Revisiting the Economic Cycle

Revisiting the Economic Cycle

In the previous two discussions on economics, The Economic Cycle Part 1 and The Stock Markets, we introduced the simplest form of the economic cycle and an explanation of stock markets and how they work.

I want to revisit the economic cycle that I explained by adding two more stakeholders that regularly take part in the economy – the government and the private sector. Today, we will spend our time on discussing mainly the government but do keep in mind the existence of the private sector alongside the government. Everything I mentioned before still stands, including how the households, markets and producers work within the economy, but this time around I will be involving the government and the private sector.

After including these stakeholders into developing an economic cycle model, the model will now be called a closed economic model. It is closed because it does not take into consideration the foreign sector, which is another stakeholder.

Let us welcome the government

The government of any country is a group of elected people or political representatives with the authority to govern everything that is within the boundaries of that country according to the regulations the group follows. The role that the government plays in an economy is vital to ensure that there is an efficient flow of goods, services and money within a country. An economy that has no government involvement is called a free-market economy since all the prices of the goods and services are determined by the market according to factors such as demand from the households and supply by the producers.

An economy where the government intervenes and sets policies on how prices should be determined is referred to as a socialist controlled economy. If the private sector, which leads the capitalist economy, is included, then we refer to it as a mixed economy.

The role of the government

The government, when in a socialist controlled economy, will set out policies guided by economic theories. These policies are aimed at growing the economy and encouraging the participation in the economy by the various stakeholders. The reason the government puts the interests of the various stakeholders at heart is because if the policies are not favourable for any of the stakeholders participating in the economy, then the economy itself will not function. So, the government needs to set policies that ensure all of those involved in the economy have equal share of the opportunities available in the economy. (This is viewed as a socialist philosophy and will be contradicted by any capitalist philosophy, but the two can be merged in any economy).

Another important role that the government plays in the economy is that it will act as an employer for all the participants in an economy. That is, the government will employ households that have people who are employable. This will give them a salary or wage that will allow them to spend and so move money into the economy. Producers will be encouraged to provide services and goods that households need. The government will also be creating another revenue source for itself from the producers through tax. It also creates an additional revenue source for itself through taxing its employees whenever they get paid. As a result, the government receives revenue from households and producers operating in its economy and that money will be spent on things such as service delivery, social development, and building infrastructure like roads, schools, shopping centres, hospitals. When the government does this, the standard of living of a country improves and so does the economic growth of that country.

Here is a visual representation of the Economic Cycle I’ve talked about so far:

 

The Economic Cycle by AFrika Kesho

Final Thoughts

In this article, we took a deep dive into the discussion and role of the government in our economic cycle. Along the way, we also introduced many concepts related to the different types of economic models that appear when different stakeholders are added to the economy. Take your time exploring this information layer by layer so that you can have a broader understanding when new information layers are added, such as in the next article where I will include a discussion on the private sector and foreign sector. I will also include in the discussion another lever that government uses to promote equality amongst its participants.

Take care of yourself and keep reading.

This article was written by Realeboha Molaba.

You can contact Realeboha Molaba by clicking on the social media buttons below, or by emailing him on: relebz.quinton@gmail.com

 

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