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Factors which affect international trade operation in Africa

“The International Day of peace which was established by a U.N resolution in 1982, and is marked every year on September 21, is a global even whose activities are significant in highlighting the worldwide efforts towards conflict resolution and peace building.”[Diaspora 2008]
This day is more concern with African continent which most of place conflict have taken place. That there are troubles in Africa for quite decades even after several countries in the continent went through change from colonialism to self-government, is not a deniable reality.
2.0 Political Stability in Africa
As described in the first essay, country with political stability, donors will trust that country and they will invest a lot. The larger company can transfer they investment to that country, also investor can return their profit back to the communities, and will boost the sectors which it almost died of is in bad shape.
Country with political stability economy will grow; this is due to investor will invest more as long as they feel secure on their investment. People of the respect country will be benefited by get knowledge which transferred from the investors.
Countries that can produce a product at the lowest possible coast will be able to gain a larger share in the market. Therefore an incentive to produce efficiently arises. This will help standards of the product to increase and consumers will have a good quality product to consume.
More employment could be generated as the market for the countries goods widens through trade. International trade helps generate more employment through the establishment of newer industries to cater to the demands of various countries. This will help countries bring down their unemployment rates.
However it could lead to a more rapid depletion of exhaustible natural resources. As countries begin to up their production levels, natural resources tend to get less.
2.1 Assessment of political stability on international trade in Africa
2.1.1 Peace and Stability Tanzania is one example of the country among sub Saharan Africa which economic and political stability is stable. Multi party democracy adopted in 1992 has not disturbed the peaceful political climate of the country. This is why FDI are very interested with country situation and invest a lot on different sectors, such as Mining Industries, beverage industries, telecommunications companies, NGO’s and so on.
2.1.2 Labour skills and availability International Trade is doing well; this is because of access to skilled labour which is a key priority for companies competing in African economies. Tanzania has a long term commitment to make sure development on training and educated specialists is going well. The government put more budget of education sector in order to improve education and improve human capabilities and encourage technology transfer as a precondition for enhancing productivity of investment and attaining the desired level of competitiveness. [http://www.tic.co.tz/]
2.1.3 Private sector development Tanzania has notable itself among of few African countries that have thoroughly transformed their economies. Achievement of these reforms is imitated in the country’s strong macroeconomic fundamentals every time increasing growth rates, consistent falling inflation and increasing inflow of FDI. One of the factors that contributed to this achievement is the country’s unwavering commitment to build a strong private sector. [http://www.tic.co.tz/]
2.1.4 Infrastructure Facilities Tanzania put infrastructure as one of the key investment drivers of country is trying very hard to improve.
2.1.5 Stable Macroeconomic performance Tanzania had been caring out successful economic and structural reforms, which have improved economic performance and sustained growth. These achievements are based on solid foundations of political and economic reform undertaken by the government since 1986, placing Tanzania in a position where a prolonged period of high GDP growth rates is expected. In additional, Tanzania has a stable fiscal regime with sustainable level of inflation. [http://www.tic.co.tz/]
3.0 Political Instability in Africa overview
Regarding political instability in African Country, it is also undeniable that African continent has gone thru some tough situation during fifty years past. But the fact is almost African cases regarding political instability the major cause of problem is leadership. And because of this African freedom heroes come to dictators, while African natural resources, politics of elimination and scarcity to slope the balance of authority continues to control the public globe. Moreover, these difficulties have been pointed out due to ordinary Africans leaders who already edged and they don’t want to retire.
Political instability in Africa may be obliged much of its reason to internal factors, though the interpenetration of internal and external aspect especially geo-political and economic comfort of the international community always play a major role in undermining the vey procedure and society that are expected to care for democracy and to inspire a sense of stability for community development in Africa. In combination to such issues as unequal development, poverty, disease, violence and the scheming tendencies of the local best, political and economic stability in Africa is continually under threat is though not emanating from inside the continent but as of external interests whose dryness for African resources, continue to figure the dynamics in areas connected to governance. Resources in Africa if fine managed are able of providing for its entered population, therefore the potentials for an extra stable environment, nevertheless, it is well recognized that stolen riches from African frequently end up in banks abroad. [African Focus Bulletin, 2006], exist it money stolen by the political selected (case of Mobutu of Zaire, Abacha of Nigeria, and Moi of Kenya, just to state a few or the current Kibaki regime Anglo-leasing scandals in Kenya), they still end up in banks in the western capitals.
3.1 African’s leadership problem and political instability
The African political instability and former related problems is basically an outcome of its leadership trouble. African governments are run in ways that have been staring as far from the modern western state structure [Osei Tutu, 2004]
Domestic issues play a major role in the changeover. These domestic issues frequently variety as of corrupt rulers, repressions, a majestic legacy, distended states, and inadequate political structures and an obliteration of democracy [diamond, Linz, and Lipset 1989; Diamond and Plattner 1999]. However, the international framework often plays a vital role in both the changeover in general and the attendance of violence in exacting [Lupo, 2004]
3.2 African’s economy and political instability
Despite the miserable predictions, most African economies are exploiting well even though a few country cases are still experiencing hard times in terms of political stability, economic growth and challenges posed by poverty and diseases, trade quantity and foreign investments have enlarged over time. However the political instability in Africa, which as well underpins the economic development frequently, has strong associates to internal and external distinctive interests time and again. Africa’s resource in this case has never been its approval, but a nuisance. These is no justification for the under development of the continent even as it sits on huge natural resources. [Rodney, W. (1981)]
3.3 Africa Political violence and political instability
As an effect, the legitimate frameworks and state institutions have been meddle with, in order to generate an uneven play field alongside the opposition. Some of these procedures have seen irregular violence during electioneering era, leading to political instability. However the level of violence and the mode in which they are perpetrated differ from country as the recent elections in Uganda, Nigeria, Kenya and Zimbabwe can illustrate. [Mahamoud, 2006:15]
With a lot of countries holding their third or fourth multi-party elections, internal power struggles have engaged a cruel dimension, thereby intimidating the very existence a lot of countries. Since the beginning of multi-party democracy in mainly African countries electoral procedures have been go together with political violence, as part of the democratisation process [Lupo, 2004; Huntington,1991]. Most violence is such cases are often state supported, to the advantage of the incumbent, while a variety of groups that hike for state power also intensely hired violence, in the form of informal groups, militias and gangs. In the circumstance of all the violence, it is the normal people who loose out in terms of lives and property. The calamity is that the political conflict is not about substitute political programmes that could address the main problems such as poverty, disease and illiteracy, but only a fight over who has right to use the state resources.[http://www.country-details.com/africa/zimbabwe-economy.php]
4.0 Analysis 4.1 International Trade within Political Instability in Africa Country with political instability will be hard for investor to invest. This is due to situation is not good for them. However other investors are attracted with situation and take advantage for the situation by starting to make business. The International companies who are suppliers of guns and weapon will their time to sell and pray to God situation remain the same for sack of the business. People killed each other but investors they don’t care as longer they doing business.
In other part they may support that conflict by provide some money for other part to make them be able to fight other side and war continue. So as we can see one side they will be in trouble due to the investments been destroyed in the war because of political instability, and other side they will be benefited.
Some of countries remain poor because of political instability. This could be ethnic tension, tribalism or all out war. Country such as Zimbabwe, Somalia, Rwanda and others they involved with long-term conflicts, they have a little chance of developing. Some countries also crash ethnic divides that are a constant distraction de-stabilizing the region and end up of discouraging investment, one example is Sir Lanka.
4.2 Assessment of political instability on international trade in Africa There are often political factors involved in why some of African country such as Zimbabwe, Somalia Sudan, Ethiopia, and Burundi and other suffers. This is due to bad government. Governments need to do a lot of things to encourage development, they need to build and maintain infrastructure and raise and spend finance wisely on the right projects. When governments are inept at managing infrastructure, development is impossible. Nobody wants to build a factory in a city where the power could go out at any time. Zimbabwe and other mentioned country should do the same and also needs to set up their laws and business practices in a way that encourages investment.
Some of the Factors which affect international trade operation in Africa Corruption International Trade Trade Laws Political Instability Corruption Corruption is something which frustrating, disheartening and fundamentally disempowering investors. When government become loose on the simple process such as customs officials which everyone knows about, it end up of make life difficult to investors and business in general. In African countries this is common and is needs to be stopped and my country tried very hard to make it happened. [makewealthhistory n.d]
Trade Laws Trade Laws it is largely a political matter. “Sir Walter Raleigh famously said ‘whosoever commands the trade of the world commands the riches of the world and hence the world itself’
Political instability Political instability plays a role in why some countries like Somalia and others remain poor. This could be ethnic tension, tribalism, or all out war. Needless to say, countries with long-term conflicts such as the ones in Somalia or Afghanistan have little chance of developing unless otherwise. [makewealthhistory n.d]
I tried to make research for some of the African countries as follow
SOMALIA Somalia involved with war since of Siad Barre’s regime in 1991. A lot of people in Somalia suffered due of conflict which causes long-term impact of disturbed peace, security and stability also development. This conflict cause a lot of problem and continued loss of life which end up of intermittent fighting, famine, displacement of persons and the resultant flow of refugees. The conflicts affect also neighbor’s countries such as Kenya, Ethiopia and Djibouti, due to proliferation of small arms, huge influx of refugees many of whom are ex-soldiers its criminal target.
Overall Somalia politically is unstable. After the collapse of the Somali government various factions decided to vie for control of Somalia, which resulted in chaos, clan warfare, and interplant fighting. Although Somalia is not as lawless as it was at the time when Barre as ousted Somali factions still continue to fight for control of the territory.
Somalia is a much divided national that lacks any sense of cohesive government and therefore there is no real overall ideology of the country. Somalia is attempting to stabilize many of the internal conflicts that continue to prevail in the country along with attempting to create a political ideology and a foreign policy.
Political uncertainty it’s like nightmare to investors. It does disturb FDI (foreign Direct Investment) flow of their investment plan together with private sector and economic growth because government owned those public sector units as well. If happened that country faced unstable political, many this goes wrong.
In situation like this no investor will be interested to invest in Somalia Land. This is due to political instability which put FDI in hard situation to invest. This conflicts cost the horn Africa countries deeply in terms of security due to increase of groups of arms, due to influx of refugees and lost trade.
However international and regional organizations such as the UN (United National) and IGAD (Intergovernmental Authority for Development) have come between for the aim of bring peace in the war torn country. According to [BBC conversation 29th December 2010 thru radio] American tried to make peace there but they failed due to Somalia arm group come together and fight American.
Somalia is one of the nations that has struggled and still does today in order to function well. It is one of these are rare places where there is ongoing civil war and it has no central government. Somalia is in a state of anarchy because it had problems after their president got assassinated in 1969, it has many economic problems, and native clans in Somalia are constantly fighting with their foes. If Somalia can solve these problems, it will be able to function very well and gain a government that will suite them well.
UGANDA Another example is Uganda country. Iddi Amin President by then ruled the Government to manage all of Asian investor’s properties and commanded them to leave the country in short notice. This was applied to all whites’ investors, and even rich black. This was real bad to investors. Due to dictatorship mode of government the country came down economically and eventually to poor position.
After war he decided to attack neighbor country which is Tanzania and caused a war. Situation become worse, Tanzania and Uganda war rendered Tanzania economy to fall drastically. It takes time for Tanzania to recover due to many country resource used on that war. Frankly it will be difficult for investors to withstand in violence countries. Economic growth needs political stability which will attract investors to invest in a particular country.
BURUNDI Another example is Rwanda and Burundi. People killed and neighbor countries also affected due to the guns and other dangerous tools goes to them and used for robbed and so on. Rwanda war was so bad because it was tribe war (within Rwanda’s people). It was very difficult for investor to invest there or do international business there. They so cruel killed themselves, kill religion leaders and so on.
Let’s look at Zimbabwe; Mugabe makes things worse thereby take away the investors investments which most of them was farm. Those investors were doing very well on that sector. Mugabe was trying to divide the land to the Zimbabwe farmers without knowing that they don’t have money to invest there and at the end they fail to run the business. Look at Zimbabwe now is terrible. There was violence which has badly hurt the commercial agricultural sector “the traditional cause of exports and foreign exchange and the provider of 400,000 jobs, revolving Zimbabwe into a net importer of food products. The EU and the US give food aid on humanitarian foundation. Badly needed bear from the IMF has been suspended as of the government’s arrears on long-ago loans and the government’s unwillingness to ratify reforms that would become stable the economy. The Reserve Bank of Zimbabwe normally prints money to fund the budget deficit, causing the official annual inflation rate to rise from 32% in 1998, to 133% in 2004, 585% in 2005, passed 1000% in 2006, and 26000% in November 2007, and to 11.2 million percent in 2008. In the meantime, the official exchange rate chop from approximately 1(revalued) Zimbabwean dollar per US dollar in 2003 to 30,000 per US dollar in September 2007?[ country-details n.d]
Many people in Zimbabwe they don’t have jobbed, currency is in bad shape due to inflation. Before Mugabe took land from investor, people were employed on that industry, the difference from now there is no job due to those who given that land they don’t have money to run the business.
Zimbabwe is other country which has political problem. Zimbabwe is the second highest HIV infection fate, per capita, in the world. Zimbabwe has experienced the breakdown of law and order, unemployment of 65%, inflation104%, the collapse of the economy and the health delivery system. Human rights abuses in the form of violence and rape have continued unabated and are carried out with impunity by the ruling party activists. Voices against basic human rights abuses speak at great personal risk. It has been established that the effects of the current situation have impacted negatively on the health and well being of the people through increased stress, little or no access to primary health care facilities, unemployment, hyper-inflation and a general sense of helplessness and hopelessness. All this is due of political instability. [gateway n.d]
Zimbabwe there are group of people have good life, but majority are not enjoying anything. They have very difficult life. Most of people they live in poverty and cause of anger among them towards government. These anger cause political instability and end up of forming crime revolutions and so on. [wiki.answers n.d]
INFLATION-ZIMBABWE Zimbabwean inflation rates (official) since independence Date Rate Date Rate Date Rate Date Rate Date Rate Date Rate 1980
7%
1981
14%
1982
15%
1983
19%
1984
10%
1985
10%
1986
15%
1987
10%
1988
8%
1989
14%
1990
17%
1991
48%
1992
40%
1993
20%
1994
25%
1995
28%
1996
16%
1997
20%
1998
48%
1999
56.9%
2000
55.22%
2001
112.1%
2002
198.93%
2003
598.75%
2004
132.75%
2005
585.84%
2006
1,281.11%
2007
66,212.3%
2008
231,150,888.87% (July)
http://en.wikipedia.org/wiki/Zimbabwean_dollar
Hyperinflation http://en.wikipedia.org/wiki/Zimbabwean_dollar
Zimbabwe Economic Overview The government of Zimbabwe faces a wide variety of difficult economic problems as it struggles with an unsustainable fiscal deficit, an overvalued official exchange rate, hyperinflation, and bare store shelves.
GDP -real growth rate -6.2% estimated in 2008.
GDP (official exchange rate): $4,397 billion
Note: In 2009 the Zimbabwean dollar was taken out of circulation, making Zimbabwe’s GDP at the official exchange rate a highly inaccurate statistic.[Source: C/A World Factbook]
http://www.country-details.com/africa/zimbabwe-economy.php
EXTERNAL INFLUENCES PHYSICAL AND SOCIAL FACTORS Political policies and legal practices Culture factors Economic forces Geographic influences4.4 Economy factors affecting international business operations OPETATIONS OBJECTIVES STRATEGY MEANS Economy analysis Economic indicators Economy system Economic freedom Transition to a market economy Before Investor decide to invest to any country especial African country always they tried to check of follow
Gross National Income (GNP) GNP helps to measure income generated together by total domestic production towards as the international trade production activities of local companies. Gross Domestic Product (GDP) GDP is the broadest measure of economic activity for a country. GDP helps investor to assessing countries in which the output of the multinational sector is a significant share of activity. Improving the Power of GNI GNI is a robust estimator of an economy’s absolute performance. Here international manager has to be careful because GNI can mislead when he/she tried to compare countries. For example, manager to compare economic power of USA and Tanzania will not give manager a good result. So in order for manager to get good view should adjust it for taken the number of people in that country, their growth rate, and their cost of living also economic sustainability. Per Capital conversion Manager will use this indicator to which helps to explain an economy’s performance according of number of people who lives in such country. Purchasing Power Parity Purchasing Power Parity (PPP) is the number of units of a country’s currency required to buy the same amounts of goods and services in the domestic market that one unit of income would buy in the other country. [Daniel, Sullivan et. al 2009pp186-202] 5.0 Effect of Political Instability – Opportunities could be caused by political instability
5.1 Conflict resolution and peace building initiatives In terms of conflicts in Africa, many hot spots are recovering, and making big leaps towards peaceful coexistence. Even though there are some pockets of unresolved cases like Somalia, Darfur, Congo and Northern Uganda among others, there are encouraging examples such as Sierra Leone, Rwanda, and Southern Sudan. In this context Africa is undergoing a complex process of multiple transformations. Solution to some of these cases has been found from within, coupled with external support. For this reason, it can be argued that part solution to the conflict situation and political instability in Africa lies in the west. More specifically is for the western governments to address the issue of arms manufacture and sale of arms, weapons to Africa and to address the conduct of their multinational involved in extractive activities at the expense of African lives. On the same breath, we cannot talk of health problems in Africa when countries in the west have not seen the sense and subsequent implications of dumping hazardous technologies and products in Africa
5.2 International Trade in Africa
Some of the country they take advantage of the political instability situation to make money by doing international business in that such country. In both situations, political change creates systemic risks that impact all firms whose activities are affected by the political system. System changes don’t necessarily create political risks that reduce potential profits. Elections and policy shifts can create opportunities for foreign investors. For example in 1990’s a newly elected government in Argentina initiated a radical program to deregulate and privatize the country’s state-centered economy. Investors who accepted the risk and pursued the resulting opportunities prospered as Argentina became more democratic. There is one case in our International Business model talk about china. That case trace about the development of China, where political change has created opportunities in several areas, including market potential and performance. This of course, that taking advantage of such attractive opportunities entails taking risks in a country where political and legal complications still pose roadblocks to profitability.[Daniel, Sullivan et al (2009) pg155]
When other countries suffer of political instability, other countries enjoy that situation very much. Let’s say country faced political instability and happened there is a war, some of international companies from other country they start to do business by selling guns, and other things which needed in situation like that. The neighbour countries get advantage of when refugee run to them, they get support from international support programme. The people of such neighbour country they will be benefited by get food, clothes, and other human needs thru refugee.
However those neighbour countries may suffer due to refugee may transfer the conflict in that country.
Unemployment When country faced political instability unemployment rate will be high, and country will not be able to offer job to the people. So when investors who they ready to take risk move to that country will be easy for them gets cheap labor. People they don’t have job and they need money means they will do any kind of job to get money. However countries that are unable to create jobs for their citizens create a risky business environment. So investors whose will take risk to invest in such country must take precaution for robbery and thief due to people are desperate to get money. Generally, people out of work and unable to find jobs depress economic growth, create social pressures, and provoke political uncertainty.
Inflation Inflation cause rise in prices measured against a standard level of purchasing power. Country in political instability inflation will be high and the investor who doing there they have power to set their price (high) and consumer they don’t have choice. Life will be expensive and investor who doing business there are benefited with high price of commodities. People they work to them and get salary and at the end of day they give back that money to them. This is to say foreign will be able to transfer resources to home country indirect.
Debt The debt for the country which faced political instability growing because government don’t have money, and end up of borrows money from the financial institution. This will be benefit to those countries which hold those financial institutions such as IFM and so on.
Income distribution GNI or PPP (Purchasing Power Parity) will be low due is calculate with which income the average person earns. Country with political instability not everyone is average, neither indicator tells us what share of income goes to what segments of the population. So the big share will go to foreigner whose they have big share of money, and this will be benefit to them.[Daniel, Sullivan et. al pp196-203]
Production factors move Capital especially short-term capital is the most internationally mobile production factor. In country with political instability companies and private individuals primarily transfer capital because of differences in expected return. This situation cause of transfer capital back home or to another country and will be benefit to foreigners due to some of country when foreigner came to invest, government allow them to make business for the first three years without of paying tax. The countries with political instability foreigner advantage of this situation and invest for only three years without tax and move to another country. This happened because they not secure with political situation.
Analyzing Risk In between political instability, one country risk may be another opportunity to other country. For example companies which provide security services such as guard services, alarm systems, insurances and guns may get the big opportunities of sales where the victim country suffer in war.[Daniel, Sullivan et. al (2009)p 502]
6.0 RECOMMENDETION
An African countries leader has to make sure political in their country is stable so that FDI can transfer they technology, skill and knowledge to the local people thru International Business.

Overview Of Keynesian Income And Expenditure Model Economics Essay

Introduction: Keynesian economic theory has been named after a British, John Maynard Keynes (1883 – 1946). The foundation of his theory was on the basis of circular flow of money. Keynesian economics is one of the major schools of thought in the current era.
Keynesian theory was popularized during Great depression period (1920 – 1930). Keynes argues against the custom of excess hoarding, non consumption or none spending. Keynesian theory also supports the redistribution of wealth when and where it is needed because; the spending style of the lower middle class of economy is higher than there saving trends. This will support a growth in the economy. Another interesting idea of Keynesian theory is that, it identifies changes in the macroeconomic level which has great influence over the consumer behavior at micro economical level. Keynesian economics is also called as macroeconomics due to its vast and extensive study over the economics.
Over look into Keynesian Income and expenditure model: The Keynesian income-expenditure model explains the relationship between the expenditure and current national income. The Keynesian model considers that, the real GDP consist of four major factors:
Aggregate expenditure on consumption
Investment (I)
Government (G)
Net exports (NX)
Investment, government and net exports are autonomous expenditures where as aggregate expenditure on consumption is dependent on the real national income. He summarizes his argument into an equation.
Aggregate consumption = C mpc (Y) In which “C” explains the independent consumption expenditure and “Y” is the current real income which corresponds to the value of existing real GDP. Whereas the “MCP” (marginal propensity to consume) when multiplies “Y”, becomes part of change in real income available for consumption. The change in level of aggregate consumption has direct connection with the changes in “Y”.
Hence aggregate expenditure can be expressed by following equation:
AE (Aggregate expenditure) = A mpc(Y) In which “A” is Autonomous or independent expenditure which is the sum of (C I G NX). “Y” is the real national income, match with levels of aggregate expenditure (AE).
There is a direct relation between independent income and aggregate expenditures on government G, Investment I and net exports NX.
Equilibrium real GDP in the income-expenditure model is found by setting current real national income
, Y, equal to current aggregate expenditure, AE.
Y = AE
Therefore
Y = A mpc(Y) Determination of stability of GDP – An income Expenditure Approach The above figure details that, variations in the Autonomous expenditure (A1, A2, A3) is identical to the shift in the Aggregate expenditure (AE1, AE2, AE3) .The positive slop of AE explains the increasing value of Mpc. This slop also indicates that up changes in national income Y has positive influence over AE, consequently GDP according to Keynesian condition is Y= AE.
Graphical illustration of the Keynesian theory.
The above figures explain a practical picture of how the aggregate demand and supply works. Imagine an economy whose GDP is in the natural level (Y1) initially and has aggregated expenditure AE1 curve. Now consider the independent or autonomous expenditure declines (from A1 to A3). This decline causes a downward trend of the AE curve from AE1 to AE3. This decline in the autonomous expenditure also affects negatively the aggregate demand (AD1 to AD2), this reduction influences the fall in equilibrium of real GDP from Y1 to Y3 at the same price level, but the SAS (intersection) and AD2 comes towards lower level (P2) which explains a fall in price level. The AE level however will not come down along with the level to AE3 but instead of that it will fall only to AE2 , thus forming a new equilibrium real GDP Y2 which lies below the natural level Y1 . Keynes explains that there will not be any further decline in the price level from P2, due to high resistance for further reduction in their wages which also restricts the suppliers to take decision on further increase in the supplies. Until and unless a shift in the SAS curve, Y2 will remain constant and this will drastically affect the resources and employment. If workers cannot earn anything more they cannot make any purchase of goods and service, this will cause a stuck on position on the Aggregate expenditure curve AE2 and will also prevent the economy to reach its natural real GDP level. To boost this stage Keynes advises to use “prime the pump” concept.
“Prime the Pump” is the remedial measure suggested by Keynes to restart the idle economy back to its initial condition. Keynes believes that the real factor to drive the economy is aggregate demand. The concept can be compared to a starter fluid which is used in a car engine to ignite its move. Thus Prime the pump concept is also designed to maintain the motion of economic engine identically like a gasoline dose in a motor car .In Prime the pump concept, Keynes explains that the government should step in to increase the expanding by either increasing the money supply or by actually buying things on the market itself. This will slowly boost the confidence of the consumer, which will encourage him to restart the spending and to bring the economy back to its original position.
Government spending , taxation and borrowings has great influence over economic activity and growth , output , employment and aggregate demand .It is very important to understand that this fiscal policy can affect the aggregate demand and aggregate supply .
Fiscal policy and Keynesian theory: Fiscal policy has been treated as an instrument of managing demand where government spending, budget balance and direct and indirect taxation can be used to sooth out some of the unpredictable external economic shocks for example there is a fiscal stimulus in UK economy (2001 – 2005) which applied through increasing the government spending on transport, health and education and this fiscal stimulus later terminated by slowing down the rates.
Keynesian theory explains that fiscal policy has great influence over aggregate demand, employment and output at the time when the economy is operating at a below national output capacity level also, the economy needs an external stimulus. Keynesian also argues that the government has a reasonable role in making use of fiscal policy measures and to administer and maintain the level of aggregate demand.
The great depression – a review: In the US, 1920s is the period which has been dominated by republican presidents who believed in the conservative economic philosophy of leave it alone or ‘laissez-faire’. This was the time when people had complete freedom to operate in any market without the interference of government rules or any taxes. This adversely affected the regulatory situation and led to monopoly markets, practice of too much saving or under-consumption resulting in high rates of unemployment, which were the by-product of laissez-fair. The federal government was not ready to increase the money supply that worsened the entire situation. . Share market, Agriculture, mining and energy were the major sectors drastically affected by the depression. During this decade, half of the Americans lived at or below average survival condition.
Laissez-faire approach created an economy with inequality in wealth. Poor became poorer and rich richer. The American labor and business sectors faced equal dilemma where monetary policy became inefficient during the great depression. Fall in the asset price was another reason for institution failures.
Keynesian model explains that in a normal economy, the level of employment will be high and supply will be equal to one’s earnings. In the model he also describes that spending and earning goes in a circle and one’s spending supports another’s earnings .Thus earning and spending becomes a part of the money flow and helps to function the economy normally. But any sort of disturbance in the normal flow of money will shake the confidence of the people. This insecure reaction will result in hoarding money in order to overcome fiscal deficit .But according to Keynesian; this panic reaction will worsen the entire situation which can put the economy on a standstill.
As an economist Keynes studied that incentives are the best effort to overcome the people’s hoarding tendency. Keynes also suggested that injecting money or ‘deficit spends’ into the economy is the best option to awake a poor economy which faces absence of regular investment.
How US attacked great depression with Keynesian methods for putting control over unemployment and inflation The federal reserve bank started buying US debts from commercial banks in return of their government securities . This support helped the commercial banks to increase their capacity to generate the amount of money they could lend.
The government also used measurements to ease the credit requirements, which helped the banks to increase the amount generated through banking system. Expanding money supply is the tactic used by the bank to stimulate the spending capacity which opened chances for more jobs. But these tactics increased risky chances for inflation in the economy where money loses its value. Considerable discretion policy or control in the money supply will be used to balance the money supply .Considerable discretion is the process where the federal reserves balances the economy perfectly .Any fault in balancing will result in severe unemployment or inflation
Practical importance: Keynes is the first one who destroyed grace of Laissez- fair and he proved that interference of state into the economic affairs under certain circumstance will help the public as well as the economy.
He explained the importance of deficit budget and how it can be used for increasing the amount of income output and help to reduce the intensity of unemployment in an economy. He highlighted the importance of achievement of full employment both in a planned and unplanned economy.
Critical evaluation of Keynesian theory Keynesian theory has its own defects even though it opened a new gateway to the revolutionized economic thinking.
Keynesian theory failed to give genuine and complete solution for unemployment and he was not able to give a comprehensive plan to achieve full employment .
He failed to explain suggestion for monopoly and monopolistic competition as well as to phenomenon of a perfect competition.
Keynes failed in giving long term solutions for the dynamic economy.
Keynes was not able to provide statistical evidence for the relationship between effective demand and the volume of employment.
He concentrated only in short period problems and paid less or no attention to long time problems
Keynes neglected the acceleration concept such as extension of multiplier concept
An economy will get completed only with micro and macro economic factors but, Keynes completely neglected the micro economic problems.
Keynes theory is criticized because of its non dynamic character as well as it failed to analysis the business cycle; therefore his studies are considered to be static or motion less theory.
Keynes did not explain the international trade and its impact on income and employment.
Keynes’ theories failed to find applicability in a developing or underdeveloped economy because it requires huge investment to solve unemployment issues.
Conclusion Even after so many short comings Keynesian approaches remains as one of the most outstanding theories which were able to analyze economic problems and Keynes showed courage to challenge the Laissez-fair theory which prevailed during his time. His ideas were undoubtedly cemented during the most crucial US economic crisis. Keynesian theories also played a major role to solve the problems of market failure and that of a collapsed economy. Keynesian approaches remained one of the best until the end of 1960’s when it was confronted by Friedman and monetarists and later Keynesian ideas were replaced by classical macroeconomics. However, Keynesian approaches have been considered one of the most outstanding gifts in the history of economics. Economic practitioners still use Keynesian ideas and concepts as a guideline to analyze economic problems.

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