Economics
C. M
Heydenrych
November 2015
Demand and supply
Economic Growth
“You can
stand in front of an empty fireplace and say “give me heat and I will give you
wood” as long as you want and you will not get heat. You have to put the wood
in first.”[1]
These are
wise words – not only for the individual, an household, a firm or an economy.
In formal
terms it can be said that: “Economic growth is the increase in the
inflation-adjusted market value of the goods and services produced by an
economy over time. It is conventionally measured as the percent rate of
increase in real gross domestic product, or real GDP.”
The
question now arises – “What policies can a Government employ to foster economic
growth?”
- Encourage savings. Savings is
used by firms to acquire productive resources, which leads to economic
growth. This is done by lowering taxes. Low taxes also mean that people
have more money to spend. Spending according to Keynes will move the
Aggregate Demand curve to the right and increase the output of a country.
- As a short term measure Keynes
indicated that the Government could embark on capital expenditure programs
such as road building. This will also put more money in people’s hands
which they will be able to spend on consumer goods. It will also help to
reduce the cost of production which helps an economy to gow.
The problem however with increasing
government spending, is that the money has
to come from somewhere (taxes) and that will reduce private investment and private consumption. So unless
government has savings (or prepared to risk inflation, by creating money - which in itself is a form
of indirect taxation), this route is
not recommended
Fiscal policies
- Low interest rates will also
act as a stimulus for spending
Other
- Encourage entrepreneurship.
Make it easy to start a business, no onerous entry requirements to start
any business.
- Decriminalise the sale of some
drugs such as marijuana. It is well known that tobacco played an enormous
part in the growth of the American economy in the early years as did the
sale of heroin in the development of Hong Kong.
The legalisation of marijuana (dagga) will boost the depressed economies
of the Transkei
dramatically. The current decriminalisation of marijuana has benefitted
the economy of many states in the US.
GDP
Gross
Domestic Product is the market value of all the final goods and services
produced within the borders of a country within a given time period normally a
year. It is the spending on goods and services in a country
It is also
equivalent to the money earned by all the production factors employed in a
country.
This figure
can also be calculated by the value that is added to products and services by
the various industries in an economy.
GDP is
therefore a measure of the economic well being of a country.
If GDP
increases because of more economic freedom (less Government intervention) and
real economic activity (production and trade) it will mean that poverty
will be reduced since the people would have earned wealth through the
production of goods and services required by society and not just the
redistribution of wealth. Money will also be available to assist those that
cannot help themselves.
Unemployment
One of the
macro-economic objectives that societies have is to reduce unemployment –
unemployment is when not all the production factors are being utilised fully.
The most important one being labour.
Structural unemployment focuses on the structural problems
within an economy and inefficiencies in labour markets. It also includes
unemployment resulting from industrial reorganization, typically due to
technological change, rather than fluctuations in supply or demand. Changes
that cause a skills gap are part of this phenomenon.
One
structural reason for unemployment is the vast numbers of regulations that
stifle the free interaction between individuals. These regulations are said to
protect consumers, but often the hurt that they cause is unseen.
Frictional unemployment is the time period between jobs
when a worker is searching for or transitioning from one job to another.
Cyclical unemployment is a type of short to medium term
unemployment that occurs when there is not enough aggregate demand in the
economy to provide jobs for everyone who wants to work. Also called
recessionary or depressionary unemployment
Classical unemployment occurs when real wages for a jobs
are set above the marketing clearing level. This is the big problem in South Africa
because of minimum wage laws.
Inflation
Inflation
can be defined as a significant (1-2%) and general rise in prices over time – or
conversely the fall of the value of money.
The cause
is generally accepted as: an increase in the money supply that is more than the
increase in the goods and services being produced in an economy.
There are
other theories related to this – such as cost push inflation and demand pull.
Macro economic Objectives
Economic Growth (also see
separate heading)
The
relationship between economic growth and economic freedom (less government
involvement in the lives of people) is undisputed (www.freetheworld.com).
Economic
Freedom = Economic Growth
Individuals
have economic freedom when property they acquire without the use of force,
fraud, or theft is protected from physical invasions by others and they are
free to use, exchange, or give their property as long as their actions do not
violate the identical rights of others.
As you will
remember from the discussion of the PPF, one way to achieve output and
consumption levels outside the limits set by the PPF is through technology, capital formation and trade.
Currently the world is on a path to end hunger and achieve food security and
improved nutrition for the first time in human history – this is through the
use of sustainable agriculture and innovative GMO strains (technological
advancement).
The result
of economic growth is also that people live healthy lives live longer, obtain
better education as well as gender equality and the empowerment of women and
girls.
It is
generally agreed that free market economies that are unencumbered lead to the
most optimum economic outcomes.
Countries
with the highest GDP growth are also able to build infrastructure, promote inclusive
and sustainable industrialization and foster innovation.
Economic
growth also leads to peaceful relations between trading nations.
Economic growth is the result of limiting the size of government and low taxation
Countries with economic growth protects private property and the rule of law
The soundness of
money results in faster growing economies
Since trade is one of the cornerstones if wealth creation
there is little in the way of trade
regulation and tariffs in fast growing economies
Economic growth is positively correlated with
less regulation of business, labour and capital markets
[2] Monetary policy is the actions of a central
bank or other regulatory committee that determines the size and rate of growth
of the money supply, which in turn affects interest rates. Monetary policy is
maintained through actions such as modifying the interest rate, buying or
selling government bonds, and changing the amount of money banks are required
to keep in the vault (bank reserves).
http://www.investopedia.com/terms/m/monetarypolicy.asp#ixzz3si4dbfOu
