Microeconomics Assignment: Economic Growth, Central Bank and Fiscal Policy
Section I: Economic Growth
The G-8 Countries
Countries that are said to have an industrialized economy are the ones that have
moved from producing unfinished agricultural products to producing finished goods with the
help of modern technology that replaces aspects of manual labor to ensure mass production for
export and local consumption. The known countries in the world with industrialized economies
are: United States, Canada, United Kingdom, France, Germany, Japan, Russia, and Italy and they
go by the name the G-8. The G-8 Countries are characterized by; high levels of industrialization
with their aggregate Gross Domestic Product of 50% of the global economy and 49% share of
the global trade market. The exports of these countries consist of finished products and services
that fetch high market prices for example cars and machinery, electronics, construction services,
etc. Germany is known for making and exporting Mercedes Benz, Audi cars while Japan is
famous for Toyota cars. The USA has Apple Inc. a company responsible for making and selling
Apple electronics. Low levels of unemployment is another characteristic of the G-8 countries,
the US for instance according to a recent publication by the Bureau of Labor statistics recorded
unemployment rate of 13.3% .G-8 countries have adopted high mechanized production
techniques whereby human labor is considered up to a certain level and machines take over
heavy and intensive production work. This results in the massive production of high-quality
goods for both export and local consumption. The national income of the G-8 countries is mainly
contributed to by the industrial and service sector of the economies and finally, due to high levels
of production in the economy especially in the service and manufacturing sectors, a greater
portion of the countries' population depends on these two sectors for its livelihood.
Property Laws and Economic Growth
Private property laws are laws that govern the exclusive rights of owners of tangible and
intangible things. According to O’Driscoll, G, and Hoskins, L (2003), "A private property
system gives individuals the exclusive right to use their resources as they see fit". Property rights
and prosperity or wealth creation are interlinked aspects hence spelling out the importance of
having elaborate and well-defined property laws. This aspect has now started gaining popularity
among economists and policymakers. This backed up by Haydaroglu (2015) who stated that the
attention of economists and researchers has been drawn by the aspect of a strong correlation
between property rights and economic growth.
Properties refer to resources that could be put into use by the owner to reap benefits. In
economics, there have to be profits that are obtained by deducting total costs from revenues
earned after employing various resources. One is considered to have benefited from the use of
his/her resources when the costs incurred are as minimal as possible. Economists view these
costs and benefits with depth and conclude that they lead to higher standards of living of
individuals. Improved standards of living of many individuals owning property translate to the
economic prosperity of a nation on an overall scale. Haydaroglu (2015) supports this claim by
mentioning that when people have absolute control of a certain resource; they will not hesitate to
take steps towards making long term investments aimed at increasing the resources in the long
run. Investments are a result of capital formation, these two variables upon being combined they
significantly contribute to economic growth.
To fully realize the economic benefits of legally owning property there has to be equality
in the allocation of resources as well as implementation property laws and rights. Creating
disparities in the allocation of resources as well as protection and enforcement of intellectual
property rights can contribute to differences in economic growth around countries (North, 1990;
Libecap, 1989; Tornel, 1997; Torstensson, 1994)
Upon realizing the economic significance of property laws and rights, it is necessary for a
clarion call towards the clear definition and strengthening of property laws by governments of
different countries. This will go a long way in ensuring that ownership of property effectively
contributes to economic growth. According to Furubotn and Pejovich (1972), wastage and
inefficient allocation of resources for instance into non- productive sectors, is brought about by
poor protection property rights.
Jeffery Sachs’ Suggestions towards Uplifting Poor African Countries
African states have been for a long time been beleaguered by severe poverty levels, poor
governance, diseases, underperforming economies, and weak structural and institutional
frameworks. The predicament that sticks out the most is underperforming economies and leads to
the argument by Sachs that rich countries can and should a percentage of their GDP which is
0.7% to Official Development Assistance which should go to less developed countries.
According to Sachs (2005), he further explains that it is of no help to lecture and condemn
developing economies for not doing anything at the early stages of their predicament. Rather, it
is the task of developed economies to stretch a helping hand to them. This shows that Sachs
agrees with the fact that economic growth globally has been unevenly distributed. He has been
for a long time inclined towards the distribution of wealth from richer economies to poor
economies and further went ahead to give suggestions and ways in which rich industrialized
economies can adopt help the poor African countries in his book, The End of Poverty.
Transfer of appropriate technologies towards developing economies of African states will
play a role in improving their economic conditions. Mechanized production will lead to the
production of high standard goods and services that will fetch high market prices in the global
market. African states highly dependent on agricultural production for economic growth;
efficiency in production will be improved colossally and hence economic growth. This worked in
the 17 th century in England on account of practicing mechanized agriculture Sachs (2005). The
benefit of this to the developed economies is efficient and gainful trade with these African states.
Trade is an important sinew of wealth creation.
Developed countries should be part and parcel of a collective force to fight diseases. This
is an aspect of underdeveloped nations on account of the poor health sector. This can be achieved
through the transfer of medical resources and knowledge to African countries. Strong health
sectors mean tackling global pandemics together. For instance, the ongoing COVID-19
pandemic that has been a global disaster could be tacked collectively by countries as the
pandemic has crippled various sectors of the economy. Cooperation towards fight a common
problem translates to success.
Transfer of educational opportunities to African states in form of scholarships,
fellowships, and funds for the establishment of learning institutions. Quality education is
important as it is leeway for employment and also an important tool in capital formation.
Education instills skills necessary to provide the needed labor and expertise in production. This
will benefit the large economies through strengthening diplomatic relations as well as the foster
formation of favorable foreign policies between these countries and the African states. Well
defined diplomatic relationships between countries form a base for international trade which will
lead to economic development. Sophr, A and Silva, A (2017), propose that the economic aspect
of a foreign policy has an undeviating relation to the development , mostly to its economic
growth point of view.
The provision of critical infrastructure in African countries will facilitate the mobility of
factors of production as well as ease of movement of goods and services. This will contribute to
the economic development of these countries. The benefit of this to developed economies is the
creation of employment for their citizens through of transfer of labor by a certain agreed
percentage in form of contactors
Sachs championed for debt cancellation and debt forgiveness in poor African states to
ease the burden of servicing the loans. Most of the African states' GDP is made up of a
percentage of the debt and hence repaying the loans draws back their efforts towards economic
growth. The benefit of debt cancellation to the big developed economies is that they will have
played their part in contributing towards the eradication of global poverty and kept the promise
they made in 1970 to support developing economies of the world at a UN meeting IMF (2001).
Increased funding through aid from developed countries towards development projects of
developing African states will play a big role in the eradication of poverty in these countries.
Sachs stated that to wipe out global poverty, funding in form of foreign aid should be increased.
Achieving the goal of total eradication of world poverty will benefit economies of both
developed and developing nations especially when globalization comes into action as the
benefits will be distributed equally. Developed economies will benefit when developing nations
pay back loans with interest rates. The flow of exports of the donor countries in terms of aid is
noted as well as the promotion of development in the recipient country hence bring about a win-
win condition for both parties and may also reduce taxpayer reluctance to devote resources to aid
Martinez-Zarzoso I., Nowak-Lehmann F. and Klasen S.(2013)
Sachs launched The Millennium Villages Project in Africa that was aimed at fostering
economic growth in 12 selected African villages through a heavy investment of funds in massive
food production, education, health care, education, and infrastructure. The project failed despite
decades of pumping in billions of dollars towards the project. Sachs did this believing that
development could be achieved by simply assembling a suitable set of instructions and then
investing funds towards their implementation.
Increasing foreign aid to developing countries of Africa in for of concessional credit on
increases the burden of debt repayment and more slowed down economic growth. Efforts
towards achieving zero poverty levels in these countries will be futile.
Technological transfer from highly industrialized economies has to be gradual and
precise. The use of sophisticated machines and technology for production in African countries
will tamper with the labor unit of production as most jobs are manually done by individuals and
machines only play a small role in the production. This will cause unemployment if machines are
assigned jobs meant for human beings and most companies will declare their employee
Debt cancellation as suggested by Jeffery Sachs will have negative effects on the donor
country's economy as it will cause loss of income and profits in form of loan interest. A balance
of payment deficit might be realized in the long run due to debt cancellation. Global monetary
institutions that support many countries will not have the financial capacity to do so if they
canceled debts. IMF (2001) emphasizes the need to consider debt cancellation as a means of
eradicating world poverty since funds are required to meet the development plans of all
From the above criticisms, it is clear that the suggestions by Jeffery Sachs were quite
difficult to achieve despite his promises their success once they are set rolling.
Section II: Central Banks
Inflation is a sustained rise in the overall level of prices in an economy. The effect of
inflation is a decreased purchasing power or value of money in that the same amount of money
can purchase less real goods and services in the future, Gambera M., Ezrati M and Cao B. (2013)
To monitor the level of an economy in an economy, the Central Bank of countries uses
the consumer price index. The price index is a representation of the average prices of a basket of
goods and services. In the case of a recession in the economy, the type of inflation to be
experienced will be Cost-push inflation which affects the cost of inputs of production on account
of a declining GDP level. Businesses, therefore, slow down on production, slash off employees'
salaries, and reduce labor costs by laying off some employees. Piros C. (2013) in his book,
Economics for Investment Decision Maker states that in the areas of wage push inflation,
economic analysts can look for signs in commodity prices because commodities are input to
production. But because wages are the single biggest cost to businesses, they focus most
particularly on the labor market. This will translate to unemployment hence greatly impeding
capital formations necessary for savings and investment. For the Central banks, this shows that
supply money in the economy is on the low hence it is within the domain of roles to apply
necessary expansionary monetary policy like reducing interest rates to encourage more
borrowing. The U.S Federal Reserve is responsible for setting the monetary policies to maximum
employment, stable prices, and moderate long term and short term interest rates.
On the demand-pull inflation side, economic analysts try to identify the relationship
between real potential Gross Domestic Product and utilization of industrial capacity. The higher
the rate of capacity utilization the more likely the economy will suffer shortages, bottlenecks,
and a general inability to satisfy demand, Gambera M., Ezrati M, and Cao B. (2013). This kind
of inflation occurs when the economy as the peak. The money supply is in plenty therefore
demand for goods and services is high. The Central banks, therefore, employ contractionary
monetary policies to deflate the economy for instance to reduce money supply in the economy
the central bank can raise interest rates to reduce borrowing.
The U.S Central Bank and Federal Reserve
Upon applying the knowledge from the Phillips curve that depicts the relationship
between inflation rates and unemployment, it is noted that there exist tradeoffs between
unemployment rates and inflation rates in the short run such that when unemployment rates
increase, inflation decreases and as inflation decreases unemployment rates decrease, inflation
increases. In the long run, however, the unemployment rate stays more or less steady regardless
of the inflation rate. According to Shroder, D. (2018) the tradeoffs between unemployment and
inflation rates as depicted by the Phillips curve creates a "cruel dilemma" that forces
policymakers to choose between price stability and full employment.
The tools the Feds can use to achieve these goals are; influencing the discount rate in
times of high inflation and low unemployment to increase the money supply in the market for
investment and use by businesses. They can raise the interest rates in the economy in case of a
peak in the economy to reduce money supply (contractionary monetary policy), influence the
reserve requirements either by expansionary or contractionary where necessary and finally buy
or sell U.S government securities to reduce or increase the money supply in the economy. The
correct application of these monetary tools will help achieve the goal of having low inflation and
Fed on Unemployment and Natural Rate of Unemployment
When the natural rate of unemployment is lower than the real unemployment rate, the
indicator is that the real Gross Domestic Product is greater than the potential GDP; hence the
economy is at a boom. This will lead to inflation and the Fed has to use contractionary monetary
policies to bring stability in the economy. On the other hand, when the unemployment rate is
greater than the natural unemployment rate the real GDP will be less than the potential GDP
hence expansionary monetary policies will be adopted.
Section III: Fiscal Policy
Comparison between the Federal Reserve and Executive Branch of the U.S Government
when Conducting Fiscal Policy
Fiscal policies are economic policies that keep the economy at a balance through the
influence of taxes and government expenditure. They can be expansionary or contractionary. The
Federal Reserve and the Executive Branch of the U.S government work separately to achieve
stability in the economy as they come to. Therefore their goals are the same but the methods by
which they influence fiscal policies are different. The executive branch directly influences fiscal
policies through taxes and government spending while Federal Reserve influences fiscal policies
indirectly, for instance through acting as a lender to the government when the government wants
to increase spending.
Fiscal Policies Administered by Bush since his Tenure in 2001
The fiscal policies administered by George W. Bush during his time in office were: tax
cuts during the 2001 recession to boost consumer spending, disaster spending to pick up the
economy from the impacts of Hurricane Katrina Amadeo, K (2020).
Denmark’s Decision to Re-train Workers who Lost their Jobs
Loss of jobs may affect many workers in the sense that displaced workers face long
periods of unemployment and job hunt. Even if they get the jobs they receive lower pay than
what they were receiving in their former jobs before being displaced. Denmark has come up with
a policy to retrain the workers who lost their jobs as well as ensuring they have access to proper
re-employment opportunities and adequate income in their periods of unemployment. Walker,
M. (2006) says that despite Danes being the most easily laid-off workers in Europe, statistics
indicate that the country's workers are the most secure about their future. These policies are
under the Danish “flexicurity model”. However, these policies tend to benefit only a few workers
in Denmark as workers dismissed from large firms tend to access faster and more support than
workers dismissed from small firms. Blue-collar workers are treated less favorably than white-
collar workers. Therefore there is room for improvement of the policies to ensure equal
distribution of benefits.
Amadeo, K. (2020 January, 13). How President Bush Affected the Economy. The Balance.
Retrieved from https://www.thebalance.com/bush-administration-economic-policies-
Demsetz, H. (1967). Towards a Theory of Property Rights. American Economic Review,57, 61-
Furubotn, E.G., and Pejovich, S. (1972). Property Rights and Economic Theory: A Survey of
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Gambera, M. CFA., Ezrati, M., and Cao, B. CFA. (2013). Economics For Investment Decision
Makers: Understanding Business Cycles. Unemployment and Inflation, 6, 303-304
Haydaroglu, C. (2015). The Relationship between Property Rights and Economic Growth: An
Analysis of OECD and EU Countries, 6(4), 217-239
IMF. (2001). 100 Percent Debt Cancellation? A Response from the IMF and World Banks.
Retrieved from https://www.imf.org/external/np/exr/ib/2001/071001.htm
Laub, Z. (2014 March,3). The Group of Eight (G8) Industrialized Nations. Council on Foreign
Relations. Retrieved from https:www.cfr.org/bacgrounder/group-eight-g8-industralized-
Libecap, G. (1989). Contracting Property Rights. Cambridge University Press
Sachs, J. (2005). The End of Poverty: Economic Possibilities for Our Time.