Economic Policies Employed by Governments

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Table of Contents

Introduction
Policies
References

Introduction

The main aim of the economic policies adopted by a government is to attain a sustainable superior rate of economic growth so as to accumulate national income and wealth, as well as attain superior living standards for its people. In order to achieve its economic goals, a governments economic policy (ies) should be a combination of macroeconomic reforms, macroeconomic policies, as well as a constructive/conducive international economic environment (Mankiw, 2012).

The purpose of this paper is to discuss the various economic policies employed by governments in order to improve economic growth.

Policies

Governments mainly use fiscal and monetary policies; monetary policy influences the supply, as well as the cost of borrowing within a country, which in effect influences the countrys currency stability, full employment, and non-inflationary growth (Mankiw, 2012).

This policy is carried out by a countrys central bank; in the US, the Federal Reserve Board is the one that conducts this function (Mankiw, 2012). The central bank or Federal Reserve may decrease or increase the rate of interest, which eventually affects business investment. The fluctuations in the rate of borrowing also affect consumption by the private sector, for example the household (Colorado.edu, 2011).

On the other hand, fiscal policy involves the utilization of government influences on revenue collection, as well as expenditure, to control economic effects and policy aims as employed through budgeting. The legislative and executive arms of the government make decisions on fiscal policies; consequently, in the US, fiscal policy decisions are made by the president together with the Congress (Mankiw, 2012).

Fiscal policy decisions revolve around two main items: taxes or government revenue and expenditure (Mankiw, 2012). A reduction in taxes increases the disposable income available to household and businesses, increasing household consumption and investments or savings.

This eventually facilitates increased rate of growth of the GDP; conversely, government expenditure on infrastructure, health, and education among others, directly influences the countrys GDP growth. Increase in the GDP as a result of increase in Consumption, Investment, and Government expenditure improves the standard of living since services or goods are readily available for consumption by the private and public sectors (Colorado.edu, 2011).

For instance, if a country is in recession, the government can cut tax and increase its spending in order to fuel economic activity (Colorado.edu, 2011).

During the 2001 recession, for instance, the US government reduced taxes for three years; from 2001 to 2003, together with a 13% increase in government expenditure (Prithiviraj, 2009). Partially attributable to remarkable fiscal stimulus, the real GDP had grown by 7% by the end of the year 2003 (Prithiviraj, 2009).

A government can also use trade policy to increase economic growth since a countrys openness to foreign investment directly impacts on its economic prosperity. Governments that limit investment through the use of protectionist policies burden the country with superior costs and inefficiencies (Mankiw, 2012).

Equally, free trade enhances economic efficiency, as well as boost living standards of the people; free trade also enhances a countrys chances of gaining benefits of the comparative advantages.

A country can specialize and leverage the natural resources through the use of its distinctive or more effective practices in order to acquire other goods and services that are not internally produced. Through the use of trade and comparative advantages, nations can therefore improve their GDP (Mankiw, 2012).

Government regulation policies also play a crucial role in economic growth since red tape and bureaucracy have a significant effect on the economy of a country. Deregulated markets promote the effective distribution of resources because decisions are made based on the economic factors, but excessive regulation can lead to unnecessary superior costs and unproductive behavior (Mitchell, 2005).

Governments can also promote savings or investment if both the private and public sectors save more, this means money will be available to finance business projects or investments in technology or capital goods which increases productivity, eventually improving the peoples standards of living.

Also, political stability and efficient legal systems promote foreign and domestic investment, thereby increasing productivity as well as creation of wealth for its citizens (Prithiviraj, 2009).

The private sector is independent from government expenditure, and so property rights also play a crucial function in the performance of the economy (Mitchell, 2005). In cases where the government controls or owns the resources, the economic atmosphere is likely to be influenced by the prevailing political forces, and the government then establishes how the resources are distributed and used.

If private property remains unsecured by law and tradition, the resources may be inefficiently used by the owners. Therefore, for any specific level of government expenditure, property right protection affects the performance of the economy and eventually the peoples living standards; improve or deteriorate.

Economic growth takes place due to the increase in the amount of products or the quality of resources. Governments must work hard to improve human capital and workforce skills, as well as the knowledge level and the wellbeing of that workforce.

A country with a superior human capital will have a higher performance in terms of productivity and will also be able to adopt more efficient technologies and facilitate specialization in specific areas. A government should be more concerned with improving the workforce skills rather than educational qualifications because the skills are the powerful economic growth drivers (Mitchell, 2005).

In a nutshell therefore, economic policies are meant to encourage economic growth rate in the long-term by dealing with structural issues that may be obstacle(s) to future prospects for that economy.

References

Colorado.edu. (2011). Business cycle, aggregate demand and aggregate supply. Web.

Mankiw, N. G. (2012). Principles of macroeconomics (6^th). Ohio: South-Western, Cengage Learning.

Mitchell, D. (2005). The impact of government spending on economic growth. Web.

Prithiviraj, S. (2009). Issues of economic growth and government policies promoting economic growth. Web.

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Economic Policies Employed by Governments

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