Question

Case-1

In 1920, there was considerable debate regarding how much the US government should intervene in the economy. US citizens, for example, were concerned about the future of an American car brand, Chevrolet, which was included in the failing General Motors. While some people wanted the government to ensure that their jobs were safe, others were concerned that the government was intervening too much. It should be noted that from World War I, the US government has considered itself a mediator regarding problems in the market while avoiding controlling aspects of the economy. For example, the US government regulated anti-competitive behaviour while avoiding running several industries. On the other hand, when the 1925 recession took place and the economy began to shrink, the government had to stimulate demand for which it started spending more and intervened significantly so that the banking sector could be saved from collapsing. Moreover, the US government had to provide businesses with aid to sustain them.

Questions: [ Student has to write answer at least 125 words for each sub-question]


i) Analyse the possible benefits of a government intervention in an economy? .






ii) Which economic system ensures complete freedom for individuals in economic activities? What are the benefits of freedom of individuals in an economy?









iii) Compare the economic system of Oman with that of USA in terms of social welfare and competitiveness.

Answer 1

Answer to Part 1)

The government of the United States has had to take tough stands of market interventions during extreme recession or inflation in the economy. It is required as often the market cannot correct itself due to lack of demand and/or supply in the economy.

Cyclical variations lead to market inefficiency which can only be corrected by outside forces. For example, due to the recent Corona Virus outbreak, the government has increased its spending many folds. This is due to the existence of a cycle which needs to be actively broken and is explained as follows: -

During a recession, the Aggregate Demand for goods and services begins to fall. This leads to a drop in the price level of goods and services in the economy. The resultant is that the total Gross Domestic Product which is the final value of goods and services produced in the economy declines. To contain costs, suppliers reduce supply lines and fire people so that costs efficiency can be maintained. The reduced jobs again lead to demand crisis in the economy.

It is thus believed that this cycle of low aggregate demand, low aggregate supply and job crisis in the economy, can only be corrected if the government is to participate and ensure that the aggregate demand can be increased. Without government intervention breaking this cycle is impossible and therefore the benefit of this exercise is that it removes this cycle from existence.

Answer to Part 2)

The system of a capitalist society which has no market intervention is what ensures complete freedom for people in the economy. Such an economy does not have any government intervention and the forces of demand and supply decide what is to be produced in the country.

Over the years, numerous countries have established this in most economic markets, to ensure that consumer remains the king. This is because the central decisions of what a market would produce are then left to the forces of demand and supply. If the demand for a goods is high, and the consumers favour purchasing certain types of goods, the economy itself adjusts and begins supplying this to the consumers. In societies which do not follow this system, such as North Korea, the country decides what consumers would get which in turn never maximizes their benefits as the market is controlled in every aspect by the government respectively.

Answer to Part 3)

The Oman though, is a free market economy, the major factor which distinguishes it from the United States is the fact that it does not have a diversified industry. Most income in the country is only through export of oil which makes other industries extremely vulnerable. The imports on the other hand are very high and competitiveness of most other industries such as agriculture, technological development, Information Technology enabled services is extremely low.

The United States on the other hand, does not depend on oil exports to be the only deciding factor for its Gross Domestic Product. Government intervention only takes place during crisis and otherwise, market participation remains negligible. The Oman government on the other hand is very active in participation. The United States is the market leader for most product and services and the competitiveness and quality of products being delivered is very high in comparison.

Please feel free to ask your doubts in the comments section if any.