How Demand-Side Policies Can Be Used to Stimulate Economic Growth - Essay Example

The debate of demand and supply is as old as the existence of the mankind. There is always a debate between the two theories that whether one has to let the economy grow without intervention from economists, policy makers and governments or there should be a lot of thinking and demand policy making involved in order to make the economy grow. Each has its own opportunities, advantages threats and weaknesses. Even some policy makers are of the view that key to success is if the government holds the major industries within the country. It is good to support one theory but with experience it has been found that the blend of both approaches can work wonder for the nations. There is not a one solution that fits all. (Bacon, 1976) So there are certain situations where the demand policy can harm the economic growth while in the other situations the implementation of demand policies can bring about positive results for the countries. Economics has to play a role in every part of our life, whether it is on the micro level or the macro level. Usually in short, the whole economics is based around the concept of demand and supply policies. The demand side of the sphere is based upon the consumption patterns of the consumers and markets. Some of the markets that are involved in creating demand are the consumer markets, resellers, and government markets, international and national markets. To be specific the demand side is dependent upon the fact that how much the entities involved are able to pay and what will they save from the disposable income. (Ruby, 1999-2003 ) Some of the areas that are covered in the demand supply sphere of macroeconomics are the level of income, purchasing power of the consumers and markets, the inflation rate, improvement in the living standards of the people and density and dispersion of the population. The supply side of the market ensures or focuses up on the fact that what is the ability of the producers to produce in certain scenarios and how demand and supply are affecting each other. There are multiple policies that collectively represent themselves as the demand side policies but the two main or major categories involve the monetary and fiscal policy. The monetary policy of the demand policy depicts the main role of the central bank in maintaining the flow of the cash among nations. The supply of the money is basically controlled with the help of the central bank. On the other hand the fiscal policy depicts how much the government is spending and how much taxes they are collecting. It is on the basis of the government spending which determines the growth and establishment of the nonprofit sector in the economy. The type of the government formation also has a major role to play when determining what factors fiscal policy will consider. (Wetherly, 2011) Usually in the statist and liberal regime or the nature of the government the government spending is low for the welfare of the population or nation and the scenario is that the fiscal policy creates a huge demand but the resources to fulfill this demand are limited and costly to afford so the economic growth is lower. Similarly in the corporatist or social democratic regime the nonprofit sector grows and the government spends a lot of money for the welfare and well being of the people. In these types of regimes people have great deal of money to spend and other than saving they can spend money to fulfill their wants and demands. The demand side policies are able to boost the economic growth with initiating a change in the gross domestic product values or the output of the economy. Even the blend of both can be used to improve the economy. Some of the areas in which government can invest and can make effective policies by undertaking demand side polices include the labor laws and policies. This area can cover the immigration laws which can induce huge population shifts from one geographical area to other, education at subsidized rates for the less literate people and the senior citizen retirement and social security plans. By working on these the governments can increase the capacity of the nation to produce and make it more productive. The technological advancement, accumulation of the capital and investing in the opportunities of research and development can be another area which can build up resources, produce more products and thus create more demand by increasing the disposable income of the socio economic sectors of the society. A good example of the demand side policy implementation to improve the economic growth can be reduction in the taxes, if an individual has to pay fewer taxes ultimately there is a large amount of disposable income in his hand to spend and save. According to Engel’s law whenever the disposable income of the consumers increase they used to spend same on the basic necessities, but spending on luxuries as well as savings increases. It has been observed that of all the countries the countries that have little international foreign reserves, volatilize and larger cash flows as compared to the economies or the markets they operate in and the currency that is not convertible the economic growth is difficult. One needs to resolve the issues and decrease the volatility of the currency in order to improve the economic growth by using demand side policies.(Philip Arestis, 2007) The factors that can positively or negatively influence the economic growth usually involve the natural capabilities or the resources of the nation which usually form the subsistence economy, the free economy, lesser trade barriers, lesser tariff and non tariff barriers, the infrastructure and property rights other then technological resources also matter a lot. Both supply side policies and the demand side policies have the ability to influence the economic growth. In the demand side policies the basic purpose is to shift the aggregate demand curve to the very right side, while the basic purpose of the supply side policies is to shift or move the long rate aggregate supply curve. Not only demand side policies are enough to promote the economic growth although their role is significant but it is the blend of both demand and supply side policies that can truly help the nations to get out of the recessive economy and move it towards growth. In order to increase the investment expenditure the taxes need to be brought down which leads to the industry and diversified project initiation more profitable ultimately creating more employment opportunities. The government spending has a direct influence up on the government expenditure and creating the new demand policies. One can introduce the expansion in the fiscal policy in any of the categories to end the decline in the economic growth. (Arnold, 2008) So all in all demand side policies should be taken into consideration in order to make the growth of economy possible when the economy or the nation is not following the right path or wander off from the optimized long run path of growth. If the trend in the recent few decades is taken into consideration then it is obvious that to boost the economic growth via demand policies it is monetary policy that is given first hand importance as compared to the fiscal policy. It is at the secondary or later stage that the cutting down in taxes is suggested or approved to improve the growth.(THOMA, 2011) The supply of money in the economy to create the demand and the fixation of the interest rates all are included in the monetary policy. The tax reduction and realization on the monetary policy helps to stabilize the economy and help to control and maintain the business cycle. But scenario is not same in case of slump or recession. When there is recession in the economy the fiscal policy or the government spending plays a greater role.(http://economicsonline.co.uk, 2012). In the government spending the most of the investment takes place in the infrastructure development category. This infrastructure development creates new employment opportunities and thus positively creates demand and helps the economy to grow. It is believed that in the developed countries a total of seventy percent that the population spends up on the services and goods is later invested by government in areas that help the economy to grow and stabilize. But in the past few decades governments are tackling the recession via other strategies and the most focus is upon increasing the aggregate demand by spending more upon the services and goods and tax reductions. The tax reductions have increased the disposable incomes and thus increased the purchasing powers of individuals and they are ultimately spending more upon the goods and the business cycle continues. (Spyros Andrepoulos, 2012) Although the infrastructure development was also on the list of the government spending but the major concentration is upon boosting the economic growth by increasing the demand with every passing day. References ARNOLD, R. A. 2008. Economics. Internet: Cengage Learning. BACON, R., AND ELTIS, W,. 1976. Britains Economic Problem - too few producers. HTTP://ECONOMICSONLINE.CO.UK. 2012. Fiscal policy, government spending. Available: http://economicsonline.co.uk/Global_economics/Fiscal_policy_government_spending.html. PHILIP ARESTIS, M. B., J. S. L. MCCOMBIE 2007. Economic Growth: New Directions in Theory And Policy. 1 ed. Online: Edward Elgar Publishing. RUBY, D. A. 1999-2003 Economic Policy. [Accessed 22 April 2012]. SPYROS ANDREPOULOS, J. F. M. P. 2012. A Different Place. Morgan Stanely [Online]. Available: http://www.morganstanley.com/views/gef/. THOMA, M. 2011. Unemployment: Why Stimulus Hasn’t Created More Jobs Available: http://www.thefiscaltimes.com/Columns/2011/05/25/Unemployment-Why-Stimulus-Hasnt-Created-More-Jobs.aspx#page1 [Accessed 23 April 2012]. Wetherly, P. and Otter, D. (2011) The business environment: themes and issues, 2nd edition, Oxford: Oxford University Press.  Read More