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National Debt

16 Dec 2016Economics Essays

National debt is also called government debt or Public debt. National debt can be described as the money a government (central, federal, municipal or local government) owes. Governments in normal circumstances are supported by taxpayer’s money; the taxpayers comprise people the government represents. Therefore any debt any government owes can be seen as an indirect debt to the taxpayers. When a government spends more than it taxes it runs a deficit thereby accumulating debt over the time because it forces the government to borrow from within or outside.

Government debt can be broken down into two: internal debt and external debt. Internal debt is money owed to lenders that are within the country. External debt on the other hand is the debt the government owes foreign lenders. The government’s often borrows by issuing securities in form of government bonds or sovereign bonds and bills that form what are called treasury securities or securities that the government borrows from the central bank. Sometimes unethical and hard-pressed governments may resort to borrowing from commercial banks. Government debt can also be classified according to the repayment period that the particular debt takes. There is short-term debt, long-term debt and medium term debt. Short-term debt is normally one year and less, long-term debt is 10 years and more while medium term debt falls in between the two.

Money creation

The process of producing or issuing money is termed as money creation. Money is normally created in 2 ways. Manufacturing of physical money in a mint. This encompasses manufacture of coins and notes (paper currency) Through loaning out the physical money several times by what is termed as fractional-reserve lending.

Creation of money by mint

Minting of money can be categorized into competitive or nationalized. When the minting is competitive it means that competing manufacturers are in business of manufacturing coins. The mints first have to purchase billion from the billion markets. A billion is best described as bulk precious metals that are used for coin manufacture. Purity and mass are the critical aspects of the billion rather than the face value. Once they buy the billion the mints manufacture coins out of it, which they use to pay for their production costs and retain some profit.

On the other hand, nationalized minting is where a particular government monopolizes coin manufacturing. In this system the government owns and operates mint that have the responsibility of producing coinage for the national system. Nationalized minting can either be minting with a right to exchange or can be minting with no right to exchange.

Creation of money through practical reserve system

Money multiplier is the most common money generating mechanism. This mechanism generally measures the level by which a commercial banking system increases the level of money supply. http://www.prosperityuk.com/prosperity/articles/moneymake.html#3 Central banks play the role of controlling the amount of money that the system creates. The central bank does this by placing reserve ratios on the commercial banks. These ratios set the primary deposits proportion the banks are required to hold as reserve qualifier. The reserve ratio is a very important factor because it prevents banks from generating excessive amount of money that would harm the economy of the country and also it safeguards the banks from cash shortages when large deposits are withdrawn.

International Trade

International Trade as the name suggests is the exchange of goods and services between one country and another. It can also be defined as trade across international boundaries. Traders in an international set up can be classified either as exporters or importers. The antecedent to international trade was barter systems or transactions where goods and other valuable items were exchanged

The factors that greatly encourage international trade include lower production costs on one country as opposed to another, which means goods and services from one region are cheaper. Another factor is the availability of specialized industries in a particular region that is not available in another one, this means that a certain region has the capacity and capability to produce certain goods and services in a very specialized manner because of the availability of advanced technology. Also lack or surplus of natural resources plays a major role in international trade.

International Trade is an important component of economics and can be considered the ‘Engine that runs most nations’ and contributes greatly to GDP of most countries. If not for international trade must countries would be limited to the goods and services that are only available within the country itself, this of course would basically make the growth of many economies grind to a halt. International trade has continued to evolve and change especially with the advancement of technology and perhaps the latest technological advancement that has impacted the trade significantly is the Internet, which has turned the world into a ‘small global village’.

Works Cited

  • A Glossary of Political Economy Terms: http://www.auburn.edu/~johnspm/gloss/national_debt: Retrieved on 28th February 2008
  • http://www.prosperityuk.com/prosperity/articles/moneymake.html#3: Retrieved on 28th February 2008
  • Reem Heakal : What Is International Trade? http://www.investopedia.com/articles/03/112503.asp: Retrieved on 28th February 2008

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