"The Basics" Please respond to the following:
•Analyze the relationship between the production possibilities curve and the circular
flow diagram. Discuss how the change of production possibilities curve affects the
circular flow diagram. Provide an example to support your response.
The Circular-Flow Diagram is a visual model of the economy, shows how dollars flow
through markets among households and firms. There are two types of “actors”: households
and firms and there are two types of markets: the market for goods and services and the
market for “factors of production”. In product markets, business firms supply and sell goods
and services while households demand and buy them. In resource markets, the relationship is
reversed. Households supply and sell factors of production, such as labor, while business
firms demand and buy them.
The production possibility curve is a curve showing alternative combination of goods and
services that can be produced by a government and the private sector when available
resources are used efficiently in an economy. It also shows the boundary line between
inefficient and the unattainable combinations. On the other hand, circular flow diagram
shows all the productive resources for household, firms and the government divided into
sections with the lower and the upper half’s showing flow of resources between household
and the firm and the middle section between household and the government and between
business firms and government. In analyzing the relationship between these two concepts, the
production possibility (PPF) shows a trade-off between the government and the private sector
in the production of goods and services, given the resources, technology, and the rules of the
game. The PPF curve shows the production in an efficient manner that may compels the
government to embark on the trade-off with the private sector. Again, compared to the
circular flow, the PPF identifys the point on the curve where there is efficiency in the
production of goods and services, inefficient and unattainable points that is absent in the
circular flow. The production possibility curve shows how two resources can be allocated.
The text shows government goods and services and private goods and services. The
Production Possibilities Frontier (PPF) is a graph that shows the combinations of two goods
the economy can possibly produce given the available resources and the available
technology. Households/individuals/consumers take their income earned through their
participation in the factor market and exchange it for goods and services in the product
market. What they purchase is called goods & services and the money they spend is called
household/consumer expenditures. The money from the perspective of firms is called
revenue. From the perspective of the firms, the inputs are combined through the production
process adding value along the way and converting it into goods & services.
Any point on the PPC curve is understood to be characteristic of an economy “fully
employing all factors of production at the highest level of technology.” So, it means that any
point on PPC, considering two goods, all the factors of production i.e. land, capital and labour
are fully employed and firms are able to produce the goods efficiently. In case of the outward
shift in PPC curve, it would mean that household's income has gone up and they are able to
consume more goods and services. Similarly, firms are able to produce more quantity of
those goods and services consumed by the end customer using better technology. It also
means that there is an increase in the quantity and quality of the factors of productions.
For an increase in government goods and services private goods and service must decrease if
the economy is at full employment. The circular flow diagram how's the flow of goods and
services and money to and from the different markets. In. Pure market households would
supply resources to the input market and the input market would supply the resources to the
firms. Goods and services would then flow from the firms to the output market to the
household. The flow of money old be the direct opposite of this. In a pure market there would
be no government involvement so there old not be a need to list them in the circular flow
diagram. In a mixed market the government also provides goods and services and they use
resources from the input market and receive goods from the output market. Money flows
from the households and firms to the government and in turn flows back out to input and
output markets. When government increases the amount of goods and services on the
production possibility curve then the private sector must decrease the amount offered. On the
circular flow diagram there would be more resources and money flowing through the
government.
•Compare and contrast federal government expenditures, state and local government
expenditures, and financing government expenditures. Suggest a total of three actions
that should be taken to reduce the level of federal government spending.
The federal government spending can be broken into three categories, transfer payments,
interest payments and consumption. Transfer payments make up 60% of all government
spending. Transfer payments include social security, Medicaid, unemployment benefits,
payment to the poor and federal grants. In order to reduce spending there will have to be cuts
in transfer payments. The two largest expenditures of the state and local government is for
education and health care. Even though both are subsidized by the government through grants
they are still a sizable burden on the state and local governments. In order for the Federal
Government to reduce spending they must discontinue some of the transfer payments. This
can be accomplished by making it more difficult to get welfare or Medicaid. Some of the
many grants could cut such as government subsidies to private companies or to the states.
Consumption could also be reduced by cuts in military spending, roads or other services that
are offered. The federal government, theoretically at least, collects taxes, fees, etc. and
provides services that are less effectively done through either private markets or state/local
governments.States and municipalities have vastly different resources, natural and human,
among each other, and there is often a negative correlation between available resources and
the support needs of a community, so the federal government operates as a redistributor of
resources through social programs and grants. In addition, they provide national programs
like land management and defense. State and local governments provide most of the direct
services such as police, parks and rec, and libraries. Both types of governments use taxes,
fees, and bonds to raise funds, and the federal government collects tariffs and .such as as
well.
I think the best was to reduce government spending in the long run is to increase it in the
short run with development projects such as education and high-speed rail that are known to
have multiplier effects in the long run. However, in the short run, government can: decrease
services and oversight, run more efficiently, or raise more money through taxes and
decreasing interest payment. A sound economy can only help alleviate the federal budget
deficit issue and for that it is important that there are investments on various development
projects and other sectors which will have the multiplier effect on the economy. In the short
run, measures such as cut on both security and non-security discretionary programs, health
care cost containment, cuts to agriculture subsidies and the civil service retirement system,
Social Security reforms, comprehensive tax reform, and budget process changes would help
reduce the federal government spending.
Three ways of reducing the level of government spending are;
1. Rebirth of the Byrd committee. The committee that once investigated the government
spending trend to approve any type of expenditure. Any recommendations from a committee
modeled on the Byrd Committee should be privileged and require an up-or-down vote on the
floor.
2. Put every transaction or award of contract to the public knowledge or on line in real time.
This will ensure transparency to avoid waste, locate inefficiencies and empower the people
whose money is being spent (the taxpayer) to be fiscal watchdogs.
3. Sitting Congressmen and Senators should not be able to name buildings or be too much
involved in budget preparation to bring in their self interest activities to swirl the expenditure
figures (Norquist, 2010).
References
Hyman, D. N. (2011). Public Finance. Mason: South-Western Cengage Learning.
Norquist, G. (2010, August 20). Retrieved January 10, 2013, from Ways to Reduce
Government Spending: http://www.atr.org/fourteen-ways-reduce-government-spendinga5332