Question

1. Why do economists look at a government’s honesty when they study national wealth?

2. Illustrate on a supply and demand diagram how price ceilings may distort the market outcome and specify what secondary effects price ceilings can create.

3. Explain what Adam Smith mean when he said the market operates as if an invisible hand is guiding the process.

Answer 1

1) Economic growth is likely to occur when the income is distributed equally between the individuals in a society. When the wealth is distributed between to poor instead of rich we can say that some sort of equality is attained.

An Economist looks at a government's honesty while studying national wealth. The probable reasons could be:

- Government is not concerned about long run policy goals rather it is only concerned with short term goals which may help them in winning the elections. Prior elections, the government talks way more about poverty alleviation, employment generation, equality and wealth generation but all these agendas go in vain once the government comes into rule.

- The top 1% comprises of the 10% of total wealth a country has, in the case of developing nations and this is a matter of concern. According to the study by Kuznets in his inverted U-Hypothesis, in developed countries the income share of the upper income brackets were significantly lower than the same groups in the developing countries while the income shares of the lower income groups in the developed countries were significantly higher than the same groups in the developing countries.

- Any policy formulation will be a waste if the prevailing government is not ready to willingly invest on its implementation and is ready to work on it with full honesty and diligence.

Therefore, a government's honesty is very important when economists study national wealth.

3)   Adam Smith was one of the leading classical economists who talked about division of labour and specialisation of labour in the industries which is very important for the industrialisation which would ultimately lead to the economic growth of a nation.

The theory of invisible hand was given by Adam Smith on his book, "An Enquiry into nature and wealth of nations" in 1776. It describes the unintended social benefits of an individual driven by his self interests. The market force that helps to equilibrate demand and supply of goods in the market automatically is referred to as the invisible hand.

The theory of invisible hand states that an economy can work well in a free market scenario when everyone is working to fulfil his own self interest. according to this, an economy will comparatively function better if it is free from government intervention (laissez faire) and the equilibrating forces are left in the hands of market. If the people are left to trade freely, the self interested traders would compete amongst themselves and this would lead the market towards a positive output via an invisible hand.

Invisible hand is a guiding force whereby there are no trade restrictions and traders compete with each other, if prices are lowered there is more demand and this way traders compete. The theory of invisible hand is based on Say's law i.e supply creates its own demand.

Hence, we may conclude that invisible hand is the guiding force bb=y which all the members of a society function under their own social interest which ultimately leads to the equilibrium in goods and money market and gradually this leads to economic welfare and economic growth.