Markets and the Economy
Explain how an increased federal budget deficit resulting from a recession can actually help stabilize an economy
There is a relations between the economy and budget deficits. After a recession, an economy of a nation goes down, and at this time workers risk losing their jobs, the interest rates goes up making the people to shy away from lending from banks, therefore, investment and savings by the people goes down (Minsky, 2008). This means that the federal government receives less money paid through taxes, and at the same time, it spends more money. The inflow of money becomes slower than the outflow, thus the government is forced to go into deficits. All this leads to more deterioration of the economy because the production of such an economy goes down. It is at this time that the federal government chooses to increase more of its budget deficits in order to help its people through these tough times. This would only help the economy if the budget deficits assist the growth of the economy (Minsky, 2008). To improve the growth of the economy the increased deficits are injected in the productive sectors; these sectors include the agricultural and industrial sectors. This sectors leads to the growth of the economy, whereby more goods and services are produced and more employment opportunities created. When more of the goods and services are produced and employment level increases the GDP of the country, also, there is an increase in the taxes collected by the government. The increased budget deficits can also be used to influence the interest rates by reducing them, which increases the number of people interested in borrowing and investing (Minsky, 2008). The increased saving and investments increases the goods and services produced by the country, hence, leading to a growth of the economy. Therefore, it is the role of the government to make sure that the allocated funds are efficiently utilized.
Describe how adjustments in wages and prices take the economy from the short-run equilibrium to the long-run equilibrium.
To describe this lets take an example, where there is an increase in demand because of an in wealth of the consumers. The consumers and producers make decision considering certain assumptions on the price level. Assuming that the consumers and producers believe that the level of the remains at the same level, and the buyers buy more of the product than before because of their increased wealth; the short run equilibrium results in an increased level of price (O’Sullivan, 2010). In the short run, the costs of the resources used in the production of the product would not keep up with the high-level price of the product. The producer continues to produce more and sells; this increases the demand for the resources used in the production of the product. In the long run, the owners of the resources together with the workers realizes the increase in price level of goods and services and change their decision on the price to charge the producer on the resources, they chose to negotiate for high prices for their resources in order to cope with the inflation. This might take time because of the delays in realizing the new levels of price, and labor contracts expire. New adjustments are then made and the long-term equilibrium is attained; whereby, the producer produces the as before even though the levels of price are higher. In this case, the economy would remain sustainable and at full employment level and everything goes back to its original level (O’Sullivan, 2010).
Explain why a system of marketable pollution permits leads to less costly pollution abatement and a higher concentration of polluted areas than a command-and-control system.
Marketable permits system is a pollution control system, where the authority responsible determines the target level of environmental quality, which is defined by allowable level of emissions. The level of environmental quality is then translated to a number of allowable emissions, which are discharged then allot the rights of discharge to firms in form of permits (Kosmo, 1989). The permits are later distributed to firms with each permit carrying a specific dischargeable amount of pollution. The demand of these permits is derived using the discharger’s treatment marginal costs; this implies that the discharger treats the waste if the marginal cost of treatment is equal or less than the cost of buying a permit (Foster, 1989). These permits are transferable for monetary compensations. The marketable permits are considered cost effective; this is because the cost savings are greater if the discharger has several discharges. The discharger utilizes the economies of scale because the standards are not strict for the dischargers to remove 100% of their waste from the environment by treating it. The system is also cost effective in terms of time; the polluters have increased incentives, which they use to invest in emission-reducing technologies at the time of regional growth (Kosmo, 1989). In addition, when considering developing countries, where there is initial environmental quality standards that are fairly modest, opportunities for cost savings through trades are substantial.
Marketable permits also have a potential of higher concentration of polluted areas than a command-and-control system. This is because when the dischargers take advantage of the economies of scale and there is no strict measures on them to remove or treat 100 of their waste, the dischargers discharge the wastes without caring about the long term effects of the accumulation of the wastes (Kosmo, 1989). In areas with such a system and quite a number of dischargers suffers accumulations of pollutants that are considered less and in the long-run becomes more harmful to the environment. This system also has issues with defining the exact amount of emissions that is right as well as making adjustments on the value of the right considering when and where it is used. If these rights are not well defined and especially when defined in a way that it permits more pollution of the environment, it leads to concentration of discharge in certain areas (Foster, 1989).
GDP has been proven to be the most successful measure of the economic activity of a country. However, GDP is widely acknowledged as an indicator, which does not account for the well-being of the families, individuals and communities (Eisler, 2007). Additionally, the GDP does not include the economic activities that are outside the market such as taking care of the people in household; without care giving no work force would be available.
There are various factors, which suggest the well-being of a nation. These include poverty, which gives the percentage of people in a nation living under the poverty level. the rates of poverty of families as well as children are the common indicators, also the poverty rates of women especially in families of single women and elderly women and the poverty rates among the minorities are not included in the GDP (Dewan, 2008). When it comes to health indicators, all the health indicators are included except the access to contraception as well as abortion. There is also the issue of nutrition, which is not broken down on the basis of gender; women are the most affected by malnutrition. Education also gives an indication of a well-being of a nation; however, the different demographic groups are no independently compared to acknowledge the level of education in each group.
Employment is frequently used as an indicator of economic growth; this is usually measured through underemployment and unemployment rates as well as labor force participation. However, the existing measures of these rates underestimate the rates. In this case, the unpaid work is completely overlooked. When income and wealth is measured, the measure are done only on income groups. There is always a measure of inequality between males and females; however, the measure does not include the lifetime earning disparities given to women, when they drop out to care for the elderly and children (Eisler, 2007). The GDP also miss the social welfare mechanisms such as unemployment, pensions and disability benefits. The category of shelter as an indicator in the GDP measurement include rental costs and homeownership rate, but the rental costs as well as ownership rates incurred by women, especially those who are single heads of household are not indicated separately (Dewan, 2008). There is also the lack of an indication of the condition and size of informal rents such as slums; this is a great disadvantage because more than half the people in the world live in urban areas and majority of those in urban live in informal settlements (Eisler, 2007).
When it comes to the environmental issues, the environment is assessed using indicators such as effects on human health, environmental quality, and the status of ecosystems and natural resources. In this category, the GDP fails to include the readiness and capacity to respond to environmental disaster (Michaelson et al, 2009). There is another category of political participation, which includes legal and social rights, voting rights, and a fraction of the population willing and is permitted to participate in political activities. The GDP focus more on the women participation and leaves out the participation of immigrants, minorities and the disabled. This people have to be included because of their lack of political voice.
Following the above limitation, GDP is not a sure way of measuring the well-being of a nation. This dimension has to be explored more; special attention should be given to the unpaid labor, particularly the care work (Dewan, 2008). This is in terms of childcare. In the United States, the child care workers are paid and the estimates amounts to 1.7 million individuals, and those who are not paid are at least 2.4 million and when added to the unpaid parental care it adds up to approximately 17 million workers (Michaelson et al, 2009). The care work, which is both unpaid and paid, is a human capacity development that requires acknowledgement and measurement.
This investment is critical for economic effectiveness and well-being of a nation. This is particularly in the postindustrial era. These investment include a number of components, which range from investment in education for care giving such as child care education as well as pay for professions, which entail care giving in elementary and child care teaching (Eisler, 2007). The women status in human infrastructure is another investment. This is because women are the primary caregivers worldwide and studies shows that during the first years of life capacity development is critical and the status of women should be integrated in most categories.
The situation of next generation also requires assessment. Reports shows that there is a relationship between the status of women and the welfare of children, and since children are the future drivers of the society and economies much should be dedicated to children (Michaelson et al, 2009). This implies that a measure of welfare of women and children should be included in GDP measurement. A nation with an improved child mortality rate shows a raise in economic growth.
When assessing the national economic productivity and well-being, the well being and lives of the minorities should be included. This includes the ethnic populations, religious groups, gay, and bisexuals among others. Their well-being should be considered and measured, then compared to the welfare of the other dominant groups. This shows how the nation cares for the minorities well being (Michaelson et al, 2009).
In most of the categories used in measuring the nation’s well being, the dimensions are considered individually or independently. These categories should be considered in relation to each other because each contributes to the measure of the well-being. If these limitations are considered there would be a more clear picture of the condition of a nation.