PBL #4

PBL #4

Kerkko Jahnukainen



Problem: How does government control affect a countries economy?

Learning Objectives:  

• How can the government influence the economy within a country?
• The pros and cons of shifting from mixed economy to market economy?

Keywords: 

• International relations
• Free market,
• Goverment control
• Foreign trade
• Sustainable solutions vs. rapid changes in country's economy

How can the government influence the economy within a country (in India)?

Government plays huge part in influencing the economy of its country through taxes and regulations, which may attract foreign trade partners or may shut them completely out. In India's case big changes can be seen after Prime Minister Narendra Modi was elected. His biggest challenges has been convincing foreign countries to consider India as their partner, as it has shown  a quite rocky history with some clients. Modi has taken actions both domestically as well as abroad. "Modi Effect on India's economy" (www.tiagnet.com) has a very concrete example of this, in from of Modi's announcement of GST (Goods and services tax). This lowers taxes by dividing it more equally among manufacturing and services. On top of regulation taxation and so forth is also promotes exporting and employment. Streamlined process is easier for everyone, which will also lower the burden of taxes for employers.

Another, maybe a bit smaller thing, is that Modi set out search for "black money" hidden in tax havens trough investigations specifically for this called the "Special Investigation Team" (SIT). As well as this, Modi has made extensive efforts to streamline bureaucracy.

I picked up a few more general ways in which governments can influence the economy from a site called www.investopedia.com and perhaps Modi has used a few of these in his quest to help India economy! The article talked granting favorable taxes to move capital between investments, which is something that Modi did do. When Modi was elected as the prime minister, inflation was really low during the time, so currency inflation is something that was most likely used to help as it gives short-term economic boost for companies, bailouts to help troubled companies  and also Fiscal Policy, which is about interest rates to counter act inflation. 


The pros and cons of shifting from mixed economy to market economy


Characteristics a of mixed economy:

• protects private property
• allows free market
• driven by the motivation of the self-interest of individuals

Pros:

• allows prices to measure supply and demand
• customers get the best value as the most efficient producer is rewarded the most
• encourages innovation to produce things more efficiently and cheaply
• capital is allocated to the most efficient producer

Cons:

• sometimes too much freedom, which might leaver less competitive people without government support
• monopolies
• not enough regulations

Characteristics a of market economy:

• the law protects ownership of private property
• anything legal is allowed to be bought, sold and produced (free market)
• driven by the motivation of the self-interest of individuals
• prices are allowed to float along with supply and demand
• the primary role of government is to make sure that everyone has free access to a free market

Pros:  

• no/very little government interventions
• efficient use of resources = less waste
• streamlined prices
• consumers spend their incomes in ways that maximize satisfaction
• promotes competitiveness

Cons:

• costs associated with production are not always paid by the supplier, for example the pollution that came as a byproduct is not included int he price
• a market economy will produce what people want, not necessarily what they need
• economic imbalance

Mixed economy is quite close to market economy, market economy only being slight more open and having to less to almost no government control. Both economies hold their pros and cons but overall I would say that mixed economy dose bring a more balanced environment. With less control, a market economy might run into a few issues more easily/faster such skyrocket of commodity products, economic imbalance and creation of inferior products. While on the other hand in a mixed economy the government might regulate too much, clogg the economy and flow of business.

Keyword: Sustainable solutions vs. rapid changes in country's economy

Sustainable solutions can often be characteristics as more long term, which seek out to solve the issue rather than fixing it temporarely going from one "solution" to another. To mes sustainable solutions are more flexible, more stable, solution that really hold the foundation of future growth rather than temporearly lifting it up.

Sources: 

Mixed Economy: Definition, Pros, Cons, Examples - Kimberly Amadeo 11.8.2017  www.thebalance.com

Pros & Cons of Market Economies - Thomas Metcalf www.samllbusiness.com

Sources: 

Modi Effect on India's economy:   

(http://www.tiagnet.com/files/Member%20News/Modi%20Effect%20on%20Indian%20Economy-September%202014.pdf)
http://www.investopedia.com/articles/economics/11/how-governments-influence-markets.asp

https://www.thebalance.com/mixed-economy-definition-pros-cons-examples-3305594
http://smallbusiness.chron.com/pros-cons-market-economies-58684.html
https://flowpsychology.com/10-pros-and-cons-of-the-market-economy/