Introduction
The long run is a time horizon long enough for all economic agents to adjust their plans and expectations accordingly. In macroeconomics, it usually refers to the time period over which the economy returns to its potential level of output. The difference between the long run and short run is that in the long run, all factors of production are variable, while in the short run, at least one factor of production is fixed. There are several factors that affect the economic development of a country, and embracing them leads to high productivity within the economy. Both monetary and fiscal policies have different techniques for creating an impact on the economy. There are many factors and tools used by policymakers to control economic development in different countries.
Discussion
The level of economic development within a country is determined by a variety of factors, many of which are interrelated. These issues can be broadly classified into four categories: institutions and policies, human capital, infrastructure, natural resources, and the environment (Zallé, 2019). Concerning institutions and policies, a strong and stable government with effective institutions is critical for economic development. Good policymaking is also important, including measures to promote private sector growth, attract foreign investment, and create an environment that is conducive to innovation and entrepreneurship.
Moreover, human capital is composed of the skills and education of a country’s workforce. Countries with a high level of human capital typically have a higher level of economic growth. Infrastructure is made up of the physical systems that are used to produce and deliver goods and services (Zallé, 2019). A well-developed infrastructure can help increase a country’s level of economic growth. Natural resources and the environment include things such as land, water, forests, mineral deposits, and climate. The way these resources are used can have a significant impact on a country’s level of economic growth.
In an AS/AD framework, human capital, infrastructure, natural resources, and the environment are factors that affect long-run economic growth. As factors in an AD diagram, they affect short-term fluctuations in economic output. In particular, they can contribute to shifts in aggregate demand (AD) and changes in prices (P). For example, an increase in human capital (HC) would lead to a rise in productivity and, thus, to an increase in real GDP (Y). An increase in infrastructure spending would lead to an increase in business investment and consumption spending (Nathaniel et al., 2021). Additionally, the depletion of natural resources would lead to higher prices for goods and services that use those resources. Similarly, institutions and policies are key factors in an AS/AD framework that affect long-run economic growth. For example, stable monetary and fiscal policy can provide certainty for businesses and help to maintain economic stability, while well-functioning institutions can encourage entrepreneurship and investment.
Monetary policy is controlling the money supply by a central bank, while fiscal policy is using government spending and taxation to influence the economy. Both monetary and fiscal policies can be used to achieve different macroeconomic objectives, such as price stability, full employment, and economic growth. Monetary policy is usually used to maintain price stability, while fiscal policy can be used to achieve other macroeconomic objectives (Evans et al., 2018). Each type of policy has its own advantages and disadvantages. Monetary policy is less politically risky than fiscal policy but can be less effective in influencing the economy. Fiscal policy can be more effective than monetary policy, but it can also harm the economy if not implemented carefully.
Government spending and taxation are two of the most important tools that policymakers have to affect the economy. Government spending can be used to boost economic growth, while taxation can be used to help control inflation. When the government increases spending, it drives up demand (AD) in the economy. This increase in demand leads to higher prices (inflation) and higher output (economic growth). When the government taxes people, it reduces demand (AD) in the economy. This decrease in demand leads to lower prices (deflation) and lower output (economic contraction) (Evans et al., 2018). Policymakers use these tools as part of their overall strategy for controlling inflation and promoting economic growth. On the other hand, monetary policy is the process by which a central bank, such as the Federal Reserve in the United States, alters the amount of money in circulation to manage inflation.
In addition, there is always a tradeoff between affecting the economy in the short run and in the long run. In the short run, measures taken to stimulate the economy may have some positive effects but may also have negative consequences. In the long run, these measures may have even more negative consequences. For example, increasing government spending in order to stimulate economic growth may lead to an increase in inflation (Evans et al., 2018). This increase in inflation will cause people to spend less money, leading to a decrease in economic growth. Alternatively, increasing taxes to reduce the budget deficit may lead to a decrease in consumer spending, which will similarly lead to a decrease in economic growth.
Conclusion
In conclusion, economic development is affected by human capital, institutions and policies, natural resources the environment, and infrastructure. Each factor impacts economic growth, but some play a more significant role than others. For example, human capital is one of the most important determinants of economic growth, as it affects a country’s ability to produce goods and services. Infrastructure is also essential since it enables the operations such as the production of goods to take place. Therefore, promoting these two factors leads to economic development by facilitating goods’ movement and production. Central banks, government spending, and taxation are some of the tools policymakers use to create an effect on the economy.
References
Evans, O., Adeniji, S., Nwaogwugwu, I., Kelikume, I., Dakare, O., & Oke, O. (2018). The relative effect of monetary and fiscal policy on economic development in Africa: A GMM approach to the St. Louis equation. Business and Economic Quarterly, 2, 3-23. Web.
Nathaniel, S. P., Nwulu, N., & Bekun, F. (2021). Natural resource, globalization, urbanization, human capital, and environmental degradation in Latin American and Caribbean countries. Environmental Science and Pollution Research, 28(5), 6207-6221. Web.
Zallé, O. (2019). Natural resources and economic growth in Africa: The role of institutional quality and human capital. Resources Policy, 62, 616-624. Web.