Fiscal Policy and Economic Indicators

Fiscal Policy and Economic Indicators

Introduction

Fiscal policy refers to the involvement of the government in the nation’s economy through monitoring tax rates and adjustment of spending levels. Fiscal policy is used by the government to push economic development agendas as well as directing the nation’s economic goals. Economic indicators refer to a sample of economic data that can be used as a basis to not only analyze the prevailing economic trends but also predict future economic trends. Economic indicators help in the diagnosis of the overall health of the economy.

Summary of Article

Fiscal policies include taxation, the introduction of subsidies, and public provision by the government.  Taxation as fiscal policy is used to increase the prices of purchases and sales of goods that flood the market (Frenkel, Razin and Yuen, 1996). The second possible intervention is introducing subsidies, and this lowers the rates of purchases and sales of goods produced in low volumes. Other methods of intervention include a public provision that entails the government directly providing a good to attain equality to all and hence maximizing public welfare. In cases where the government does not want to provide a particular good directly but still want to influence its consumption, it employs public financing. Public financing entails financing a private company to deliver the level of provision required. Another method if intervention by the government in mandating or restricting individual purchases and sales.

Economic indicators help investors and investment analysts to assess investment opportunities in an economy. Gross domestic product (GDPs), consumer price index, and employment index are the leading economic indicators (Stock & Watson, 1989). Gross domestic incomes are the total value of goods and services produces in a country over a given period. Expanding GDP is an indicator of a growing and promising economy. The consumer price index is the measure of the change in the prices of commodities in a given economy (Burdick & Fisher, 2007). The consumer price index measures inflation in an economy. A rise in inflation leads to an increase in interest rates hence reduce lending. Employment indication refers to factors such as labor force and payroll. A decline in the employment index causes a sequential decrease in consumer spending.

Discussion

Market equilibrium is an essential factor in trade; it is achieved when the supply in a given market equals the demand. A market that demonstrates a state of equilibrium is said to produce the most efficient outcomes, and when this fails, it results in market failure, which forces the government to intervene. Through proper government intervention, there is a possibility for improvement of efficient outcomes.

Fiscal policies can have direct or indirect effects on the firms and the people in that country. Direct effects are predictable impacts that are likely to occur if there is no change in behavior to the intervention. Indirect effects, on the other hand, are effects that only arise when firms and individuals alter their behavior after the government’s interventions. Redistribution of incomes and correcting market failures are examples of government’s interventions in economic matters.

Graphical Analysis (Image and 1 paragraph)

PL

Vertical LRAS at full

Upward sloping SRAS curve

PL 1

Downward sloping AD curve

                                                                             ^{Y1                                                                            r}GDP

The vertical axis of the graph represents the price level denoted as “PL,” and the horizontal axis represents the real GDP indicated as “^r GDP.” The downward-sloping curve represents the aggregate demand and is labeled “AD.” The Upward sloping curve represents the short-run supply curve and is labeled “SRAS.” The pint where supply equals demand is referred to as equilibrium. A vertical long-run aggregate supply curve is dependent on the output gap od long-run equilibrium.

Consequences

A market that demonstrates a state of equilibrium is said to produce the most efficient outcomes, and when this fails, it results in market failure. Market failure refers to a market situation that leads the economy to give results that minimize efficiency. It should be noted that market failures can interfere with the welfare-maximizing result in a free market. Similarly, there can be government failure resulting from inappropriate government interventions hence calling for the politicians to consult widely on ways of designing public policies that promote maximization of economic efficiency and wealth redistribution in the country.

Refrences

Burdick, C., & Fisher, L. (2007). Social Security Cost-of-Living Adjustments and the Consumer

Price Index. Soc. Sec. Bull., 67, 73.

Frenkel, J. A., Razin, A., & Yuen, C. W. (1996). Fiscal policies and growth in the world

            economy. MIT press.

Stock, J. H., & Watson, M. W. (1989). New indexes of coincident and leading economic

indicators. NBER macroeconomics annual, 4, 351-394.