There is a relationship between economics and politics, which is interrelated and complex. However, it is essential to understand this relationship, which is widely regarded as a political economy. How does this affect the financial market? To explain this and more, this guide will provide a deep insight into political economy and the financial market, as well as the connection between them.
What is Political Economy?
Political economy is a branch of social sciences that places emphasis on the relationship between government, individuals, and public policies. Through this, policies set by the government can be well-defined and these policies often have their ways of influencing the economies of nations.
Political economy also ensures that the study of economic policies, including socialism, communism, and capitalism, is possible. Basically, economic theories involve methodologies that are embraced to ensure that a finite amount of resources are distributed in a beneficial way for the greatest number of people.
Based on the political ideology of a country, the relationship between the political landscape and the financial market can vary significantly from one nation to another. Take, for instance, the economies of capitalist countries, including the US, the UK, and Canada. In these countries, the economy is defined by capitalism or private ownership of assets and the free market. As a result, this determines the income, price, and distribution of commodities.
In contrast, a socialist economy is characterized by a greater degree of intervention from the government in the lives of its citizens. This is often aimed to allocate resources and wealth more evenly. Ideally, no country can be 100% socialist. The United States, for example, has an element of socialism in the form of Medicare, Social Security, and more. For this reason, the U.S. is best known to operate a mixed economy, which combines capitalism and socialism.
Regardless of where a nation finds itself on the political spectrum, its economy and financial market will be largely affected by its political position. However, it is worth noting that there is always a degree of intervention of government in a capitalist society, even though it might be less.
Managing the economy remains an important objective of a country’s government. For this reason, there is always a connection between political popularity, effective management of the economy, and power. This makes it very important for a government to adjust its spending to ensure that the economy is kept buoyant. This can be achieved through various fiscal and monetary policies.
Take, for instance, when the economy is too strong and inflation threatens to increase the prices of commodities, the government intervenes. They do so by raising interest rates, which ensures that borrowing will become more expensive for consumers. As a result, their spending power is reduced. On the other hand, when the economy moves too sluggish, the government reduces the interest rate to make borrowing cheaper. This incentivizes people to borrow money and spend more.
This, among other reasons, is why political stability is critical for the growth of an economy. After all, uncertainty and disruption will only impact confidence in the market.
It is no stretch to suggest that the relationship between politics and the economy represents a key component of the financial market, thanks to its significant influence. There are many sectors of the economy that the political economy affects, including the financial markets. This also impacts the trading decisions in financial markets, as well as the behavioral sentiments among investors and other economic agents.
In recent times, as businesses begin to have more to do, there is a great need to embrace the strong economic theory, which can help in achieving organizational success. Indeed, it is not uncommon to find many agents equip themselves with essential knowledge, as well as practical skills, which can expose them to the economics of the real world.
By understanding the relationship between the government, and the people, and how public policies can impact the general economy, it becomes easier to achieve stability in the financial market. This could include how resources can be better distributed in the economy. After all, the impact of political economy on the financial market of a nation cannot be ignored.
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