Short-Run Equilibrium of an Economic, Factors Leading to Slow Economic Growth and Unemployment - Essay Example

RО-ЕСОNОMIСS ЕSSАY ЕСОNОMIС MОDЕL АNАLYSЕ By Student’s name Code+ course name Professor’s name University name City, State Date Introduction The measure of economic growth is important it shows a country’s progress. Most analysts have used aggregate expenditure model to show impacts on the economic growth. However, in order to have an equilibrium, the GDP must be equal to the Aggregated Expenditure. The equilibrium is often affected by a change in the Aggregated Expenditure’s components. Some states have shown slow economic growth while others have shown rapid economic growth. Despite a country having an economic growth, it does not guarantee the creation of employment. This essay covers measures of short-run equilibrium of an economic, factors leading to slow economic growth and unemployment. The potential impact given by the statement “Tailwinds in the form of lower rates, a weaker currency, and cheaper petrol were helpful” on short-run equilibrium output. Economic growth is crucial for every country. It is defined as the total increase in the market value of goods and services. It is commonly measured using the gross domestic product (GDP). When the GDP is equal to the aggregated expenditure, then we have macroeconomics equilibrium. Aggregate expenditure can be defined as the current value of goods and services. It is used as the total measure of national income. The components of aggregated expenditure include government purchases, household consumption, business investment and net exports. Household consumption is what people use in their daily lives. Business investment is real capital that is purchased and utilized in the production processes. The government purchase is what the government uses as inputs and expenses as it offers services to its citizens. The net exports are given by subtracting imports from the exports. It is because the amount spent on imports is not included in the economy’s output. Any change in one or more aggregate expenditure components results to change in the equilibrium. It can result to shift of the equilibrium to the right or to the left as shown in the chart below (Hubbard, Garnett, Lewis and O'Brien, 2015). (Figure 1: Aggregate expenditure verse GDP) Rates, petrol and currency will have a direct impact on the components of aggregated expenditure. Lowering of rates will make people to have a lot of cash at hand due to increased loans. This will encourage business investments since people have plenty of cash to spend and to spare. Increase in business investments will have a positive effect to the short run equilibrium making it to move to the right. Petrol is used in the production processes and also by the final consumers. Cheaper petrol means that there will be more production (Lewis, 2013). It also implies that the manufacturer will reduce the price of those goods which may result to increased demand. Cheaper petrol will have effect in the household consumptions and the net exports. With cheaper petrol goods will be cheaper and people will spend more on those goods leading to increase in the household consumption. On the other hand, cheap petrol will have a positive effect on the net exports. There will be increased exports and reduced imports. Cheaper petrol will therefore cause short run equilibrium to move to the right. Currency is the heart of every economy’s development. The growth of an economy means growth of the currency to be stronger. A weaker currency will have effect to net exports. It means that other countries will be paying more for the same amount of goods and services exported. This will cause a shift in the short run equilibrium to the right. Factors contributing to the slow growth response of the economy Economic growth in various countries has been uneven all over the world. Availability of resources, industrialization, security and political stability has been the main drivers to the growth of an economy. In the recent research, it showed that most western countries have a very low economic growth while the eastern countries have a very high economic growth rate. For example, United States has an economic growth of 0.7 while a country like Qatar has an economic growth of 13 (GUPTA, 2014). This is unimaginable considering that US is a superpower nation. Analysts say that the global power may soon shift from the west to the east. This article discusses some of the factors that lead to slow economic growth. One of the factors is when a country has an unstable government. There are various examples of leaders in some states who are using power for their selfish gains. This leads to deterioration of the economy because of poor delivery of services and there is little or no foreign and domestic investment. In most cases, there is war and conflicts leading to the destruction of property. The working nation is disrupted, and the production of goods and services is minimal. The second factor that may lead to the slow economic growth is the conflict between the behavior of financial markets and the real economy. Sometimes the prices of assets do not guarantee economic growth. It is expected that as the demand increases for goods the price to increase too so that to eliminate high competition. However, in some cases, an increase in price might lead to decreased demand and instead of boosting the economy it shifts the distribution of wealth. This means that there will be slow economic growth. Underlying economic conditions can be the reason for slow economic growth. If the economy has enough supply of resources, human labor and it’s structurally flexible, it is more likely to have a very high rate of growth. On the other hand, if it lacks one of the factors, it is more liable to have a slow growth rate. Effect of slow economic growth on the AE model Factors that lead to a slow economic growth makes the equilibrium point in figure 1 to move to the left. It is because they have negative effect on the components of aggregated expenditure. For example, unstable government leads to low business investments. Secondly, when there is a conflict between financial markets and the real economy it leads to low household consumptions. Underlying economic conditions discourages investments since the investors are not assured if there will be space for their business to grow. When “Annual growth at that rate is too low to arrest a slide in unemployment” One of the benefits that are usually associated with economic growth is the creation of employment opportunity in that given country. It is mostly due to the effect of demand and supply forces. High economic growth can be due to the rise in demand for some commodities hence there will be increased production. This will means that there is increased chances of employment. However sometimes when there is little economic growth, unemployment might also be on the rise. The primary reason for such cases is that economic growth may be lower than the productivity growth improvements. When a country has a big economic growth of about 2.5 % it means that the country’s productivity capacity is growing at the same rate. It also confirms that the firm can increase its outputs with the same number of the employees. However, if a country has an economic growth rate of 0.5 % (Paul, 2015). It means that the demand in that economy is only growing by 0.5% per annul. It also means that the supply might be increasing at a higher rate than demand. Therefore could lead to laying off of some employees in order to reduce the supply. (figure 2: dynamic Aggregate Demand/Aggregate Supply model) This is evidently shown by the curve drawn above (Bhaduri, Kazimierz and Martin, 2013). AD1 was the initial curve. After a small demand growth it led to AD2. On the other hand, the initial supply curve is AS1, and there was a huge growth in supply that lead to AS2. Due to the difference in the growth rate of both the supply and the demand curve, the equilibrium point shifted to the right. This means that in order to move back the equilibrium point to where it was initiatly, the supply need to be reduced. Reducing the rate of supply means that a certain number of the employees will be cut. Leading to increased rate of unemployment. The price level will also be affected. When the supply is more than the demand, there is unfair competition. This leads to sellers selling at the lowest prices possible to attract more customers. This is clearly shown by the curve above. Initially, the price was at P1 but lowered to P2 when the equilibrium point has shifted. Conclusion It is evident that progress is valued across all the countries. Hence, countries should keep on taking self-evaluation tests to ensure they are on the right track. However, countries must avoid factors that will lead to slow economic growth and adopt those that will ensure fast economic growth. Economic growth has been in most cases associate with a reduction in the rate of an unemployment. It should be clear that very low economic growth may not lead to a reduction in the rate rate of an unemployment. Bibliography Bhaduri. A, Kazimierz L, and Martin R. (2013), "Effective demand versus profit maximization in aggregate demand/supply analysis: a dynamic perspective." PSL Quarterly Review 52, no. 210. GUPTA, H. (2014) "Public expenditure and economic growth.". Hubbard, G, Garnett, A, Lewis, P & O'Brien, T (2015), Macroeconomics, 3rd Edition, Pearson, Frenchs Forrest, Australia. Lewis, W. A. (2013), Theory of economic growth. Vol. 7. Routledge. Paul G, (2015), “Economy crying out for stimulus, say analysts”, The Advertiser. Read More