Markets an Increased Budget Deficit

Markets

An increased budget deficit resulting from a recession can stabilize the economy in that the deficit represents an increase in government spending. This spending counterbalances the decline in business and consumer spending. The GDP accounting identity is GDP = C + I + G + X -- M, indicating consumer spending, business investment, government spending, exports and imports respectively. During a recession, C and I are going to decrease, bringing down the GDP with them. If the government increases spending, this will stabilize the economy in that the GDP will not decrease as much. The increase in G, however, will result in an increased budget deficit, especially as there will be fewer taxes generated from C. And I.

The short-run is a time period characterized by one factor of production being fixed. When an industry is in short-run equilibrium, it will be pulled into disequilibrium when any of the other factors changes. To move into long-run equilibrium, the fixed factor needs to be flexible. So a firm can achieve short-run equilibrium in price and production but if, say, a competitor goes out of business, then the situation changes. A short-run point of equilibrium must be achieved but in order to reach the long-run equilibrium the firm would need to build new capacity. It is through changes to factors that are typically fixed that the industry can move from short-run to long-run equilibrium.

3. A system of marketable pollution leads to a concentration of polluted areas because areas that can afford to pollute generally will. With a price placed on pollution, firms or nations need to determine how much pollution they can afford, based on the balance of the costs associated with reducing pollution and the costs of buying the right to pollute. Under this system, a wealthy firm or company is more likely to pay for the right rather than reduce pollution with long-run investments. Alternately, firms that are less efficient at reducing pollution would be the ones that are unable to do so, and would buy pollution credits instead.

The system also results in less costly pollution abatement. The firms that can abate pollution more efficiently (at a lower cost) will do so, and sell their pollution credits to firms that are less efficient at pollution abatement. This reflects the theory of comparative advantage at work. If the firms that have the most efficient (relative) means of pollution abatement are those engaged in the practice, then the average cost of pollution abatement will be lower, even though pollution itself will be clustered as a result, concentrated on the areas where firms have less efficient pollution abatement.

4. One of the main issues with GDP is that it reflects economic activity rather than economic progress. Thus, Japan's efforts at rebuilding after the tsunami will appear as a boom in construction, when in fact the country has recorded a significant economic setback and the temporary boost in construction activity is simply going to get the country back to its previous level. The first thing that should be added to a new measure of GDP (or economic health) is an adjustment for negative economic activity. This can be a natural disaster, terrorist attack or other activity that detracts from a nation's economic growth but is not currently included in the GDP calculation.

The second issue is that the GDP per capita does not accurately reflect the wealth of a nation. Liechtensteiners do not live materially better than their Austrian and Swiss neighbors, but their per capita GDP says they do. Brunei has a very high per capita GDP, but almost all of that wealth goes to the Sultan -- the average Bruneian has the same standard of living as his Malaysian neighbors. Thus, there should be a means of adjusting GDP for wealth disparity (GINI Index). This would isolate wealth that goes only to the ruling class from true economic growth that benefits the entire nation.

The third issue with GDP is that it does not accurately reflect non-economic progressive. Bhutan has the Gross National Happiness instead of GDP, reflecting a Buddhist view that well-being is more important than just economic growth. Other positive activities besides economic growth should be reflected in the GDP. Thus, acts like pollution reduction, community service, or if the Buddhist philosophy is applied something like meditation, could all be included. This would orient the people of the society to acts that are positive in some way, and not just positive in an economic way.