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Showing posts with the label Government Expenditure

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Fiscal Policy-A Note

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  The government without doubt plays a critical role in the economy. Given its volume and domineering presence, one cannot ignore the centrality of the government in giving direction to the macroeconomic plane. The role of course has been controversial and subject to many debates. There exists little consensus on the ideal nature of governmental role. While the classicalists believed the role of government in the economy to be minimal with focus on ensuring law and order, the Keynesians emphasised the centrality of the government intervention. While the classicalists favoured the supply creating its demand, it found its limitations in the Great Depression of 1929; John Keynes formulation was there was lack of demand and the government must step in to create the demand that became the foundation for macroeconomics and thus greater fiscal intervention. While the monetary school emphasised the role of money thus favouring a greater role of the Central Bank in framing the economic trajecto
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A Note on Circular Flow of Income and National Income Accounts

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Macroeconomics differs from microeconomics in the mode of analysis. While the latter uses the bottom up approach using a profit maximising firm or utility maximising individual as the starting point, the former uses the geographic construct of an economy as a starting point. To borrow from the forest, one can analyse the forest from the point of the various animals, birds, reptiles, insects, plants, shrubs, creepers, trees, herbs, caves, water bodies, soil among many other entities found in the forest. One can analyse them individually, their functions in a group, their interactions, etc. This is bottom up approach, thus the micro way of analysis. The other way is to have helicopter view or bird’s eye view of the forest. One can observe the total area the forest occupies as percentage of landmass, the oxygen content released by the forest, the carbon dioxide and other green gases absorbed by the forest, the amount of water by volume in the forest, the nature of flora and fauna in th
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