Principles of Economics Is a Leading Political Economy, Essay Example

Economic principles also called economic laws are the principles outlining how the economy works. It shows the inter-relationship among several economic factors that explain the cause and the result of some circumstances. These principles oppose other laws such as the laws natural sciences.

Economic Policies

The economic principle involved in economic policies and factors affecting the economy are the principles that the society faces in a short-run trade between inflation and unemployment. The efforts put in reduction of inflation results in a significant increase of unemployment. Efforts need to be put in place to correct the inflation problem, which is achieved by use of economic policies. The principle is applicable in maintaining economic development of a given nation.

Economic stability of a nation is of significance if economic development and growth are to be realized. The nation should ensure that measures are put in place to correct inflation or recession from occurring (Siklos, 2001). There is a need to ensure a steady growth in the economy, which is normally achieved through effective utilization of economic policies (Siklos, 2001). There are two policies used in maintaining the economic growth of a given nation. These are monetary and fiscal policies.

Controlling inflation has been a major concern of the government to control inflation. It has been the government’s objective in controlling the problem. The government achieves this by using economic policies. Such policies focus on the causes of inflation and thus formulate the appropriate ways of curbing the situation. There are two economic policies, which include monetary and fiscal policies. Monetary policies involve the control of supply of money by the monetary authorities. Their intention is to target interest rates so that they can promote economic growth and stability of a country. Monetary policy will aid in maintenance of stable prices whilst keeping unemployment rates as low as possible. This provides an understanding of meeting the right monetary policies.

The theory of monetary theory is effective in the provision of understanding how to handle different monetary policies. The policy stresses on the existing relationship between interest rates in the economy and the total supply of money. The policy in its accomplishment of the desired goals and objectives utilizes variety of tools in the effort to control the economy’s inflation, growth, unemployment and exchange rates. Monetary policy is of various types, which include inflation targeting, mixed policy, gold standard, and fixed exchange rates.

Monetary policy has significantly contributed in reduction of inflation this has resulted into effective marketing process thus stability in the economy realized.

Economic Principles

The economic principle involved in a financial institution is the principle of people chooses. People usually want more than what they own or have at hand and the productive resources usually limited. This, therefore, poses an economic problem to individuals and businesses in their operation. Choosing the alternatives, which can provide the necessities with least costs, is normally done. Scarcity of resources is what makes people seek assistance from financial institutions, this assistance from financial institutions include provision of funds, security or advice.

Financial institutions are institutions or providing financial services and advice to its members and clients. They are involved in conducting establishment used in conducting financial transactions such as deposits, investments, and loans. A set of financial laws and the government regulates and maintains the activities of financial institutions. Therefore, the government authority and financial institutions set regulatory rules. Financial institutions achieve these services by acting as financial intermediaries. Financial institutions in its operations are significant in the transfer of funds to companies that require funds. These funds come from investors, they assist in facilitation of money, in the economy, they achieve this they use savings in the provision of loans. The financial funds do play a significant role in controlling the flow of money in the economy, thus significant in controlling inflation and deflation.

Financial institutions are of various types, commercial banks, credit unions, stock brokerage firms, finance companies, insurance companies, retailers and building societies. Commercial banks, insurance companies, and credit unions will be dealt with in this paper.

Credit unions are usually financial institutions offering services similar to commercial banks they are non-profit cooperatives. Credit unions deposit money for its members, offer financial aid and act as collateral security the union, however, offer higher rates on deposits than that of commercial banks.

Insurance companies act in pooling of risks, normally done by collection of risks from a group of individuals with an intention of protecting themselves. Insurance companies can act as savings especially for life insurance. Insurance companies also play a significant role in the provision of loans, credit cards, and participating in buying or selling real estate services.

Commercial banks are a significant financial institution, commercial banks can be defined as profit-oriented financial institutions. It is important to note that customers usually make deposits in commercial banks, thus commercial banks are responsible for security provision to its customers at customers convenience. With deposits made in commercial banks, security guaranteed unlike when in cash where the money are prune to theft. Commercial banks also play a role of giving loans to individuals and businesses, which are necessary for business expansion or in purchasing of goods (Marshal, 2010). By helping businesses with funds, investment thus increased in the economy hence more money will be deposited in commercial banks, this will ensure circulation of money in the economy.

Commercial banks serve as payment agents within their country and between various nations. In addition, with the issuance of debit cards for their account holders, commercial banks also arrange with other institutions to make payments using wire transfers. In acting as payment agents, commercial banks make convenient commercial transactions to its customers.

During inflation central banks can decide to regulate the flow of money in the economy, this is normally achieved through contracting money in circulation (Muhlbacher, Lee & Helmuth, 2000). The central bank will ask commercial banks and other financial institutions to deposit some percentage of money with the central banks. In doing so, the money in circulation will reduce significantly. The result will be a correction of inflation, in some cases the central banks can raise the amount of money to be deposited by commercials banks until there is less money in circulation, thus the need to correct the problem. Commercial banks can use several ways to ensure that there are enough funds in circulation. They do this by, selling security bonds and other securities to central banks so that they can be issued with money. This will in turn increase the money in circulation. These methods are used by commercial banks in correcting the inflation collectively called credit controls. The most widely used credit control methods include marginal requirement, publicity, moral suasion, bank rate and direct action.

Credit control methods play a significant role of controlling inflation and deflation. It also assists in boosting the economy normally achieved through facilitation of adequate amount bank credit. Effective use of credit control methods aids in developing the economy.

Global Economy

Global economy is a significant aspect in enabling success of business involvements in the society, with the major issue of concern is a specialization in production. The economic principal applicable in this case is Voluntary Trade, which creates Wealth (Mankiw, 2011). Different countries and nations of the world who engagement in businesses need to specialize in how they produce. Individuals and countries specialize in the production process with the intention of gain. In this case, people engage in what they are specialized in production for gaining from the exchange.

Global economy also called world economy is a term referring to the economy, it usually based on economies of the countries of the world and national economies. Engaging in the global economy involves putting efforts essential for preparation and involvement international businesses and activities with an effort of improving the country’s economy. Global economy is achieved through the availability of free trade. Free trade is the ability of different countries to participate in the import and export of products without any restrictions and payments of tariffs. Initially these tariffs were the main government’s monetary income. Free trade is normally considered as providing a better solution for countries trading together. Free trade has been of significance in enabling business practices to take place effectively. It has several advantages, which has enabled it prosper.

Free trade is responsible in bringing about increased production and efficiency. By embracing free trade, different countries and businesses will specialize in production thus, leading to profit maximization. Increased production will lead to increasing efficiency by individual countries. Specialization, which results from free trade, enables these countries to allocate resources, hence having a greater bargaining power. Free trade brings about consumer satisfaction; these results from the completion from the market thus bringing a variety of products, competition will bring to consumers purchasing goods at low prices. Free trade is of significance to consumers in that it brought about increased innovation.

Free trade; however, have disadvantages resulting from the undertaking of the businesses. Opening of international borders by countries to their trading partners opens the economy to the possibility of unhealthy competition. Countries within the same trading zones will thus be competing for same consumers even in their own country. It is important to note that the increased competition, which is a result of free trade, has resulted to unemployment in some countries. Competition for market and profit maximization has resulted to adoption of technological advances this has resulted to unemployment. Free market has been known to cause economic under development resulting from fall in foreign exchange. The process of making labor mobile has resulted into expansion of the global economy. These results from free trade, which has been of significance in enabling success in the market.

Free trade, however, has barriers preventing its operations and its effective in undertaking its activities by individuals. These trade barriers results from restrictions imposed by the government on international trade. These barriers usually take several forms; Import licenses, trade restrictions, currency devaluation, subsidies and export licenses among others. These restrictions discourage the efforts by individuals and businesses to carry out business activities. Excess restrictions have been known to result into ineffective participation in trade by various countries and nations.

References

Mankiw, N. G. (2011). Principles of Economics.New York:  Cengage Learning.

Marshal, A. (2010). Principles of Economics: Abridged Edition. Cosimo, Inc.

Muhlbacher, H., Lee, D. & Helmuth, L. (2000), International Marketing: A Global Perspective. Kogan Page Publishers.

Siklos, P. (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill Ryerson.