Government and the Economy - Case Study Example

Economics Name: Course Instructor’s name Institution Date A) Need for government involvement in market economies In any economy, the government plays a crucial role concerning the consensus in the economic literature, should it fail in performing the following functions, many negative consequences may be encountered. These functions include: Providing the economy with a legal structure or system: The government should ensure private property rights, provide enforcement of contracts, act as a referee and impose penalties for externalities. It should also facilitate the economy with regulation, legislations, and ways of quality determination and moreover define rights of ownership. Such a move not only positively impact on the current investors but also on the potential investors. Nevertheless, the government involvement may help protect the consumers for high prices or sub-standard goods. Maintaining competition: The government should make anti-monopoly laws that fight monopoly power and non-competitive behavior In order to encourage competition which is a motivator to producers and resource suppliers to respond to price changes and consumer requirement. Although monopoly may be due to the high risk involved or the high starting capital, basic needs should not be left in the hands of monopoly power. Nevertheless, it is worth noting that although it is important to enhance competition, there is also the need to protect the domestic industries from unfair competition. An example is dumping where foreign companies or countries enjoying favorable factors of production dump sub-standard goods to countries with inferior economies. It is important to note that the foreign countries exports a big proportion of the profit earned to their mother countries. It is in this reason that the government need to weigh the impact of implementing its policies regarding monopoly competition and the domestic industries. Redistribution of income: The government should tax those with larger income and provide relief to the needy, dependent, handicapped and the unemployed; this is achieved through welfare, social programs and social security. In addition to that, support initiatives like low-interest loans to students based on their family income. Such a move help raise the per capita income thus increasing the purchasing power of the consumers. That notwithstanding, income redistribution avails more capital to both the current and potential investors, such income may be used to expand the business ventures. Provision of public goods: It is the government responsibility to provide products and services like health services and security that are not provided by the private businesses or individuals. In an instance where the distribution of such goods or services is left in the hands of private investors, both the country and the consumers can be exposed to great risks. The consumers may be subjected to high prices while the security or sovereignty of the country may be put at a balance. Promoting economic growth and stability: By correcting market failures like unemployment and inflation, while increasing the GDP through changes in its fiscal and monetary policies, the government will be at a position of improving its economic growth and stability. Economic growth creates more job opportunities thus raising the per capita income. Secondly, economic stability attracts more investors both domestic and foreign investors. Political instability is classified as one of the major contributor to economic stagnation. Improving both the political and economic environment may help improve the economic stability. B) Trends in the United Kingdom economic growth, inflation and unemployment over the past ten years This chart plots the Current Annual Inflation Rate starting in January 2000.in the long run, the trend is falling as realized since in October 2001 the peak was 6.09% while the Oil Peak in July 2013 was 5.6%only..and later we realize inflation peaked to 14.76% in march 1998. Over the past years food increased 3.2%while energy fell on an unadjusted basis .the biggest gainers were not motor vehicle insurance at5.0.% and hospital at 4.3%.the cpi index was lower in December than in November implying lower prices and when analyzed in September prices were still lower than in July. Deflation which is signified by the prices being lower than the previous month but still higher than a year ago which is a rare occurrence in a single year, this year prices began falling during the summer indicating growing deflation forces due to fed tapering. In the labor market as unemployment falls skilled labor shortages may be encountered hence putting pressure on wages and prices to rise ,however other factor markets like cost push increasing demand for copper,processed and manufactured foods and oil can also cause inflation. Employment rate From the diagram the real level of unemployment has risen sharply due to the recession. Actual unemployment is now well above the presumed theory, and this is one of the reasons for low wage inflation rate despite its persistence above 3%. Jobless rate remained steady in the united kingdom at 5.7%in the three months to January of 2015 from the previous this was the lowest since the mid of .2008 at this time the employment reached a record high but paid the low. Unemployment decreased by a margin of 102000 on October compared to august that year since 1.86 million people were unemployed in august. At this time 30 million people were in work ,an increment of 143000 more than for august to October 2014and 617000 more than in 2013.those who were working full time were 481000 as 8.3 million people worked part time. The rate of employment was 73.3% which was the highest since comparable records begun in 1971yet there were 9.03 million people aged from 16-64 who were out of work and not seeking work. The condition was 22.2%partially changed compared to august to October 2014 and with a year earlier. in comparison of the three months ending January 2015, with year earlier the pay for employees increased by 1.8% including bonuses and 1.6%excluding bonuses Trends in the United Kingdom economic growth       Diagram showing trends in the United kingdoms’ economic growth.    Actual Previous Highest Lowest Dates Unit Frequency 0.50 0.70 5.00 -2.70 1955 - 2014 percent Quarterly In the case of any other developed nations united kingdom is the world’s sixth largest economy since it accounts for 75% of the total GDP .distribution, transport hotels and restaurants are some of the key segments in the economic account of the united kingdom by accounting to 18% of the total GDP; government, health and education (20%); professional and support (11%) insurance and finance (9%) and real estate’s (9%) . The United Kingdom had a positive increment of 0.5% in the last three months which is a reduction from 0.7%rise in the previous period. Due to 1.4% fall in business investment gross capital formation reduced to 1.2%following a 4.6% increase in the previous year. C) Objectives of monetary policy and the mechanism through which it operates to control inflation Monetary policy is the credit control measures adopted by a country’s central bank to control the supply of money as a way of achieving the objectives of general economic policy. In instance where there is a lot of money in the money supply, the central bank will introduce new measures to reduce the money in supply. An example of such measures is the Open Market Operations (OMO). OMO is a market operation where the government sells it shares in attempt to reduce the money in supply. The goals of this monetary policy include; Rapid Economic Growth: Through the control of interest rate and its impact on investment, the investment level of an economy is encouraged hence speeding up rapid economic growth since per capita income increases. However, this is possible if the monetary policy is efficient in maintaining price and income stability. Price Stability: Fluctuations in prices bring instability and uncertainty to any economy, which results in price instability due to inflation and deflation. For this reason, it is the monetary policy’s task to try and keep the money value stable hence reducing income and wealth inequalities. When combined with the exchange rate stability, price stability greatly influences the balance of payments-how a country’s imports fairs with its exports. Exchange Rate Stability: Exchange rate is referred to as the expression of home currency price to any foreign currency. In an instance where the exchange rate of a country is very volatile, the international community may lose confidence in such an economy. It is in this reason that the monetary policy aims at maintaining the relative exchange rate stability. In addition to that, unstable exchange rate may affect the economy negatively in term of foreign debt settlement. Balance of Payments Equilibrium: Developing countries experience disequilibrium of payment, for a country to maintain equilibrium in its (BOP) it needs its monetary policy, maintaining the monetary policy where BOP surplus does not exceed BOP deficit, then the balance is achieved. In short, the value of the export should be more than the value of the import. The reverse implies that the economy being an importer is exporting a large pool of currency to the exporter. Generally, a country that exports finished products enjoys favorable balance of payments Equilibrium as opposed to an economy that largely relies on exporting raw materials. However, the balance of payment Equilibrium is also greatly affected by the foreign exchange rate. Different rates will favor importers and vice versa. Full Employment: Absence of involuntary unemployment where anyone who wants a job gets one, having in mind that it is not absolute nor employment, monetary policy can be used in achieving full employment. However, in case it is expansion then application of credit supply can be used to assist in creating more jobs in different economic sectors. Nevertheless, the aspect of full employment can also be viewed on the education curriculum perspective. As the government introduces more relevant curriculums, the goal to achieving full employment is realized. Neutrality of Money: Since the money is perceived as a passive factor by most economists, it should only play a role of medium of exchange. The monetary policy is to regulate the money supply and neutralize the effect of money expansion. Equal Income Distribution: Of recent, economists have given an opinion that economic equality can be attained through a supplementary role played by the monetary policy since it can make special provisions for the neglect supply like agriculture and provide longer term cheaper credit as a result enabling these sectors to come up thus reducing economic inequalities among different society sections. In short, empowering the less privileged in the economy helps narrow the gap between the rich and the poor in the society. Mechanism through which monetary policy operates to control inflation A transmission mechanism is a chain of cause and effect that runs through a bank’s actions to asset price changes, demand aggregate, gap output and finally inflation. For example, Canada's’ two percent of consumer price inflation has been controlled by the policy of overnight interest rate policy which is the rate at which major financial institutions borrow and lend funds among themselves for one day, or overnight . A target that can be achieved by the overnight rate is set using a balance sheet for overnight funds supply. When the target for the overnight rate is changed an intricate chain of consequences that affect prices in financial markets is set in motion hence affecting production, employment, spending hence inflation. The overall level of short to longer term interest rates and other financial assets rates and obligations like risk premium are affected by a persistent change in the overnight rate of interest. Obligations like risk premiums reflect the creditworthiness of borrowers and the financial instrument liquidity degree, hence carrying a rate of interests incorporating many of these considerations to their customers. References Meade, J. E. 1986. Objectives Of Monetary Policy. Economic Papers: A Journal of applied economics and policy, 1(11), 5-20. Nicke, C. 2007. Objectives of Monetary Policy. Schneider, R. R. 1995. Government and the Economy on the Amazon Frontier (Vol. 11). World Bank Publications. Wade, R. 1990. Governing the market: Economic theory and the role of government in East Asian industrialization. Princeton University Press. Read More