The economy of a country comprises of its economic resources such as labor, capital and land and the manufacturing, trade, distribution as well as consumption of goods and services. On the other hand a market may be defined as a process by which prices of goods and services are determined. Market allows traders to exchange goods and services by facilitating trade through allocation of resources (Hossain, 2009).
Effects of Recession to a Nation
A federal budget reflects the social, political and economic priorities of a nation. It serves as an important tool in the stabilization of an economy. Recession refers to a general slowdown in economic activity evidenced by a fall in inflation, gross domestic product, and employment rates. Other effects may include reduced spending of investment, household incomes and business profits. Nagle (2010) stresses that recession may results into a decrease in value of what a country offers to its citizens and to other nations.
Economy Stabilization through Increased Federal Budget Deficit
A budget deficit is the amount of money by which a financial institution, for example a government or a company’s spending exceeds its income over a period of time. Recession may result in a deficit in balance of payments and budgetary allocation. These deficits require monetary and non-monetary sources of financing (Hossain, 2009). The federal government may stabilize the economy from the effects of recession by issuance of bonds to investors, financial institutions and its central bank. Federal governments may increase its budget deficit through increasing the “monetary base, the public holdings of treasury bonds and loss of foreign reserves at its central bank” (Hossain, 2009).
Stabilization of Economy
Increased federal budget deficit in a government budget enables the government to utilize the money to deal with the recession and to promote public investment in priority areas like infrastructure, education and health services. Increased government deficit may influence the economy through a decrease in the interest rates. This decrease would raise the amount of total income received, hence encouraging individuals and corporations to save.
Alternatively, during recession, an increase in government purchases due to an increase in government budget deficit creates a market for products which consequently creates income. The resultant creation of income increases consumer spending leading to a further increase in the demand for products. This demand increases the Gross Domestic Product and raises the employment opportunities hence stabilizing the country’s economy.
Adjustment in Wages and Prices
The adjustment in wages of individuals and prices of commodities are key determinants in a county’s economic stability. For an economy to attain long run equilibrium then there should be flexibility in wages, real interest and exchange rates. Hossain (2009) indicates that the rigidity of the wages, real interest and exchange rates prevents the products in the market from clearing after demand and supply have been affected by recession. The adjustment in wages and prices of commodities in the market enable consumers to purchase goods even after a period of recession. For example, Hossain (2009) illustrates that in developing countries like Egypt the adjustment in agricultural real wages and prices during peak and slack seasons results into a stabilized economy.
Effects on Economic Equilibrium
Nagle (2010) considers wages and prices of commodities as major causes of recession. However the adjustment in marketplace due to the fall in demand for goods and services restore balance in the economy. Nagle (2010) asserts that rigidity in wages puts a serious effect in the business cycle. For instance, when workers are hired at a salary that reflects the current state of economy, then a fall in the state of economy may result into laying off of the workers instead of an adjustment in wages. In this scenario, the economy would be destabilized. Thus the adjustment of wages in an economy counteracts the economic recession hence resulting in a long run equilibrium state of the economy.
Nagle (2010) further explains the effect of a rigid pricing. This can be illustrated by the menu costs in restaurants. As long as prices have been set and printed, then the business may not easily change the menu list to reflect an economic shift. This is due to the fact that the cost of retyping the menu list every time the economy changes may result into more damage to the business than simply leaving prices constant. Thus the adjustment in prices with regards to the shift in the state of the economy has a considerable impact.
Marketable Pollution Permits System versus Command-and-Control System
The environmental impacts on emissions by companies have been put under consideration by governments resulting in public policies on emissions regulation. Three types of policy approaches have been applied. The first is persuasion where polluters are exhorted to reduce emissions. The second relies on direct controls and include the command-and-control system whereas the last uses incentives to reduce these emissions. This paper discusses market pollution permits and command-and-control system.
Marketable Pollution Permits
Marketable pollution permits enables polluters to emit a certain quantity of pollution within a given period of time. In this instance, a polluter makes a bid for a permit that enables him creates a fixed amount of pollution. Once a polluter has obtained a permit to emit pollutants to the environment then he has a right to emit. They also have rights to exchange rights with other polluters to increase utility and profits within their businesses. The consequence is concentration of polluted areas. However, this method is less costly in emissions control as opposed to the command and control. Pollution is reduced at the lowest possible cost and it also provides polluters with an incentive to explore other emissions reductions means, either by selling more rights or purchasing permits.
On the other hand, command and control approach is regulatory in that the government sets a threshold to a polluting agent on the amount of pollutant it can emit. The government may also set a particular production method that is environmentally friendly to be used by a polluter. Thus, in this approach, the government tells a firm or an individual polluter the amount or the method by which emissions of pollutants must be adjusted to.
Inasmuch as command-and-control method achieves it mandate in environmental conservation, economists have criticized it for two reasons. First, it is expensive. It attains a given level of emission at a higher cost than what would be needed to achieve the same result if marketable pollution permits were used. Secondly, it lacks incentives to the polluters to enable them explore technological means that may limit emissions. Thus, the critics argue that this method is unlikely to attain least-cost reduction in emissions.
Gross Domestic Product
Measure of a Country’s Success
Gross Domestic Product (GDP) is one of the primary indicators of a country’s economy. GDP refers to the total value of all goods and services produced over a period of time .Nagle (2010) asserts that GDP can be calculated by summing all the money spent on goods and services in a given country. Primarily, GDP determines the buying and selling pattern in a country for it includes products bought and sold by households, governments, businesses and the country’s net export, and all goods and services created and offered in a country (Nagle 2010). In this regards, GDP is a good measure of a country’s success.
Accuracy of GDP as a Measure of a Country’s Wellbeing
The question critics of GDP ask is whether it gives an accurate measure of a nation’s economic well being. The above definition of definition of GDP fails to incorporate the vast changes in the contemporary society. The GDP should incorporate wealth variation, household production, environmental issues, personal safety, economic security, social interactions and relations, and international income flows. A good indicator of a nation’s economic well being should consider the factors mentioned above in order to promote sustainability and environmentally friendly development. For instance, failure to incorporate environmental factors in the GDP of a country may prompt some of the less developed nations to undertake rapid growth regardless of its environmental impact (Hossain, 2009).
GDP should also take into consideration the work with non-monetary value and those performed within families for free which contribute to a nation’s wellbeing. For example, the unpaid care and supervision for the needy undertaken by care workers, family members while at home and at work. The acknowledgement of care work would enhance economic effectiveness and personal wellbeing of citizens. GDP should also incorporate the social welfare policies. As recommended by the Sarcozy Commission (2008) the GDP should adequately address personal wellbeing which should include emotional ability and capabilities, personal activities, social connections and security. This would supplement GDP through the enhancement of a more detailed analysis of a nation’s citizenry.
In conclusion, this paper has shown market and economy trends with respect to budget deficits and adjustments in wages and prices. The paper has also discussed two approaches used in pollution. It has observed that an effective system of pollution reduction should provide incentives to the polluters as well as achieve maximum pollution goals at minimum cost. The paper has identified the effectiveness of marketable pollution permits. It has also analyzed the role of a nation’s Gross Domestic Product as well as indicating a few shortcomings of GDP as a tool in assessment of economic success.