Introduction
The field of economics has influenced policy decisions, influenced the development of nations and societies, and helped scientists to understand how various economies work. This paper discusses five economic theories and explains how the theories can be explained with real-life examples.
Keynesian Economics
Personal Description of the theory
Keynes (1936) framed the famous Keynesian theory. The theory focuses on national income determinants in the short run when prices are relatively inflexible. Keynes tried to explain why high labor market unemployment is not self-correcting due to low effective demand and why even price flexibility and monetary policy might be unavailing. The theory was framed in the aftermath of the Great Depression of 1930 that left million unemployed around the world, and countless were rendered homeless, destitute, and bankrupt. The theory suggests that the level of employment is determined by the aggregate demand or how much money is spent and not by the cost of labor. The theory points out that it is incorrect to presume that if a market is competitive, in the long run, it will provide full employment or that full employment is the natural, self-righting, equilibrium state of a monetary economy. On the contrary, the most likely effects would be underemployment and underinvestment, and this would continue unless the government intervenes to provide some corrective actions. The implication of the theory is that a lack of competition is not the fundamental problem, and measures to reduce unemployment by cutting wages or benefits are not only hard-hearted but also ultimately futile.
Interpretation of how the theory is currently functioning within society today
The theory can be applied to the current situation in the U.S. and other countries where recession seems to be setting in. Logic says that with immense job cuts (BBC. January 31, 2008), the cost of labor would be expected to go down, and this would mean that the prices of products should come down, which in turn would spur demand and growth. But by applying the Keynesian theory, clearly, the rates are not decreasing, prices are going up, and again rise in the price is not due to an increase in demand but due to external reasons such as inflation. The increase So the theory holds true in this example.
My Ideas on developing the theory
The theory should take into considerations factors such as inflation, GDP rates, consumer price index, and then when the GDP falls below a certain safe level, the government should intervene and place a cap on imports to conserve foreign exchange, and this would increase employment. With the increase in employment, people would have more money, and demand would increase.
Globalization Theory
Personal Description of the Theory
Globalization theory refers to economic globalization that is the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. The term defines the manner in which trade barriers between countries are broken; protective policies are removed, and corporate from one country can easily enter another country and sells goods and services (Yeats, 2001). There are many plus and minus to the concept of globalization and many supporters and detractors. Supporters of the theory are big corporations and industries that have immense means to procure raw materials at cheap rates and produce and sell products at very low rates in foreign countries. Detractors claim that this has resulted in the dumping of goods, loss of industries and employment in the targeted countries, and an over-dependence on finished goods on other countries.
Interpretation of how the theory is currently functioning within society today
The globalization theory has unfortunately favored nations such as China that have vast resources, have very low internal taxation, access to cheap labor and as a result, Chinese goods have flooded markets in Europe and China. Many companies such as Mattel, Hasbro, Nike, and others have either set up manufacturing bases in Asian countries or source-finished goods from such regions. The process has shifted jobs from the U.S. and Europe to Asia and increased unemployment (Yeung, 2007).
My Ideas on developing the theory
While it is true that globalization has removed trade barriers, it is also true that local industries have suffered. The government should put in legislation that, while allowing import of goods into their country, should demand that countries, where the goods are manufactured should also levy appropriate taxes, pay equitable wages, not employ child labor and increase the safety regulations. When such practices are imposed, then the cost of production becomes equitable and the price advantage that Asian countries have is not available anymore.
Fiscal Policy
Personal Description of the Theory
Fiscal policy is the use of government expenditure and taxation to manage the economy. It tries to influence the direction of the economy through changes in government spending or taxes. The two main instruments of fiscal policy are government spending and taxation. Changes in the level and composition of taxation and government spending can have an impact on Aggregate demand and the level of economic activity, the pattern of resource allocation, and the distribution of income. The government uses the yearly budget to set the levels of taxation and government expenditure for the next fiscal year. Fiscal policy can be used in various different ways. It may be used to try to boost the level of economic activity when the economy is flagging a little, and it is called reflationary policy. If the economy is doing too well and in need of slowing down, then this is called the deflationary policy. Supply-side policies are policies that aim to increase the capacity of the economy to produce. (Heyne, 2002).
Interpretation of how the theory is currently functioning within society today
The current fiscal policy of the U.S. was actually set in 2007 when the economy was not in bad shape that it is currently facing. Consequently, the policy can be termed as Supply-side policies, and this has led to tremendous inflation. The sub-prime mortgage crises that triggered the U.S. economy to slide was a result of the fiscal policy that allowed banks to lend as per the demand, irrespective of how the payment would flow in. As a result, people borrowed in ever-larger amounts, imports increased dramatically, and too late, the people and the government realized that they did not have the money to pay back what they owed (Bergsten, 2007).
My Ideas on developing the theory
The fiscal policy should be made such that accountability is ensured in the lending patterns of banks. While they should be allowed to lend money as they please, they should also be told to lend wisely and not bring down the economy with reckless lending.
Monetary Policies
Personal Description of the Theory
Monetary policy is the process by which the government, central bank, or monetary authority manages the supply of money or trading in foreign exchange markets. Expansionary policy is used to address unemployment in a recession by lowering interest rates, while contractionary policy raises interest rates to combat inflation (FRBSF. November 8, 2007).
Interpretation of how the theory is currently functioning within society today
The current monetary policy was set in April 2007, and it was initially contractionary policy, and this allowed the banks to raise interest rates, and lending seemed profitable. As a result of the increased interest rates, the banks realized that more money could be made by lending money, and they lent money without any thought of how it would be recovered, and this led to the subprime crises. Money became scarcer, and as a result, public spending decreased, jobs were cut, and inflation rose to very high levels and also caused the GDP to drop.
My Ideas on developing the theory
The U.S. government should first of all realize that its primary goal is to take care of its own people and not the rest of the world. Foreign currencies of Japan, India, and China have been artificially kept at a lower rate by their respective governments so that exports and foreign exchange benefits these economies. The U.S. government should immediately ask these countries to stop artificially devaluating their currency. While this would make the dollar weaker, it would make imports unviable and help the regeneration of jobs in the U.S.
Supply and Demand Theory
Personal Description of the Theory
The supply and demand theory describes the market relations between sellers and buyers of products. The supply and demand model determines the price and quantity sold in the market. The theory is used in microeconomic analysis of buyers and sellers and of their interactions in a market. It is used as a point of departure for other economic models and theories. It predicts that in a competitive market, the price will function to equalize the quantity demanded by consumers and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity. The theory incorporates other factors changing such equilibrium as reflected in a shift of demand or supply (Frank, 2003).
Interpretation of how the theory is currently functioning within society today
The theory does not make any sense when it comes to analyzing the price of commodities such as crude oil. The price per barrel has gone to more than 104 USD, and the reason for the price hike is not because OPEC has increased the prices or they have produced less. It is primarily because of uncertain markets, investors have decided to invest in oil futures since the price of oil would not fall to low levels. This factor has caused a huge and artificial increase in the price, and since oil is one of the basic commodities used for power generation and transport, the overall economy has been hit hard, prices have increased and so has inflation (Bloomberg, April 8, 2008).
My Ideas on developing the theory
The government should intervene when artificial price rise happens for selected commodities such as oil, coal, gas, steel, cement and power since these commodities can have a severe effect on the economy. Trading in such commodities should be stopped across all stock exchanges when it is apparent that some very big players are buying stock so that the demand increases so that they could sell at a high predetermined by them and make a profit. This is not supply and demand theory but illegal manipulation at work.
Conclusion
The paper has examined five important economic theories, and for each, the actual effects on the economy have been discussed, and recommendations to develop the theory have been made.
References
BBC. 2008. U.S. economy at a glance. Web.
Bergsten Fred. 2007. US Current Account Deficit: Currency Misalignments and the U.S. Economy. Web.
Bloomberg. 2008. NYMEX Crude Futures. Web.
Frank Robert H. Bernanke Ben S. March 17, 2003. Principles of Economics, 2nd Edition. ISBN-13: 978-0072503302.
FRBSF. 2007. U.S. Monetary Policy: An Introduction. Web.
Heyne, P. T. 2002. The Economic Way of Thinking (10th ed). Prentice-Hall.
Keynes John Maynard. 1936. The General Theory of Employment, Interest and Money. Palgrave Macmillan (2007 Edition). ISBN 9780230004764.
Yeats, Alexander J. 2001. Just How Big Is Global Production Sharing? Pp. 108–43 in Fragmentation: New Production Patterns in the World Economy, ed. S. W. Arndt and H. Kierzkowski. Oxford: Oxford University Press.
Yeung, Henry Wai-chung. 2007. Economic Globalization, Crisis, and the Emergence of Chinese Business Communities in Southeast Asia. International Sociology Journal. Volume 15. Issue 2. pp: 266–287.