Stabilization Although Satisfactory

Stabilization Although Satisfactory

Stabilization Although satisfactory practical solutions to these problems have not yet been found, government s have developed several lines of defence and have acquired a fairly high degree of control. The first line of defence is the so-called 'built-in stabilizers'. Progressive income tax, .unemploymentbenefit and national assistance form the main ones in Britain. When incomes and employment begin to fall, the Government's revenue from taxes is reduced and its expenditure on social security payments rises. Incomes therefore fall much less than in the absence of the stabilizers. Secondly, if more is required to push income back to the full employment level, the Government can use a battery of monetary and fiscal weapons. Interests rates can be lowered and credit eased to encourage firms and individuals to borrow and increase their spending on both consumption and investment. Taxes can be lowered to give people more money to spend or to cheapen goods and encourage spending. The Government itself can increase its spending either directly or through the nationalized industries. These measures can be put into effect in the opposite direction to check inflation.

The problem of economic instability is at least as serious for the under-developed countries of the world as for the industrial nations. For them the main cause of instability is not fluctuations in domestic investment but changes in their earnings from exports. Most of them specialize in a narrow range of primary products such as cocoa, coffee, groundnuts, copper, rubber, oil. Their earnings from the export of such products form a large part of their national incomes, and fluctuations in their export earnings therefore cause marked swings in their national income. It is difficult to damp them by the fiscal and monetary techniques used in more advanced economies that are less dependent on foreign trade. Even if they could keep up incomes by expansionary techniques at home when export earnings fall, so much of the supported incomes would be spent on imports that the foreign exchange reserves would soon be depleted by the resulting deficit in the balance of payments. Economic stabilization in these countries is thus thought to require more direct action to reduce the fluctuations in export incomes, e.g. national or international buffer funds and stocks. More fundamental policies, such as insurance, saving and other methods, have been urged by some economists on the ground that fluctuations in the prices of primary products are unavoidable, and may be desirable to indicate changes in international supply and demand.

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