Evaluate the effectiveness of government intervention in the mixed economy A mixed market economy partly incorporates interventionist aspects of centrally planned economies and elements of free market economies. The government in a mixed economy can partly answer the 4 basic economic question...
A mixed market economy partly incorporates interventionist aspects of centrally planned economies and elements of free market economies. The government in a mixed economy can partly answer the 4 basic economic questions (what goods to produce, how to utilise resources, who receives the finished goods and when to produce). Whilst private enterprises and consumers mostly dictate the 4 basic economic questions and thus have autonomy in their choices and decisions. Therefore allowing for supply and demand to freely determine market prices. However the public sector exists, allowing governments to monitor and regulate private enterprises that breach consumer protection laws and gain great market power. Government intervention in a mixed economy is decisively effective in improving the quality of life (HDI) and increasing economic outputs (GDP). In a mixed market economy, government intervention is effective through addressing economic fluctuation and market failure in increasing GDP growth, declining unemployment rates and correcting market failure. Exemplified in Kevin Rudd's stimulus package to mitigate the Great Recession’s declining effects upon the economy.. However government interventions that stimulate growth in the economy have costs and flaws that continue to hinder the economy’s expansion.
Government intervention in the mixed market is imperative in addressing economic fluctuations through increasing GDP growth and the quality of life. Economic fluctuations are periods of high and low economic activity that consist of expansions, recessions and depressions that are illustrated in the business cycle. The 5-sector flow of income model, describes the operations of the economy and links between the Household, firm, Financial, Government and international sector. Therefore illustrating the leakages (Savings+Taxation+Imports) and injections (Investments+Exports+Expenditure) that affect economic growth, thus resulting in depressions, recessions and expansions. When injections (I+E+X) are greater than leakages (S+T+M), economic expansion occurs. Economic expansion results in high economic growth as Consumer confidence is high due to future economic conditions being favourable, thus leading to increased spending (Injection) instead of saving (leakage) that results in the consumption of goods and services. With rising profits from increased demand from the Household sector, firms will attain more economic resources such as labour that results in higher employment levels leading to an increase in the factors of productions. Therefore leading to an increase in the GDP as production is at high levels and the quality of life as consumer utility is maximised. However prolonged periods of economic growth may lead to inflation as prices rise with increased demand that results in the purchasing power of consumers decreasing. When leakages (S+T+M) are greater than injections (I+E+X), this results in economic decline that leads to a Recession. Periods of Recessions comprise of low economic growth due to low consumer confidence caused by future economic growth being unfavourable. Thus low consumer confidence leads to decreased levels of consumer consumption that results in businesses losing profit (Sales revenue - Operating expenses). Businesses no longer are producing products as there is no demand, resulting in a fall of the GDP. Unemployment levels increase due to firms not able to pay their incomes, therefore exacerbating the Recession. Individuals without firms are unable to maximise their utility, resulting in a lower quality of life as their wants and needs are not satisfied. Therefore the imperativeness of the government mitigating or preventing a recession is essential to solving the economic problem. The government solves this by stimulating economic growth through a stimulus package that enables the Household sector to consume, therefore allowing firms to attain profits through rising demands that enables them to employ the factors of production such as labour. Unemployment rates decrease that results in the incomes of labourers being paid, therefore allowing more people to satisfy their wants and needs through consumption. Therefore continuing the stimulation of the circular flow of income. The effectiveness of government intervention can be seen in Kevin Rudd’s stimulus package to mitigate the Great Recession.
The Global Recession that occurred in 2009 exemplifies the Australian governments' intervention being effective in stimulating economic activity, therefore stabilizing unemployment levels and the GDP. The GDP of Australia in 2008 before The Global recession was at a growth rate of 3.7%. Unemployment levels were at 4% in 2008. Thus the HDI was at 0.927, during the global recession, Australia’s GDP growth rate declined to 1.8% in 2009. Unemployment levels increased to 5.7%, therefore the quality of life decreased to an HDI of 0.922. Kevin Rudd's stimulus package was a government intervention that included 42 billion dollars in nation-building and jobs plan to support jobs and invest in future economic growth. In this stimulus package, $950 of one-off cash payments were given to families, students, single workers, and drought-affected farmers. The stimulus package enabled the household sector to participate in the consumption of goods and services provided by the firm sector, therefore maximizing consumer utility through satisfying wants and needs. Through firms attaining profits from increased demand for products, the incomes of employees are paid that allows further consumption of goods and services, thus increased economic activity. Therefore the HDI increased to 0.926 to 2010, exemplifying the effectiveness of the government in the mixed market economy. The firm sector facing rising demand of products as the purchasing power of consumers has increased, will seek to increase supply in order to maximize profits, seen in figure 1,
thus firms will invest in producing consumer goods to attain immediate economic growth, therefore shifting the factors of production in favour of consumer goods rather than capital goods to attain immediate consumption over future consumption, seen in figure 2.
Therefore the factors of production (labour, land, capital and enterprise) are utilised in producing consumer goods that are in high demand due to the stimulus,thus increasing demand for resources such as labour will result in unemployment levels decreasing, therefore increasing economic growth. Seen in the increase of GDP growth to 2.1% and a fall in the unemployment rate to 5.2%. Therefore government intervention in the mixed economy was successful against The Great Recession in 2009 as it increased the GDP from 1.8% in 2009 to 2.1% in 2010, and a 5.7% unemployment rate in 2009 to 5.2% in 2010. However, the implementation of the stimulus has resulted in numerous opportunity costs and flaws. The stimulus package’s main objective was to boost consumer spending, however consumers were able to save the money that was incited due to low consumer confidence, therefore contributing to a leakage (Savings) that exacerbated The Global Recession. The cost of the stimulus package was a higher Debt-to-GDP ratio as the government had to borrow funds from banks to create the Stimulus package, therefore contributing to a higher Debt-to-GDP ratio.