Question

“Some economies suffer from structural economic imbalances and weak economic performance. This is reflected in different forms of leakages, the most important ones are the outflow of spending reflected in the high level of imports and the use of savings in unproductive activities.”

1. Explain clearly why structural economic imbalances and weak economic performance can cause the above mentioned leakages.

2. What are the economic rules and steps that the country should follow in order to correct such structural imbalances?

Answer 1

FIRST QUESTION-

structural economic imbalances where lack of equal development in different sector persist.whenever economy performance is weaker then the developed sector of the economy sustains but the weaker section of the economy is badly affected and it makes a negative impact on their financial situation as well as mental situation.

this can be studied as below-

• UNEQUAL DEVELOPMENT IN THE ECONOMY-unequal distribution is the main cause of structural imbalances.where one sector is generating higher income and the other sector is struggling to meet basic necessaties.the sector with higher income tends to demand for the product which can't be produced in the domestic market and thus it has to be imported which tends to be a leakage in the economy.
• INSECURITY AMONG PEOPLE-whenever economy face any fluctuation the low level people faces the worst situation,this sector lacks the knowledge facilities like educational institutions and further there is no basic medical facilities for them,therefore these people develops a habit to save money from their little income and keep it themselves rather then invest it in productive units.this ceases the velocity of money in the economy which is a negative impact on the growth of the economy.
• LACK OF KNOWLEDGE CONCERNED WITH THE INVESTMENT OPPORTUNITY-people generally don't have knowledge in the investment option.they find it very dynamic and risky,they generally prefers to keep funds in their on own hands rather than investing them it in any bonds,shares etc.
• LACK OF PRODUCTION VARIETY AND CAPABILITY-when the industries are unable to produce large variety of goods in the economy then people tends to move ahead for the foreign product which creates a leakage of flow.lack of technology and traditional production methods are the main reasons.

SECOND QUESTION-

the government should adapt the following steps for improvement-

• INCREASE IN TARIFF AND IMPORT DUTY-to decrease the level of import government should increase the tariff on imports so the price of the goods can be increased and there would be less demand for the product.
• INCENTIVE FOR DOMESTIC PRODUCTION-domestic firms should be provided and encouraged for the adaption of new and innovative technology concerned with variety of products.it would lead to decrease in the cost too.
• INVESTMENT IN HUMAN CAPITAL-government should spend on health plans,education plans,retirement plans of the people,so they would save less and consume more.effective and skilled labors are the fundamental needs of the growth of the economy.
• PRODUCTIVE OPPORTUNITY TO MOBILE SAVINGS INTO INVESTMENT-people should be made aware with the various financial and investment plans so they have confidence to invest.
• in this way the saving would be converted into investment and would be used in different productive work.