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Economic growth and goverment interaction

September 27, 2019

How can the government stimulate economic growth? 

Government stimulation can be seen in political settings and regulations that interact with the environment where a certain business is works. The central government can use various tools such as utilizing fiscal and monetary policies, engage in stimulus spending by initiating projects or enacting policies that encourage private sector investment. Its not that simple, though. Government intervention with a purpose to stimulate the growth might turn in to a negative effect.  For example, stimulus spending by the government may occur at wrong time due to delays in identifying and assigning funds. Secondly governments are not efficient using capital to its most useful purpose, leading to waste. (Kenton 2019).

 

As we can see there are factors playing in the growth of economy that are intertwined, hence if growth is the target, all of them has to be taken into consideration. Economic stimulation in general is a wide concept and is affected by political, social, technological and economical aspects. There for we will review in a general sense all of them to get a better idea of the main picture, where business and industries function.

 

 

What type of economies exist?

There are a numerous number of economic systems, but on the broad perspective there are four types that economist generally recognizes. They are 1. Command economy 2. Market economy 3. Traditional economy and 4. Mixed economy. Each of these kinds of economies answers the basic question of what to produce, how to produce it, for whom to produce it. They answer these questions in three different ways. (WallStreetMojo n.d.)

 

The traditional economic is the most ancient type of economies in the world. Rural, second- or third-world areas still can be found to function on the basis of traditional economy. These areas are usually very close-knit and socially satisfied and each member has a specific role to play. However, they do lack access to technology and advanced medicine. (Agarwal 2019.)

 

As the name gives a way the command economy functions on the command of the centralized power, because of the centralized feature the government is usually involved from planning to redistributing resources. Advantages of a command economy is that the government can mobilize resources on a massive scale and focus on the benefit of the society rather than an individual. On the other hand, workers are forces to pursuit jobs the government sees fit and lack of risk removes the need for innovation. (Agrawal 2019.)

 

Market economic system, also known as the free market economy. Is a capitalist economic system where production of goods and services is driven by the consumer practices. The demand pushes supply, hence, this type of economy relies on the law of supply and demand. Opposite to command market, in free market there is no government interference. Entering the market is free, meaning industries can freely enter the market. Even though, there are a lot of innovations, efficiency of competition and greater chance of wealth. It does face inequity problems among the citizens, unemployment may rise and poor working conditions may be seen as there is no government regulations. (Belyh 2018.)

 

A mix between free market economy and command economy is called Keynesian economic system or dual economic system. Freedom to choose and pursuit opportunities exists while there is government interference, but not to the extreme. The idea is to benefit from both worlds, include policies that are socialist and capitalist. Benefits include the possibility of social safety net programs and welfare. Inequality can be reduced by taxation. However, intermediaries can profit individually from funds directed to different projects. Black market scenarios can be imminent. Government interference can go too far and in other times there’s not enough interference. (Agrawal 2019; Belyh 2018.)

 

 

 

 

What type of political tools exist?

As we study the effect government policies and their economic impact, we come to a term called political economy. Basically, we study how economic theories such as capitalism, socialism and communism play out in the real world. The political environment is perhaps the least predictable elements in business environment, and it can impact business organizations in many ways. (Kenton 2019; Pestleanalysis n.d.)

 

Political factors in different areas differ, hence the economic impact is different. In a democratic country, where there is cycles of orders. The power derives according to the group elected for a certain time. In countries where corruption is seen, it becomes an obstacle for economic growth, because the success of the company is not based on the value they bring to the customers. The main factors that affect economic environments are: Bureaucracy, Corruption level, Freedom of the press, Tariffs, Trade control, Anti-trust law, Employment law, Discrimination law, Regulation and deregulation, tax-policies, Import restrictions on quality and quantity of product and Consumer protection and e-commerce. (Pestelanalysis n.d.) Marketingtutor sums it up to four factors that affect economic development which are: 1. Tax and economic policies 2. Political stability 3. Foreign Trade Regulations and 4. Employment Laws (marketingtutor 2018).

 

 

 

 

Which actions (political, social and economic) support economic growth?

Industries are affected by many different areas and the easiest way to understand them is by PESTEL analysis. Since we covered political aspect above we will go to the social affects. For industries to grow they need to understand in depth the social and cultural changes that they are in, for example younger generation tends to use technology much more than the older generation. The main social factors that impact customer needs and market size are: Lifestyles, Buying habits, Education level, Emphasis on safety,, Religion and beliefs, Health consciousness, Sex distribution, Immigration and emigration rates, Population growth rate, Age distribution and life expectancy rates, Attitudes toward imported products and services etc. The social aspect therefore focuses on the aspects within the society. These factors affect attitudes and opinions, hence affecting sales. (PESTELanalysis 2015.)

 

 

The economic aspect plays a big role deciding how the company goes forward. These factors are connected with goods, services, and money. These factors affect directly business and provide important details on topics such as consumer demand, taxes and asset value. Some examples include: Interest rates, Exchange rates, Recession, Inflation, Taxes and Demand / Supply. (Bush 2016)

 

 

 

Conclusion

Mixed economy of command- and free market, seem to result in best outcome. Government role is providing an environment where the competition is healthy, and the benefit of the society comes before the benefit of an individual. At the same time the government recognizes that it is not the most efficient in making economic decisions, hence giving enough room for industries and business to work.

 

The government has many tools to intervene with development of business, however the environment consists of other aspects such social, cultural and technological as well. Therefore, government interference will directly provide the wanted outcome in the real world.

 

 

 

 

References:

Agarwal P. 03 Jun 2019. The Four Types of Economies. Intelligent Economist. URL: https://www.intelligenteconomist.com/types-of-economies/. Accessed: 26.09.2019.

 

Belyh A. 09 Sept. 2018. The Four Types of Economic Systems. Cleverism. URL: https://www.cleverism.com/types-of-economic-systems/. Accessed: 26.09.2019.

 

Bush T. 04 July 2016. Economic Factors Affecting Business. Pestel analysis. URL: https://pestleanalysis.com/economic-factors-affecting-business/. Accessed: 26.09.2019.

 

Bush T.  14 July 2016. Legal Factors Affecting Business. Pestel analysis. URL: https://pestleanalysis.com/legal-factors-affecting-business/. Accessed: 26.09.2019.

 

Kenton W. 04 August 2019. Political Economy. Investopedia. URL: https://www.investopedia.com/terms/p/political-economy.asp. Accessed: 26.09.2019.

 

Marketing tutor 10 February  2018. Political Factors Affect Business Environment. https://www.marketingtutor.net/political-factors-affect-business/. Accessed: 26.09.2019.

 

Okolski G. & Stratmann T. 10 June 2010. Does Government Spending Affect Economic Growth? Monetary Policy. Mercatus Center. George Mason University. Washington. URL: https://www.mercatus.org/publications/monetary-policy/does-government-spending-affect-economic-growth. Accessed: 26.09.2019.

 

Pestel analysis N.D. Political Factors Affecting Business. URL: https://pestleanalysis.com/political-factors-affecting-business/amp/. Accessed: 26.09.2019.

 

Pestel analysis 25 february 2015. Social Factors Affecting Business. URL: https://pestleanalysis.com/social-factors-affecting-business/. Accessed: 26.09.2019.

 

Types of Economic Systems N.D. WallStreetMojo.URL: https://www.wallstreetmojo.com/types-of-economic-systems/. Accessed: 26.09.2019

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