As I went through the Macroeconomic section of an internationally popular Economics volume, I came across multiple monetary and fiscal policies and intervention techniques that could help expand aggregate demand of an economy in order to avoid recessions. However, it was hard to find any direct monetary or fiscal intervention that would allow positive increase in Aggregate Supply side in the long run, or let’s say the production side. In fact, the side that developing nations like Nepal are mostly struggling over. Despite, the volume logically reiterated that aggregate demand plays a vital role in stimulating the production or the Aggregate supply side through various means that are not usually displayed in figurative explanations.
In regards to that logic made, we can also infer that accelerating the sluggish government spending on the infrastructural development of our country should obviously help us break free from the stubborn state of economic stagflation (i.e. the economic condition that causes both growth stagnancy and inflation at a same time) that we have been encountering since years and years. According to Index Mundi Factsheet (2013), the inflation rate in Nepal remains as high as 9.5 percent (2012 est.) whereas the GDP growth rate stays as low as 4.5 percent (2012 est.). Even though the idea of accelerating government spending directly refers to boosting Aggregate demand (i.e. the totality of Public Consumption, Investment, and Government spending and Net Exports) of the economy, it might ultimately stimulate the long-term Aggregate supply of the economy (i.e. the totality of the outcome retrieved from the mobilization of the factors of productions) as soon as the high demand pressure increases the price level of such factors of productions to a level that might cause the heavy chunk of immobilized factors of production like the unemployed labors (which stands about 46% for Nepal according to 2008 est. of Index Mundi) and unused natural resource and capital stocks to come to the production play.
Lately, it was publicized in the economic section of the Kathmandu Post that the government bodies like the Department of Road (DoR) and Civil Aviation Authority have been miserably unable to mobilize or spend the budget amount it was allocated for. According to the post (2013), “The Department of Roads (DoR) has so far just spent just 12.23 percent of the total fund allocated, while the physical progress stood at only 19.68 percent.” Though a common man might be unaware of the multiple implications of such spending underperformance, the economic implications are definitely multiple. At first, such spending slacks decelerate economic progress in an already stagnant Nepalese economy in a sense that it creates weak Aggregate Demand that may not adequately value (or price) the factors of the productions that instead causes stagnancy in the production growth (GDP growth) as the huge chunk of factors of production remain immobilized due to under pricing. While on the later part, it depresses the potentiality of efficient mobilization of the factors of productions like the human capital, and private investments that could again potentially stimulate the momentum of already progressing economic growth if it would have been previously bolstered by heightened Aggregate demand. In other words, not spending properly on infrastructural resources like roads (For inst. Kathmandu-Terai Fast Track that has failed to see any progress lately), Air facility (For inst. The proposed Regional International Airport in Pokhara of which talks have stalled already) etc creates impediments and difficulty in mobilization of factor of productions, and makes it more costly to mobilize (Money, 2013).
Figurative explanation of the positive side of the government spending in the economy can make this logic more comprehensible:
As it is presented in the provided figures, once the Aggregate Demand (AD) shifts to the right after it is bolstered by accelerated Government spending of the allocated budgeet, the price level offered for the factors of productions like labor, private capitals and natural resources gradually increases from OP to OP’ thus stimulating the long-term aggregate supply curve to shift the right (from AS to AS’) (provided in the second figure) until the mobilization of further factors of production remains economically unfeasible due to gradual fall in price level. However, the improvement in national infrastructure portfolio after government spending and resource utilization increases the efficiency of further resource mobilization, thus making it economically feasible to deploy further resources even during a lower price-level. Ultimately, the Aggregate supply curve or production further shifts from AS’ to AS” (provided in the second figure).
In fact, a healthy economy often takes a progressive economic cycle whereby, there is a constant growth in price-level (i.e. inflation) and production volume (GDP). Even though, the acceleration of government spending may not fully enable the country to break free from the current state of stagflation, it is never economically logical for our government bodies to remain in such minuscule spending level.
The provided figurative explanation can also embed Short-term Aggregate supply curve on it. In fact, the elasticity of the Short-term supply curve would have rather determined the amount of shifting that long-term supply curve would have endured. However, the absence of short-term supply curve on the provided figure doesn’t compromise the validity of the logic. Short-term Aggregate supply curve is an upward sloping curve with varying elasticity in basis to the complex characteristic of a particular economy.
Index Mundi (2013). Nepal Economic Profile 2013. Retrieved from: indexmundi.com/Nepal/economic_profile.html
Mankiw (2003). Multiple Chapters. Economics: Principles and Applications. Cengage learning
Money (2013). DoR spends just 12,23pc budget. The Kathmandu Post. Kantipur Publication.
Money (2013). High Priority Given to the Project: FinMin. The Kathmandu Post. Kantipur Publication.
Macro-economic theory of Aggregate Demand and Aggregate Supply