Introduction to Macroeconomics

Four Main Economics Goals of an Economy:

  1. Stable Rate of Economic Growth
  2. Low Unemployment
  3. Low & Stable Inflation (standard target of 2%-4%)
  4. Satisfactory Balance of Payments

Other Pursuable Goals of an Economy:

  1. Environmental Sustainability
  2. Economic Equality

Growth:

  • Commonly Measured by Gross Domestic Product (GDP)
  • Measure the Output of the Economy (value)

Unemployment:

  • Commonly Measured by Claimant Count & Labour Force Survey (ILO)
  • “Those out of work, actively seeking work at the current wage rate”
  • Labour Force Survey is thorough and usually reveals higher numbers of unemployment
  • Claimant Count is problematic as not everyone is eligible for unemployment benefits

Inflation:

  • Commonly Measured by the Price of a “Basket of Goods”
    • i.e. Consumer Price Index (CPI) or Retail Price Index (RPI)
    • Inflation: Increase in the Average Price Level of an Economy

Balance of Payments:

  • Referring to the accounts of an economy, national scale balance sheet
  • There are Credits which are considered as Injection (e.g. exports or factor earnings)
  • There are Debits which are considered as Leakage (e.g. imports or factor payments)

The Next Four Years

Obama has been given another opportunity to fulfil the promises he made back in 2008, it will be interesting to see how the next four years play out as The House of Representatives still has a Republican majority whereas the Senate has a Democrat majority. The economic situation is currently the biggest issue on the presidential agenda; Obama will have to reshuffle his policies and attempt to create a dynamic and stable economy for growth.

I believe that Mitt Romney had only started showing his true potential of being a good candidate for presidency towards the end of the campaign. Even though I supported him from the beginning of his candidacy, it was apparent that he would fail to gain any of Obamas voters. If given the chance I think that Romney would have been a strong president in the sense that he would put growth and prosperity of the economy at the top of his agenda. He would not have suffered from the expectation to provide more welfare for the people as is Obama’s situation.

As January begins we will begin to get a picture of how Obama intends to handle the economy, and whether or not these next four years will be prosperous ones or a fight for survival. Until then, I wish the best of luck to President Barack Obama as in the end of the day he must serve the interest of the people of the United States.

Obama Vs. Romney (Economic Policy)

 

 

In January either Romney or Obama will begin to form their economic policy for the next four years. Both candidates have different views on how to run the economy, with different aims as a result of their policy.

Since being initially elected Obama has stressed the importance of creating greater financial equality amongst the citizens of the United States. Alongside this there is the development of welfare within the country. Obama has attempted to implement social welfare and the redistribution of wealth by introducing what the Democrats consider fair taxes (middle-class tax cuts, upper class increase). Beyond that, he favoured the increase of federal minimum wage as to establish a method of efficiently redistributing wealth. It is true that Obama was handed the economy during a time of crisis, but the question always was whether it was Obama’s policy that ensured recovery or a natural occurrence. Moreover, during a time of recovery he attempted to implement a national health service.

Romney has always stressed strong links between the financial sectors in the United States, and his economic policy. To some extent Romney can be seen as a business man rather than a political leader. Following a capitalistic approach there is the avoidance of nationalising companies or subsidising them, in favour of keeping business private. There is also the use of contractionary policies in an attempt to reduce deficit. As a method of sustaining economic growth, Romney proposes to expand the military and invest in private security firms such as Halliburton. A major controversial aspect of his economic policy is the interest of reducing the top bracket of income tax. There is also the forethought that Romney wants a U.S. with less reliance on foreign imports for its consumption. This is important in regard to the manner in which Romney would handle trade deficit, and what kind of trade relationships can be expected now.

Both politicians have valid policies backed by theory. Neither of them have the ultimate solution to develop an economy that will grow, while cutting unemployment, as well as improving the quality of people’s lives. Now all we can do is what and see who will be elected, and who will recant possible false promises on what can be done to improve the economy.

Minimum Wage (Harkness)

 

Discuss arguments for and against a national minimum wage

For:

  • Sets the living standards for the country, and also establishes what should be expected from the state. It gives a representation of the type of income one needs to live within the country
  • Ensures that employees are not being exploited by private companies
  • Generally improve the income of workers
  • Does not rely on the demand  and supply of labour

Against:

  • National minimum wage may cost jobs, as employers may not be able to afford hiring as many employees as needed
  • Does not solve the issue of those unemployed whom are still a burden on welfare states
  • Difficult to decide what a national minimum wage should be in proportion to, as 50% of average income is not always a reliable indicator
  • If the minimum wage is too low it may undermine the employees ability to sustain a living

Should National Minimum wage be raised or lowered?

Raised:

  • If the minimum wage was to increase this would lessen the burden on the state to give welfare.
  • The poor tend to spend a higher portion of their income, with the increase of minimum wage there can be increased savings, and greater monetary flexibility.
  • Since the state provides welfare for those unemployed and those with low-level salaries, it in a manner subsidises the businesses. If minimum wage were to be raised the employers owe more to the worker rather than the government.
  • People rather take benefits than an unsecure job at minimum wage, so if the minimum wage were increased there would be a greater incentive to get a job.
  • If it is lower than people will begin to struggle as almost all of their income is used up in basic necessities and families will have to have two working parents which may lead to the need for more welfare.

There is speculation that tighter control of wages simply means the economy is no longer as free and that labour within certain countries is less competitive, however it can be noted that countries such as China who have an export based market are increasing the minimum wage of employees considerably.

Discuss the possibility of an International Minimum Wage?

There are several problems with the concept of an international minimum wage. Firstly, the minimum wage would be subject to value of currencies and foreign exchange market. The second issue would be the fact that the cost of living is different in every country. Finally, not all countries offer welfare and the minimum wage set may not be enough to sustain a family or basic lifestyle.

If an international were to be set it would be as problematic as setting a single currency for multiple countries, there are both pros and cons. In the case of minimum wage it would become problematic if a certain currency was worth more than another currency which is the case globally when comparing all the varieties of currency.

The cost of living changes drastically from country to country, and even from state to state in the U.S. If a person were to move from San Francisco (CA) to Manhattan (NY) 28% increase in cost of groceries and a 57% increase in cost of utilities.[1] This is why in the United States there is a federal minimum wage, but states can increase the minimum wage e.g. Illinois, Connecticut, & Nevada. This current example clearly represents why it would be difficult to introduce an international minimum wage without effective policies to support it, which is difficult to do internationally.

Countries such as the United Kingdom offer a variety of welfare services, whether it is tax exemption or healthcare. The majority of countries outside of Europe don’t have such comprehensive welfare systems, therefore if an international minimum wage is set those in Europe on minimum wage are in a far better position than others. The concept of an international minimum wage is to increase equality, and stop exploitation in LEDs.  However it would be difficult to enforce, and on what factor would the wage be decided on.

While in class we brought up the issue of competition. If there was an international minimum wage then every country would be equally competitive for the price of labour. It is important to note that country’s do not want to move over to a high minimum wage as it may deter producers, as they rather produce for a cheaper price improving their profit margin on products. But if there was to be an international wage it would ensure that people were not being exploited in any specific region. It would be difficult to speculate what affects an international minimum wage would have on the global economy, as it could cause the creation of a black market for labour.

Discuss whether regional variations to the National Minimum Wage are a good idea

Politically it is difficult to explain variation of minimum wage within a country, as the argument would be that there is a greater cost of living within a certain area, therefore establishing that there is serious inequality within the country. Economically, variation to minimum wage with respect to region is logical. As noted in the example of the United States, were each state is allowed to set its own minimum wage as long as it is greater than the federal minimum wage. In England the cost of living is greater in remote areas due to the reliance on personal transportation (driving) and the lower supply of basic goods. Therefore, it would only make sense if the minimum wage for that area was increased.

Command Economy Vs. Free Market (Round 2)

Discuss the advantages and disadvantages of a free-market economy:

Advantages:

  • Price Mechanism:

Through free market concepts such as price signal and opportunity cost, the free market supplies a method of pricing resources without government intervention. An example being if there is great demand for a resource and it is scarce price rises, and vice-versa.

  • Self-Adjustment (equilibrium):

Resources are basically allocated by the supply and demand relationship, if there is a demand for a resource then someone will look to make profit and provide a supply. However the market ultimately decides the price, and self-adjusts so unless there is a sudden change in supply or demand theoretically there will be no shortage or surplus.

  • Human Psychological Aspect:

Each person effectively looks after themselves; there is that necessity of personal gain to feel progress is being made to achieving happiness.

We have been brought up to believe that the way to gain is to obtain employment, therefore earning money, allowing us to express effective demand over wants and needs.

  • Competition:

The free market allows the creation of competition which suits the consumer; people like to have options this therefore creates space for producers to create better products cheaply aiming to achieve a greater hold over the market.

Disadvantages:

  • Speculation & Bubble:

The free market can allows certain resources to be over-valued on false pretences, factors such as insider information or industrial espionage can lead to price surge or crash. A superficial bubble can be produced, as a certain resource should crash but people are continually trying to keep it up.

  • Undervaluation of Needs:

Since there is a concentration on immediate gain and short term perspective through the free market, important services such as education and health tend to be undervalued by consumers. In a utopian free-market these services would be accurately priced, but this does not occur in reality.

  • Monopoly & Duopoly:

If a producer gains to great of a market share they begin to control prices themselves, which leads to the failing of the pricing mechanism and the supply/demand relationship. This is against the interest of the consumer, and misallocates resources. An example of a prominent duopoly situation is Airbus vs. Boeing.

 

Discuss the advantages and disadvantages of a command economy:

Advantages:

  • Planned & Greater Predictability:

In a command economy the government sets production and growth targets, there is an idea of the bigger picture on how the economy will perform in the future. This theoretically increases the economic stability, such as maintaining the value of a currency or given resource (less volatile, fluctuation a rare occurrence)

  • Elimination of Opportunity Cost:

Since the government allocates the resource the consumer does not question the practicality or use of a given resource, this usually takes the form of coupons. The consumer does not lose out the ability to consume another resource when a coupon is used as it only works for a certain resource.

  • Valuation of Services (education, health, etc.):

There is the organisation of a social health and education system, ensuring that everyone can attend school and receive an education as well as ensuring that people are medically taken care of.  This stops people from thinking in the short term, and the government is allowed to independently decide the value of education (i.e. the creation of an education budget).

  • Reduction of Inequality:

The government decides on how the country’s wealth is distributed, in theory this stops anyone from having more money than they “need”.  This allows people with service jobs to still have food, healthcare, and education. This achieves social justice as those with jobs such as janitors are valued workers.

Disadvantages:

  • Misallocation of Certain Resources:

The government will not always know how much to give or produce of a certain resource. For the government to effectively allocate resources in this situation it must have large amounts of information on the populace of the country. This also raises the question does a doctor deserve more or equal to someone of a lesser profession such as a cleaner.

  • Lacking Innovation (no choice or variety):

There is only ever the production of one type of product, as it becomes a national brand as if there could only be Marlboro Cigarettes and Colgate toothpaste. This means there is no competition which leads to a lack of innovation.

  • Shortages & Surplus

When the government misallocates resources, it may decide to change production of the resource. The problem with this aspect may lead to too little of the resource being produced or too much, this is because it is difficult to understand consumer demand.

  • Efficiency
    • The free-market handles itself, whereas the command economy requires people to regulate all aspects and control it. This means that the producers lack profit motive and see no reason to “work harder” but to simply meet the quota.

What is the optimal level of government intervention and what does it depend on?

When looking at the role of the government in economics it is important to separate regulation and intervention. As such government regulation is a necessity, it allows us to have control to ensure that the economy serves everyone best interest.

Regulation can take form in any manner, but is in the interest of the government to provide regulation that does not hinder innovation or competition. However, it is equally important that regulation ensures that monopolies do not occur, as it does not serve the general public interest. Regulation is also important when factors such as the environment are involved, as it is in the general public’s interest to live in a healthy environment. Therefore, regulations on pollution levels are put in place and fees are introduced such as carbon tax to impose the regulation.

The government should rarely truly intervene in the economy, granted for situations such as economic collapse or hyperinflation the government must act. The situation needs to be truly dire for the government to intervene but what is more important is how the government intervenes. Allowing some aspects to fail is of great importance as it shows what must be changed; this is opposite to what governments did during the 2007-2008 financial crises where the British government decided to buy into the failing banks essentially de-privatising them.

The inclusion of government and the role of central banks is a controversial and debatable topic. There is no right or wrong as such, and every country needs a different mixture between government control and regulation and the allowance of a free market.