Q.
(a) Explain how government intervention is done in stabilizing the economy. (6 marks)
(b) Describe the difference between Domestic Trade and International Trade. (8 marks)
(c) "Government intervention in the current economy can lower the price of goods." Give your opinion. (6 marks)
(20 marks, 2015 Q2)
(17.09.2015)
A.
(a) There are ways that the government can intervene the prices in the economy. One of them is through the fiscal policy which is tabled in the Finance Budget every year.
Fiscal policy can be referred in earlier post here - 2013 Q7.
Major approach in this aspect is by tax regulation. The taxes can be personal tax, corporate tax, goods and sales tax, etc.
With heavier taxes, people spend less, and thus demand is reduced to curb rising prices. This mode of intervention is commonly used in reducing aggregate demand, which will reduce spending. This is Contractionary fiscal policy - 2013 Q7.
Expansionary fiscal policy is the reverse - ie to increase spending. By reducing taxes, people tends to spend more.
(b) Domestic vs International Trade.
2014 Q8 - International Trade, Exchange Rate, Protectionism and Balance of Payment.
The following are the major differences between domestic trade and international trade:-
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1.Mobility in Factor Of Production
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2.Movement Of Goods
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3.Usage of different currencies
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4.Broader markets
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5.Language And Cultural Barriers
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Ref:
2009. The Differences Between Domestic Trade And International Trade, College Accounting Coach, available athttp://basiccollegeaccounting.com/2009/02/the-differences-between-domestic-trade-and-international-trade/
(c) Government intervention can lower the price of goods.
[In historical contexts, many governments provided subsidies and install protectionism to protect domestic agricultural produce. For example, the wheat production in the US, and the local rice (padi) production in Malaysia and neighbouring countries.
Providing fertilizers and buying the crops at a fixed price could in fact set a lower price of the agriculture crop in the market. This is what happened in the US where the corns and wheat are given so much subsidy that their prices are so low that other countries cannot beat the price to export to the US. Neighbouring countries are producing at much higher price, that US consumers can enjoy much lower price with local planters.
A reading on Price Floor and Price Ceiling can be found here - Government intervention in market prices: Price Floors and Price Ceilings.
In fact, due to the need of stable prices, government introduce price control for most necessary food items. Price Control is a form of government intervention which can lower the price of goods. Easily understood that when a price is fixed, there will be no incentive to produce too much or too little because the margin of profit is quite fixed. Of course, there can be an element of economics of scale, however the outcome of over producing is a waste of resources in this case.]
From Wikipedia on 'Price Control':
Price controls are governmental restrictions on the prices that can be charged for goods and services in a market. The intent behind implementing such controls can stem from the desire to maintain affordability of staple foods and goods, to prevent price gouging during shortages, and to slow inflation, or, alternatively, to insure a minimum income for providers of certain goods or a minimum wage. There are two primary forms of price control, a price ceiling, the maximum price that can be charged, and a price floor, the minimum price that can be charged.
Historically, price controls have often been imposed as part of a larger incomes policy package also employing wage controls and other regulatory elements.
Although price controls are sometimes used by governments, economists usually agree that price controls don't accomplish what they are intended to do and are generally to be avoided.[1]