Fiscal Policies
Discuss about the Economic Policies and Global Environments.
The global economic framework has changes considerably over the years and has faced considerable dynamics, much of which can be attributed to the international phenomena like Globalization, Liberalization, industrial revolution as well as technological and infrastructural framework across the global scenario (Salvatore and Brooker 2015). Over the years, different countries in the global framework, have developed immensely in the economic domain, thereby emerging as globally dominant economics in the international framework.
In this context, the economic development and prosperities of different countries are highly attributed to the industrial, commercial prospects which the countries enjoy, the generation of employment scopes, increase in the overall productivity of the country as well as presence of a stable and efficient economic policy frameworks present in the countries. There exist different components in the macroeconomic policies which are usually used by the government of a country as per time and requirements (Mankiw 2014).
Keeping this into consideration, the concerned essay tries to highlight and discuss the different macroeconomic policies which the governments of different countries take for ensuring long term growth in the economy as well as for maintaining macroeconomic stability in the economy in the short run.
The economic policy framework of any country, in general, consists of two broad types of policies- the fiscal policies and the monetary policies:
Fiscal Policies- These are the policies by which the government varies its expenditures and tax collections, mainly, to influence the economy of the concerned nation, which in turn influences the macroeconomic variables like aggregate demand, aggregate supply, investments, savings and distribution of income in an economy (Borio 2014).
Monetary Policies- These forms of economic policies are usually designed and implemented by the monetary authorities of the concerned countries, which primarily include policies to manage the money supply and money demand in the country as well as the liquidity in the economy, mainly in terms of variables like the rate of interest in the economy.
Keeping these into consideration, the following section of the concerned essay discusses the different macroeconomic policies which the government of different countries can implement for ensuring economic growth in the country:
The primary indicator of positive economic growth in a country is the increase in the economic productivity in a country, which is mainly observed in the form of higher and increasing GDP trends in the country (Heijdra 2017). This, can be ensured in the long run, by the government of a country by ensuring consistent increase in the long run aggregate supply and aggregate demand in the economy, which falls under the fiscal framework, which can be shown with the help of the following figure:
Monetary Policies
As can be seen from the increasing the aggregate supply in the long run, which is coupled with an increase in the aggregate demand in the long run, can lead to an increase in the overall economic productivity, which in turn can lead to growth in the economy. The government of a country can bring economic growth in the country, by this method implementing macroeconomic policies which include the following:
Increasing the capital formation in the economy- This can be done by facilitating investments in new factories and infrastructural development which in turn are expected to facilitate increase in the overall economic production in the country (Young and Zilberfarb 2012).
Example: This policy can be seen to be taken by the government of Australia, in the recent periods, which has led to an increase in the gross fixed capital formation as can be seen from the following figure:
This in turn can be seen to have led to the expansion of the capital intensive and highly productive service sector industries, thereby increasing the economic growth in the country.
Increasing the labour productivity- Economic productivity and thus, economic growth in a country can be increased by making the existing labour force more skilled and productive, thereby increasing the marginal productivity of labour.
Example: One of the main reasons behind the robust and persisting economic growth of Singapore is the presence of a highly skilled and efficient labour force in the economy. Much of this can be attributed to the skill development programmes taken by the Workforce Development Agency (WDA) of Singapore, which include the Workforce Skills Qualifications (WSQ) System, which includes training, development, assessment of the skills of the individuals which are required by the companies operating in the economy of the country (Mom.gov.sg 2018).
Technological innovations- The overall cost efficiency in the production framework of the country can be improved by technological improvements and innovations in the country, which in turn increases the overall economic productivity in the country, thereby contributing to the economic growth of the same in the long run.
Another macroeconomic policy in the fiscal framework, which is often taken by the government of different countries for long run economic wellbeing of the country is that of creation of employment opportunities of the country. The presence of high unemployment in the country, in general, leads to decrease in the overall economic welfare of the residents, in terms of low purchasing power, thereby decreasing the aggregate demand, which in turn decreases aggregate supply and thereby total economic productivity, which hurts the long-term economic growth of the country (Burda and Wyplosz 2013).
Increasing productivity in the country
Thus, one of the primary macroeconomic policies to facilitate economic growth in the country is by increasing employment scopes for greater share of population of the country, which by increasing the economic abundance, leads to increase in the aggregate demand in the country, which in turn increases the productivity and GDP of the country.
Example: The government of Australia, in this context, can be seen to be having a pro-employment policy framework, which in turn has helped the country in creating nearly 300,000 additional jobs in country in 2017 only. This can be seen to be directly affecting the GDP of the country which increased considerably (Blackmore et al. 2014).
One of the primary aspects of economic welfare in a country is the average level of prices of products and services prevailing in the country. While a very high price level hurts the consumption pattern of the population of the country, a very low-price level leads to decrease in the overall productivity, thereby leading the economy to a recessionary situation (Hammond 2012). Thus, for ensuring consistent economic growth in the country in the long run, it is of utmost importance for the government of the country to maintain a moderated and appropriate level of price in the country, which should not be too high or too low, which the governments of different country do by targeting inflation levels and manipulating the rate of interests primarily.
Example: One of the primary real-life instances of implementation of inflation targeting mechanism can be seen in the economy of Australia, where the government sets a targeted level of inflation and manipulates the monetary variables according to the targeted inflation. The primary variable which is manipulated by the government to regulate the demand and supply of money, thereby determining the overall price level in the economy, is the rate of interest in the economy, which in turn is related to the cash rate of the Central Bank of the economy.
Apart from the above-mentioned policies the government of different countries also resort to many other macroeconomic policies and strategies like attracting foreign investments, increasing the population of the labour force of the country and many others, which in turn helps in increasing the economic growth of the country in the long run.
Apart from ensuring the economic growth in the long run in a country, it also becomes one of the essential responsibilities of the government of a country, to ensure that the economy also remains stable and prospering in the short run as well. This is because, high and continuous short-terms fluctuations in the economy can hamper the welfare of different sectors of the population of the country as well as the overall productivity and economic health of the country in the long run.
Reduction of unemployment in the country
In this respect, in the presence of economic irregularities, the monetary policies act more abruptly than that of the fiscal policies. One of the primary monetary elements which are used by the governments of different countries to bring the stability in short run economic activities is that of the rate of interest in the economy (Willard 2012). For instance, in the presence of excess aggregate demand in the country, which leads to inflationary pressure, the government often increases the rate of interest to induce increased savings, thereby decreasing money supply and aggregate demand in the economy, thereby bringing back stability in the short run. The opposite is done in case of lack of demand in the economy.
As is evident from the above figure, after the Global Financial Crisis, when the USA went to immense recessionary situations, the Federal Reserve, the monetary authority of the country reduced its Fund Rate in order to stimulate the demand, investment and overall productivity in the economy, thereby bringing in its stability.
Conclusion
From the above discussion, it can thus be concluded that the macroeconomic policies taken by the government of different countries in different points of time, contribute significantly in increasing the economic welfare of the population of the country as well as the health of the overall economy of the country as a whole. The macroeconomic policies taken by the governments, including both fiscal and monetary policies not only help in facilitating growth of the economy in the long run but also in maintaining economic stability in the short run as well as in the long run.
References
Blackmore, J., Gribble, C., Farrell, L., Rahimi, M., Arber, R. and Devlin, M., 2014. Australian international graduates and the transition to employment. Melbourne, Australia: Deakin University. Retrieved from https://www. deakin. edu. au/__data/assets/pdf_file/0010/365194/international-graduates-employment. pdf.
Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, pp.182-198.
Burda, M. and Wyplosz, C., 2013. Macroeconomics: a European text. Oxford university press.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in context. Routledge.
Granville, K. (2018). Why December Is Looking Likelier for the Fed to Raise Interest Rates. [online] Nytimes.com. Available at: https://www.nytimes.com/interactive/2015/business/economy/fed-interest-rates.html [Accessed 27 May 2018].
Hammond, G., 2012. State of the art of inflation targeting. Handbooks.
Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Mom.gov.sg (2018). Skills upgrading. [online] Ministry of Manpower Singapore. Available at: https://www.mom.gov.sg/employment-practices/skills-training-and-development/skills-upgrading [Accessed 27 May 2018].
Salvatore, D. and Brooker, R.F., 2015. Managerial economics in a global economy. Oxford University Press.
Tradingeconomics.com (2018). Australia Gross Fixed Capital Formation | 1959-2018 | Data | Chart. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/australia/gross-fixed-capital-formation [Accessed 27 May 2018].
Willard, L.B., 2012. Does inflation targeting matter? A reassessment. Applied Economics, 44(17), pp.2231-2244.
Young, W. and Zilberfarb, B.Z. eds., 2012. IS-LM and modern macroeconomics (Vol. 73). Springer Science & Business Media.
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