Macroeconomics

If a firm is not making enough profit, the government can intervene in a number of ways to help increase this average profit rate. One such method would be to cut the taxes that are placed on corporations. If these charges are lifted, corporations can maintain more of their surplus value. According to smbiz.com, personal service corporations are charged a flat tax rate of thirty-five percent of their taxable income. Personal services include such fields as health, architecture, consulting, etc. Take a consulting firm for example. The firm makes two million dollars a year. Of this two million, a hundred thousand are spent on various expenses such as electricity for the building, life insurance for the employees of the firm, magazines for the waiting room, desks, chairs, and so on and so forth. The employer then pays each of his fifteen highly-qualified employees a hundred thousand dollars. Then, the firm must pay seven hundred thousand dollars for the taxes imposed on them by the government. If you do the math, this means that the firm is actually losing three hundred thousand dollars a year. Needless to say, this firm would not stay in business much longer with these numbers. If this trend held true for all the firms in the counseling field, the government could eliminate the thirty five percent tax altogether and the firm would end up making four-hundred thousand dollars to pay the employer and provide for capital to re-invest in the firm to make it more efficient and profitable. A tax cuts into both consumer and producer surplus. If it were lifted, it would result in a higher surplus for the producer in the form of profit.

A second measure that could be taken to increase the average profit rates of a corporation are to cut back on the minimum wage. While this would be highly controversial in the United States in its current situation, it could be accepted if corporations were not making enough to stay in business and all employees were making more than enough to live on. By cutting back on the minimum wage, all wages would most likely be affected to stay in proper proportion to each other. It would take away from the amount of capital needed to invest in a business. Thus, profits would increase as the capital required to run the business was lessened. According to pbcompliance.com, the current minimum wage in the United States is five dollars and fifteen cents per hour (soon to be raised seventy cents at a time over two years to seven dollars and twenty-five cents, the first increase will be effective March 11, 2009). For simplicity's sake, let's say there's a large firm that employs ten thousand employees all at minimum wage that work eight hours a day for two hundred days a year. The firm makes ninety million dollars a year in revenue. After paying its employees though, the corporation would only have a little less than eight million dollars a year. This is far too little to cover all the costs that such a large firm would have to pay meaning that there would be no profit. If the government could decrease the minimum wage to four dollars and fifteen cents an hour, the firm would have a little less than twenty and a half million dollars to pay all their costs. They would surely have profits from this decrease in wages.

A third measure that could be taken to increase profits for a corporation are placing tariffs on all the imported goods that would serve as alternatives to buying American cars. According to the MSN financial report on General Motors, the company had an income of negative two billion dollars over the last year. If a tariff was imposed on all the imported cars coming into America, Americans would be forced to purchase American-made cars. This means that the amount of sales that General Motors would make would increase. It would create more surplus value for the company. Even if all the other components to profit remains, average profit would still increase. According to the same report, the company made a little over two hundred and seven billion dollars in sales over the last year. If a tariff was imposed on all foreign cars, sales would increase considerably and this number would be higher. More revenue means that subtracting costs would yield greater profits than before.

The actions of the government to help out one industry might just lead to negative externalities in another industry. One way in which the actions of government might harm an industry is one of the methods above. If the government was to impose tariffs on imported cars, the car industries in other countries will suffer from the loss of sales in the United States. This would also harm international relations. Many companies that sell cars in different companies are dependent on exporting a large amount of their supply to the United States. If this was taken away from them, trade would be harmed in other areas as relations would get worse. The country may refuse to export any of its goods to the United States.

Another negative effect of effect of government intervention could be a conflict between industries competing for the same non-renewable resources. Non-renewable resources are resources that producers use before they can replenish. In other words, they are used up and there is a limited supply. Petroleum is one such resource. If the government would provide massive subsidies to companies that produce jets, more petroleum would be used for jet fuel. This would harm other industries that need petroleum to produce their goods. Petroleum is also used in the production of wax for instance. The price of petroleum would rise as much more would be bought to make jet fuel. Wax producers would have to pay the inflated prices or exit the business.

This is obviously true of renewable resources too. Trees are considered renewable because they are able to plant new trees at a rate that is comparable to consumption. There is essentially an unlimited source of trees. However, even then the price of production of products made of wood could be effected by the government's actions. Take the paper industry and the furniture industry for example. If, again, the government was to provide considerable subsidies for companies that produced furniture, the furniture industry would grow. Thus, the companies would start chopping down more and more trees. The price of the equipment to cut down the trees would increase as would the cost of buying plots of land with trees on it. The paper industries would suffer as they would see their prices of production increase and profits decrease.

Another way that government actions could potentially harm an industry is by effecting industries that compete for another resource: labor. If the government was to help out one industry by cutting the taxes imposed on them, this benefit could be passed on to the industry's employees. They might get paid more from the company's profits. Wages would increase in that industry drawing more workers to it. This would result in a negative effect to other industries competing for the same labor force as they would have to either raise their own wages or lose their most skilled workers to the growing industry. For instance, two industries that may compete for the same labor force could be law and medicine. Both occupations take a considerable amount of upper level education to enter. If the government funded the growth of the law industry through tax cuts, subsidies, lowering the tuition for law school, etc. more young people would choose to become lawyers than doctors, nurses, or any other occupation in the medical field because there would be more openings and better pay.

There is a wide gap in the incomes of the lowest quintile of the labor force in the United States and the top quintile. The highest quintile owns a lot more than the lowest one. This inequality has yielded many effects in this country that holds equality and fairness as their rights. The government works to remedy these inequalities though. They pass legislation that evens out the distribution of the wealth of our country. However, inequality still exists today and it's getting worse. The gap between the rich and poor is widening despite the government's efforts.

One social consequence that may not be so apparent is that a lot of people are losing their jobs to people in different countries. With so many families below the poverty level in the United States, the government has taken the action of raising the minimum wage for American citizens. According to the US Census Bureau, the poverty level in 1996 was 13.7%. In 1997, the minimum wage was increased from four dollars and seventy-five cents to five dollars and fifteen cents. The poverty level then dropped to 13.3% in 1997 and continued to drop without another raise in the minimum wage. This is an attempt by the government to even out the distribution of wealth in our country. It is an attempt to take the capital of the top quintile of America (the employers) and give more of the profits to the lowest quintile of the population (the employees). Right now, the ever-widening gap between the rich and the poor is being dealt with in exactly the same way. The minimum wage is being raised by two dollars over the next two years to combat this growing inequality.

Though this situation sounds good, it has some negative effects too. Producers who have been used to paying their employees a certain rate find their profits being lost to the increase in wages. In order to avoid this loss, companies have started giving jobs to people in different countries that will work for less. This is particularly troubling in the field of information technology and jobs on the lower end of the income spectrum. These jobs are clearly not available to Americans anymore and the result is a growth in unemployment. According to an article in Manufacturing and Technology News, the unemployment rate of electrical and electronics engineers was 6.7% and five hundred thousand jobs had been outsourced in the field of information technology.

Another social consequence of the inequality of wealth is the inequality of school systems. Families in the lowest quintile of income in the United State can not afford to pay as much toward taxes as a family in the top quintile. As a result, the schools in their district get less funding. They can not afford to pay their teachers as much, can not afford to buy quality materials for building, and can not afford to pay for the upkeep necessary for such an essential building. The result is that the kids in that neighborhood hypothetically get a lower quality education with teachers that do not have the same credentials as those of the teachers for the kids of the top quintile. They get less nutritious food for their lunches. They lack the proper equipment to learn such as laboratory equipment, desks, computer labs, and even in the most extreme conditions simple necessities like chalk or copiers.

The kids that go through this type of education and live in this environment are likely to end up taking jobs that are on the lower end of the pay scale. Then, they will need cheap housing also and will move into a neighborhood that again has the problems caused by poverty such as an ill-equipped school. This inequality of the school systems is reflective of the inequality of wealth in the United States. Going to a good school is an emblem of wealth. It is also illustrative of the inequalities of income as the people living in such areas do not have enough income as those that live in areas where families have higher paying jobs and thus the schools do not have the finances to pull money from. This inequality perpetuates itself.

Adam Smith and Thomas Hobbes have one very important idea in common. They both imagine that human beings are driven by a sort of self-interest. While Adam Smith would call this "selfishness" and "greed", Hobbes would call it the "desiring self-defense." Either way it's put, it means in economic terms that a human being has the innate desire to maximize their utility. In short, people do what they desire to do. The only difference is that Adam Smith describes this desire in material terms, using terminology that leads the reader to believe this desire is for material goods, while Hobbes describes it in terms of survival where humans co-operate and trade for fear of being worse off or even dying without it. Hobbes's theory is that it's a dog-eat-dog world and that if we were all allowed to do whatever we wanted, we would come into conflict with each other again and again in competition for the thing we desired.

This is really where the two theories differ. Adam Smith believes that if the system were just left alone to do its work, everything would move toward equilibrium and we would have a fair and free market. It would be guided by the "invisible hand" that is the mechanisms of human self-interest. He believed that if everyone acted out of their own self-interest, society would benefit as a whole. Hobbes, on the other hand, advocated the need for authority because of his beliefs that competition would lead to conflict. He believed that some authoritative figure needed to be present to step in when conflict arose and to settle the issue. Adam Smith was adamantly opposed to such interventions as he predicted they would be detrimental to the natural growth of the economy and the general movement towards equilibrium in markets. His theory was that as long as the market was left untouched, producers would enter markets where profit was too high and thus drive down the profits for that industry and that producers would exit a market if the profit was too low and thus raise the profits up to the equilibrium. Eventually each corporation in the industry would be making the same profit that would pay the producers enough to live on comfortably.

Yet it is interesting to point out that their solutions are still not completely different. Hobbes mentions that even though there would be an authoritative figure involved in the system, that leader or organization of leaders would still be guided by "natural law" which is something similar to moral integrity. Leaders will generally act out of the interest of the group as a whole as their well-being is closely associated with the leader's own well-being. Adam Smith, however, was not willing to put up with the manipulations of a government with a personal agenda while Hobbes accepted them as the price of peace and self-defense.

"GNP per capita is one of the three primary measures used to distinguish countries that are 'developed,' and countries that are 'under-developed,' or 'developing.' GNP (and GNP per capita) also happen to be the best measures of well-being, growth, and general standards of living in a country."

The GNP of a country is representative of the economic activity within that country. It offers us the value in dollars of all the final consumable goods of a country and all of the investments in a year. It is made up of four components: consumption expenditure, gross private domestic investment, government purchases, and net exports.

Thus, a high GNP is indicative of a country that has a lot of spending power as they spend more on goods, investments, public works, and exports. A low GNP is indicative of a country that can not afford to spend its income on these essential economic activities and, thus, have a stagnant economy. It is easy to see, then, how a high GNP could be interpreted as representing a "developed" country as the residents are probably spending more money on luxury goods through their high consumption expenditures (after all other countries are surviving on less expenditures, meaning that the country with high consumption expenditure is not just spending all of its income on necessities) and are also set for more economic growth through the high investments. A country with low GNP is probably spending a larger portion of its income on necessities rather than luxuries and has no room for economic growth with little investment. This would be an "underdeveloped" country.

A country's "well-being, growth, and general standard of living" can also be associated with a high or low GNP. Government purchases, including public works and the like contribute to well-being and standard of living and are associated with a high GNP. High net exports means money is being spent efficiently, getting the cheapest goods possible while not sacrificing quality. This also contributes to the well-being, growth and standard of living. The GNP generally outlines a country's position in the economic world.

However, I disagree with this statement because, even though the GNP is a valuable number that provides a lot of information about such categories as are listed, there is a good chance that it is not an accurate representation of that country. The GNP does reflect the amount of activity in the markets of its country, but it does not necessarily measure the welfare of that country. The GNP statistics can not determine things like welfare on their own.

First off, the GNP is given in dollar amounts rather than actual tangible goods. Therefore, it is subject to inflation as everything rises in price with time. This makes the "well-being, growth, and general standards of living" in that country difficult to make out. The country could very well have a monopoly on some product and accumulated a massive stock of that product. Then, the value of that product could depreciate because of some new innovation or product. The GNP of the country would look devastating, but the people may not be that bad off as they may be in a situation where they could re-use the raw materials in the product or find some way to make them more valuable. The GNP in this instance is not reflective of the country's well-being. The GNP may even be flawed at this point while the relativity of the prices changes and it is hard to calculate their exact value.

A second problem with this statistic is that it does not reflect a change in quality of the goods a country produces. This is another reason why the well-being of a country is not in exact conjuncture with the country's GNP. New innovations may actually decrease the price of a product while the overall utility of the country increases because the product becomes more efficient in its function. If a country invented a light bulb that was brighter and conserved more energy than normal ones and cost less, their GNP would go down but their overall well-being and standard of living would go up.

GNP also does not pay attention to the purpose of production. A country whose GNP rises by thirty-seven million dollars because of a new anti-smoking campaign will probably have a lot better standard of living and well-being than a country whose GNP rises more than others because of its increased sales of cigarettes. This is also a reason why the growth of a country is not reflected in the GNP. The effects of a large anti-smoking campaign in a country could include a healthier workforce, a larger workforce, and a re-allocation of investments that were once in cigarette companies. All of these things could then contribute to the country's economic growth.

GNP also tends to leave out certain unpaid goods and services that are valuable to its country. For instance, the work of a stay at home mom is not included in the GNP even though the services these women supply are ones that other people receive pay for doing. This is one reason, also, why the GNP is not reflective of the country's status as "developed", "under-developed", or "developing". A developed country may have made advancements and reached a point where its labor force was paid well over what they need to survive. More people would choose to stay at home and care for their children as a full-time job as long as one family member was earning wages. As mentioned before, this type of unpaid work is not included in the GNP. Thus, a developed country may have a lower GNP than an under-developed country. This would reflect that they had less economic activity and we would assume that they would be under-developed, however this is not the case. The well-being and standard of living is surely better off in this country also even though the GNP would not reflect that. An increase in wages such as this would mean that people would have more leisure time and more spending power.

One other problem with the GNP is that it does not reveal anything about the distribution of wealth within a country. If a country has a very high GNP but also a very high inequality in its wealth, then the welfare of its people are not accurately represented because the extreme wealth of he country is held by the few.

The GNP is a wonderful economic tool that generally represents the economic activities of a country. It can provide some clues as to the state of the country like whether it is "developed" or "under-developed" and it can provide a rough sketch of the standard of living in a country. However, it is not the most accurate representation of these two characteristics. In many places it fails to fully describe the state that the country's economy is in.