rich already have jobs which allow them to own multi million dollar buildings, private jets, an 1890 model cars and a lot more. And with their current employment, they do not spend that money, it goes in their bank accounts not in their pockets to spend.
The government should be more careful in where their money goes. Because if the upper class gets it, it is highly certain that they will not be spending it, rather saving it. This entire problem of not spending will decrease the consumption of goods that are being produced. Where as, if the money that goes in the hands of the middle and the lower class people will be spent as soon as they get it. This is because they are the ones who are suffering from the increase in inflation. They are the ones who are not able to pay the bills, their children’s school fee, transportation expenses etc.
Hence money in their hands would be spent pretty quickly. (Cohn, 2007) Every time the economy slows down the middle class and the lower class people are the ones that are affected by it. The reduction in the economic growth of the country is usually followed by a rise in the unemployment rate. The middle class workers are the ones that are fired first and they are rehired after everyone else has been hired. And they are the ones that mostly undergo all the problems faced by people in the time of poverty. (Levine, 1982) The second problem is of the interest rates.
The government has to lower the interest rates so that the individuals are more capable of investing and consuming more. With higher interest rates in the market the people can not invest in the infrastructure, the increase in the interest rates contributes to the increase in the prices of the infrastructure that is for sale. The decrease in the investment by the individuals would in turn reduce the demand for the available land and the buildings etc. (Richards, 2007) Apart from all this, it is highly important for the government to reduce the costs of housing in the country.
If the costs are reduced, they will be better off and will be able to afford things that they could not earlier. Not only this, but the government should spend more on infrastructure and build more houses. This would create more jobs and would allow people to buy more affordable houses. Earlier, we discussed the rising rate of inflation and how it affects the lower and the middle class workers. There is one more thing that the government needs to work on considering the ever-growing inflation rate of the country.
The minimum wage rate of the people through out the country should be increased. This was the plan of the Bush administration before the attack of the September 9, 2000. It was to be implemented, but then the attack on the world trade centre took place and the economic growth was decreased dramatically. Hence, the increase in the minimum wage rate never took place. This increase in the wages will ultimately allow people to buy more by having their purchasing power increased. (Levine, 1982) One of the key factors that help stimulate the economy is a highly educated workforce.
This workforce will help boost the economy in several ways. The wages of the people will be higher once they are highly educated and this will in turn help the economy to stimulate itself. Apart from this, the government should invest more in the capital in the country. This will allow the government to employ more workers and will ultimately increase the demand for various consumer goods, thereby stimulating the economy. It is very important for a country to have a proper and a strong infrastructure; this certainly helps the government to boost the economy.
This strong infrastructure can not be obtained in a day’s work; it takes a lot of years to reach a position where the economy is strong enough to withstand the problems that the government faces during recession if there is any in the future. The individuals can and will do what ever they can in order to make their country better off but the country is nothing without proper law enforcement forces that will make sure that they are on the right track. Not only that, but the government will have to make sure that the promised contracts by the individuals are being materialized.
The government should offer people different saving accounts which will push the people to save more. This will help them learn the importance of saving. A lot of people in the country are known for living large. This term is used for them only because they spend their salaries as soon as they get them. Now, this expenditure of their salaries that they do as soon as it enters their bank accounts is not a think that they should be proud of. But if the government advertise their saving accounts more then there is a high possibility that the people will save and put their money in those bank accounts.
The reason this is emphasized is that if the people are unemployed, they would not have to borrow a lot and then be in debt for years, with the debt’s interest increasing every year. Well, first of all the government will be sure of the fact that not a lot of money will be on loaned if there is a high unemployment rate, and even if it is, they will be sure that the money is returned, because not a lot of it would have been borrowed in the first place. The people will take out money first from their saving’s account.
With an appropriate interest return rate of the saving’s accounts it will be even easier for the people to save a little every month without second guessing themselves that the money they are investing will not be in vain, and will help them in the future. It is very important for the government to allow an open market economy. This open market economy would then allow trade of goods and services from around the globe without any hindrances. Likewise it would not only boost the morale of the employees to work harder to produce more goods and services but also provide them with higher wages.
This higher wage will be a result of the increase in trade which indirectly means increase in consumption of the goods and services. This increase in consumption will allow the aggregate demand curve to shift to the right that is, the demand for the consumer goods will increase. (Sacks, 2001) There is one more thing which is very important for a country to boost its economy, to make the most of what it has and to be efficient. Timing is the most important factor of all. To produce the right amount of goods at the appropriate time is highly essential.
This efficiency can be obtained with the increase in the technological advancements taking place in the country. The technological advancements of the country would not only make the production of goods time-efficient, but the production of the goods itself will be cost effective. The term cost effective means that the products are produced with the minimum cost of the raw materials, allowing a high profit margin. This high profit margin helps various organizations to produce more, hence hire more workers, and pays them more if the sales are high. All this plays a huge role in boosting the economy. (Giplin, 1987)
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 8 November 2016
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