It is one of the fiscal policy in macroeconomic that the government spending is good for the economy during recession. The theory of government spending during recession is to reduce unemployment rate, so that people have more money to spend. When there is increase in demand it will increase the production also.
This is not as simple as it sounds, the government spending can also be bad for the economy. There economic formula that will suggest the path of government spending. This is called multiplier formula. The government sometimes spends on the things that does not generate returns and the multiplier model can show how much the returns will be when the government spends. If the multiplier is greater than one then it is good for the government to spend on the certain path, and if the multiplier is smaller than one or even equal to one then there is no point of spending on that certain path.
There a lot more issues in government spending, and it can also be illustrated with economic models when government spending is high the consumption also reduces and people will have less time for the social life. When there is high government spending then there is an increase in aggregate demand, people will have to work more hours to satisfy the demand.
It is important for government to find the optimal level of government spending. When there is low government spending there is an increase in consumption and also increase in time for social life. People will have to work less when the government spending is low. There problem is that when government spending is less the income reduces therefore people will naturally have less money to spend. Therefore, government should find the optimal level of government spending and they should also use multiplier models to know the path of spending, if it will stimulate the economy.
One of the biggest issues that is being talked about a lot is environment. We know what we have to do to prevent from climate change, we know how to reduce the carbon dioxide. What we don't know is how to reduce the carbon dioxide and still keep the economy running as normal. The more the production then higher the carbon dioxide. If we reduce the production then companies will not be able to earn money and when they can't earn money then more people will be out of work and when they are out of work then there will be increase in unemployment rate and then people will not have enough money to spend and when people don't spend then there will be a drop in sale and all the other companies will start firing people and which will have an increase in unemployment rate even more. The biggest question is how to increase or maintain the production and still reduce the carbon dioxide?
Green energy and economy
Green energy have been known for long time as the main solution for saving the environment by reducing carbon dioxide. Green energy have been growing very fast in many countries. It is still one the most promising way in reducing the carbon dioxide. There are so many countries that are still underdeveloped. Some of the underdeveloped such as in Africa, they have strong sun which can be very good way to get solar energy, the improvement of solar energy in these countries can help these countries generate income. It will be very difficult to change the infrastructure of developed countries, but it is possible to use solar energy to start developing the economy of the underdeveloped countries. In an economy there is credit constraint and lender will never want to borrow money if they know that a country does not have or use their resources to be able to pay back. Underdeveloped countries should make a really good plan to allow foreign companies to invest in their country in doing business on green energy and also food production.
Economic plan for underdeveloped country
A plan that I could give to underdeveloped countries; Lets have the country that we want to develop and we can name this country as country A, and lets say that this country has bordering countries of country B and C, and lets say these countries are in Africa, lets also assume that there is developed country E and F. Country A should implement few policies to attract foreign investment, usually foreign companies wants to invest in a country that they see a potential profit in short period of time. Country A should not have any tax on foreign companies in doing business for minimum of 5 years, this means that they should not even have tax on export. The foreign companies should not even pay for renting the land for minimum of 5 years and even after 5 years they should pay very little tax, but they should have only one term that these foreign companies have to do and that is producing food. There are some developed countries that have very good knowledge of producing food and food is the most important thing in every living things life. Another thing this country A should also do is have enough money printed but not fully used to control the inflation rate. Country A should also implement that all the salaries and businesses with in country A should be conducted in local currency. When companies from country E and F wants to invest in country A, they should be fully welcomed and protect. The companies will bring their foreign money and exchange with currency of country A to conduct their business, they will bring their experts and technologies to do business in country A. When these companies bring their money and exchange to the currency of country A, then country A automatically makes money by selling their currency. The companies will start employing the people and people will start having jobs making living. Energy is one of the most important contribution to economic growth. If country A can create opportunities for foreign companies to invest in solar energy by using huge amount of land in getting energy from sun and exporting it to neighboring countries such as B and C, these companies might have some interest in investing. If there are a lot of companies that are interested in investing in country A and country A can make money through just exchanging their local currency to foreign currency. When country A is developing then government can also encourage the local people to start doing business and supporting them financially by offering low interest rate.
All other countries can benefit when the economy of country A is growing through green energy and production of food. It will also be another source of income for developed countries. When underdeveloped countries run their economy on green energy, it will balance the world and it will be a huge step in creating green economy.
Important things to understand about making the currency stronger is demand and supply. There are some good ways to increase the demand. In order for currencies to be strong it must have a value, where other countries would want to buy your currency. If international businesses demand for specific currency to conduct their business then they will demand for that currency. Another way is to have a currency agreement among countries, it sounds like it is similar to currency swap but it is not, it is a lot more like currency futures contract.
Lets say there are 3 countries that are struggling with their currency getting weaker day by day against country 4 with currency Z. We will name A, B and C who are struggling and they want to find a very fast solution to increase their currency. A can sell their currency to B in exchange for their currency, when A demand for currency B the demand for currency B increases and at the same time demand for currency A also increases because A is giving away their currency. With the similar method A can sell their currency to C and B can also sell to C, that way their all increase the demand for each others currency. When these countries trade each other currency they have to be some kind of an agreement so that they can avoid currency speculation. For example when A sells their currency to B, then B cannot give back the currency B back to the country B right away, it should be minimum of after about 3 or even 5 years. By the time the maturity of the agreement gets to the time that they can give back the currency then country B might not even have any currency A left, if they do not have currency A left that is a good sign, because it shows that country A utilized the currency A and made some profit out of it. The contract should also have the fixed rate in the future, so the price of each other currency should be fix if one country wants to return the money back. This method will help most of the countries to increase trade among each other and have good relationship in terms of business and tourism. They would not have to depend on the third currency.
Foreign Direct Investment
Countries should attract foreign direct investment to increase the value of their currency. The more the foreign companies do their business in your country then they will demand for your currency which will increase the demand. Then the country can use the money to run their economy but best advise would be to invest in another country to diversify the income.
Investing in other countries
A country should support the local companies that has the best potentials to run successful business in other countries. These companies should invest in other countries and conduct their businesses there. The money that these companies earns will be in foreign currency and when they send some portion of their profit back to the parent country, then they will be an increase in demand for the currency of parent country.
Some countries do not want to increase public spending because it will increase production, and it will increase demand for workers. The more hours they put in to work then they will little time to spend for socially. The increase in production increases demand for job which people should be happy because there are more jobs available, unfortunately in some of the countries people wants to have more leisure time. In a way it is good for people to have extra time for social life, because it increases happiness and it also increase healthy life style.
It is known that in some countries people go to work early in the morning and come back from work very late at night. In these countries husband and wife works, they do not have enough time to spend valuable times with their children. During the day when these parents are working, children do not get enough education by their parents. The education given by the parents are more valuable than any education these children can get, because parents teach with love and good intention for their children. Unfortunately it is very hard for one a family to be supported by one income that is why both the parents work so that they have enough income to support the family.
Countries can achieve some of these issues by investing correctly and choosing where to use the public spending to increase the economy but at the same time increase the social life of a country. One of the most important things to do is to do some studies so that they know the problems. One of the usually problem is public transportation. In some countries public transportation is an issue, therefore people take their own car to go to work, which leads to increase in traffic on the road. It can take up to 2 hours to get to work and another 2 hours to come back from work. If the public transportations are good and efficient, people can take the public transportation to save cost and save time. Increasing public transportation is also not as easy as it sounds, because by increasing the public transportation, the government should increasing the safety so that people feel safe to take the public transport to go to work and other places they need to go.
Another investment is sport, there are so many countries that focus on sport but if we look at some other countries they do not invest in sport. The reason why some people do not do sport is lack of finance. Some people wants to start working so that they have income to support their life. People would go to school and right after school they would go to university or get a job. After they complete their university then they get a job right after they complete, most of the time they get a job before they complete their university. A country should make some plans and allow children in school to participate in sport and try to be professional sportsmen while they are in school. It is very hard for some of the students to manage their time with school and sport. The similar plans should be encouraged at the university level also, by the time these young students graduate they will make their choice if they should go on with working or being professional sportsmen.
Another investment that government should focus is on the international investment. The can encourage their companies to invest in other countries to have wider market and more man power. Now a days most of the companies are multinational company but they advantage of multinational company is very big.
Investment in international education is very important investment countries should focus on. By focusing on international education countries are investing their people. Country with educated people are the best foundation a country can have. I always say one smart person can contribute to 5 other people, but imagine a country with millions of smart people, they can push the country to wonderful future.