Eric Kagoi

 ECONOMIC POLICIES AND PRACTICES STUDENT NAME TUTOR COURSE INSTITUTION DATE Economic Policies and Practices Introduction The performance of an economy is solely dependent on the government policies enacted whose mainly objective and goal is to achieve the micro-economic and macro-economic objectives. If these policies are well implemented the economy would have a positive impact while growth and development would be experienced and the vice versa is also true. There are several policies that affect the state economy which include, the government employing a budget plan over its fiscal year. A budget plan is a summary statement that indicates the estimated amount of revenue that the government requires to raise, the sources from which it expects to get the revenue from and the projects it will be funding or spending the revenue on a particular financial year. A well constituted budget plan is of good help to the economy because it helps to meet the government expenditure for provision of its services, it also helps in redistribution of wealth through a progressive system of taxation where the rich pay more than the poor and it also helps to regulate the economy through government expenditure and taxes. A budget plan can lead to a significant increase in national debt if there are no policies regulating it because it will mean that the anticipated expenditure is more than the anticipated revenue thus leading to more borrowing both internally which is through selling of treasury bills and bonds and externally through other financial organizations or countries. National debt has a negative impact on the economy because it will be forced to charge higher tax rate in order to collect more money to pay the loan and its interest, reducing the capability of the citizens to save and produce. National debt also leads to an outflow of wealth because the debtor maybe required to pay in terms of goods and services making the goods to be scarce thus creating inflationary pressure leading to an economic sabotage. (Modigliani, 1961) Another policy that has adverse effect on the state of economy is the use of tariffs and quotas on all imports. Tariffs is a form of tax imposed on imports which maybe ad valorem tax which is tax charged on the product value or specific tax which is tax charged on each unit of a good sold. Quotas is the limitation of the physical quantity of goods to be imported through limiting the number of import licenses. The enactment of new tariffs and quotas has a positive outcome to the economy because it helps in the protection of infant industries which cannot compete with the well-established international industries that enjoy economies of scale. It mostly aids the manufacturing industries in the developing countries so as to replace the foreign goods with those that they make locally hence creating import substitution leading to growth and development making the economy to have a positive outcome.( Bhagwati, 1968) Tariffs and quotas also help in the elimination of “dumping”. Dumping is where cheap and low quality goods are imported into the market. This destroys the home industry which are utilizing the raw materials to make same goods but of good quality. Dumping makes a country become dependent of foreign goods making them not to work hard and produce on their own and at the long run they end up paying more than perceived. With dumping controlled the economy will grow because it results to growth of home industries and utilization of local resources. Tariffs and quotas also help in the protection of balance of payment deficit. This is because there will be regulation on imports and subsidies on exports. A government operating on a balance of payment deficit has poor economic growth because most of the times it will be preparing a budget deficit in each of its financial year and due to its limited reserves, it will not be able to finance the deficit. The tariffs and quotas will control the amount of imports so that it does not exceed that of exports in order for the government to be preparing a balanced or surplus budget for its development projects.( Rodriguez, 1979) The general public may lose confidence in the federal government in terms of their leadership skills towards economic growth and development. This mainly occurs if the government promises to create employment opportunities and it fails to deliver. The general public will then have a negative attitude towards the government because it’s not impacting any kind of economic growth. The negative attitude is mainly experienced through collection of tax where many people evade the payment of taxes or even pay less as required. This is because the people will feel that the tax collected is not well used to benefit them. Poor leadership skills and lack of economic expertise make the federal government to use the revenue collected in non-priority projects which do not have economic impact to the people. Job creation can adversely affect a country’s economy in a positive way because there will be better standards of living, people are able to save their money and invest it in profitable ventures and people will be able to pay their taxes without feeling the pinch or evading the taxman. Job creation has not been successful because of mismanagement of funds by the leaders responsible. This is due to greediness that some leaders have who are unqualified embezzle funds meant to create employment opportunities leaving many people not to have faith in their government because it can’t take care of its people but its interest first. ( Petrick & Quinn, 2001) Huge wage bills that the government impounded on itself makes it difficult to create jobs for its people because most of the revenue will channeled to the recurrent expenditure rather than the development expenditure which will aid to create jobs for the people. The government may want to stimulate the economy by reducing taxes on individuals except on those earning over $250000 per year. This will have both positive and negative effects in the economy. This is because the tax cut will encourage people to work, save and invest thus stimulating the economy is good way but if the immediate spending is not financing the tax cut then it would result in an increase in the national budget deficit which in the long run increase the interest rates and reduce national savings. Reduction of tax rate will increase aggregate demand on goods and services because the low-income earners are able to afford more goods hence making the industries to produce more to meet the demand of the people at end it also creates employment due to the increase in demand thus making the economy to have a positive growth. Increase in aggregate demand leads to creation of demand pull inflation. This makes the prices of goods go up because its demand is higher than the output hence causing inflation which might affect the economy negatively.( Darby,1975) Reducing tax rate on low income earners will result to increase in efficiency and raising the overall size of the economy because there will be proper reallocation of resources to different sectors which have high value economic use. This will result to economic growth because the country will experience even distribution of resources and areas that had poor development will have their own share of growth. The level of investment decrease because of lack of confidence in the economy. People tend to lack confidence in an economy that is staggering and not stable in that the economy may experience a growth and a fall. This creates uncertainties because people do not know what to expect hence the investment levels decrease due to the fear of losing much in an unstable economy. Inflation is part of the reason why people may lack confidence in an economy. This is because increase in inflation causes instability and people become uncertain about future cost and profitability. With this kind of uncertainty people fear to invest, interest rates become high thus making borrowing for investment purposes expensive. This makes the economy to have zero rated growth. Due to poor confidence in the economy the aggregate supply tends to reduce. This is because suppliers will tend to fear not being paid because of the economic instability making firms run into bankruptcy. Firms which do not have any supplies tend to shut down because they do not meet the consumers’ needs hence making the consumers shift to a substitute which is well established and can survive the harsh economic conditions. Bankruptcy of firms leads to reduced aggregated supply which leads to closure of the firm and makes the economy to drop because its causing unemployment. An economy experiencing persistent labor unrest tends to lose its confidence because there are no production taking place meaning the economy is stagnant. Its causes major lose output and inadequate public service. With this kind of trend the level of investment reduces because people are rendered unemployed hence they can’t save the little they have, production is not sufficient to make the aggregate demand to increase leading to creation of demand pull inflation and at the long run causing the economy to go down with no growth and development. Lack of good governance creates lack of confidence in an economy. This is because bad governance leads to mismanagement of funds that could have been used in productive projects or creation of jobs, it also leads to political instability where a country is always at civil wars. This scares away potential investors who could have brought in new developments in the country hence reducing the investment levels. Low interest rates have a resulting outcome in an economy. This is because it leads to cheap borrowing costs which makes the firms and consumers to borrow more in order to finance their spending and investment. This leads to a stimulation of economic growth because people are able to invest and build themselves without fearing the interest rates that they would pay at the end. Lower interest rate causes an increase in aggregate demand (AD)=C+I+G+X-M. This is because lower rates make people to borrow more thus causing an increasing in their consumption, with much money people are also able to invest in profitable ventures, government expenditure increases because it’s able to collect more revenue inform of taxes from the people, firms are also able to borrow in order to increase its production hence being able to produce surplus and exporting it and reducing the levels of imports. ( Darby, 1975) Lower interest rates can also create a negative impact in the economy whereby there is no incentive to save because there are less returns realized from savings. This makes people not to hold money for future investments and spend it all on consumption making it difficult to grow an economy if people spend their money for consumption purposes only. Conclusions 1. The federal government should always ensure that it prepares a balanced or surplus budget in order to avoid national debt which always difficult to do away with because of increased expenditure every financial year. 2. Tariffs and quotas should be strictly enacted on all imports in order to correct the balance of payment deficits, for protection of infant industries to allow them to grow and ensure that substandard goods are not allowed in the country. 3. Fostering of good governance is a must in order to ensure there is accountability and transparency at all levels so that funds meant to create jobs are embezzled by the leaders. 4. The federal government needs to construct a good tax system that ensures there is equality and certainty on the amount one should pay and it should also be economical in order to collect more revenue. 5. The government in conjunction with different stakeholders should ensure that the economy is always stable with no uncertainties so that it can regain the confidence of potential investors who may want to invest in the country. 6. Creating sound financial systems that ensures there is low interest rates to all firms and consumers so that there is cheap borrowing for investment purposes. References Bhagwati, J. (1968). More on the Equivalence of Tariffs and Quotas. The American Economic Review, 58(1), 142-146. Bryant, J., & Wallace, N. (1979). The inefficiency of interest-bearing national debt. The Journal of Political Economy, 365-381. Darby, M. R. (1975). The financial and tax effects of monetary policy on interest rates. Economic Inquiry, 13(2), 266-276. MacMillan, I. C., Kulow, D. M., & Khoylian, R. (1989). Venture capitalists' involvement in their investments: Extent and performance. Journal of business venturing, 4(1), 27-47. Modigliani, F. (1961). Long-run implications of alternative fiscal policies and the burden of the national debt. The Economic Journal, 71(284), 730-755. Petrick, J. A., & Quinn, J. F. (2001). The challenge of leadership accountability for integrity capacity as a strategic asset. Journal of Business Ethics, 34(3-4), 331-343. Rodriguez, C. A. (1979). The quality of imports and the differential welfare effects of tariffs, quotas, and quality controls as protective devices. The Canadian Journal of Economics/Revue canadienne d'Economique, 12(3), 439-449. Sims, C. A. (1992). Interpreting the macroeconomic time series facts: The effects of monetary policy. European Economic Review, 36(5), 975-1000.