Role of Fiscal Policy in Public Finance Management

 I.            Introduction to Fiscal Policy

a.     Definition

The role of government in the economic is to extend far beyond its activities as a regulator of specific industries. The government also manages the overall pace of economic activity, yet because of some effected of the government budget deficit, public debt in the countries can lead the government to requiring taxes collection to maintain or to make as much as high levels of employment, stable prices and economic growth. Fiscal policy is the government tool used in the economies to manipulate the market by taxation and also expenditure.

b.    Types of Fiscal Policy

There are two main tools in the fiscal policy, through which it determines the appropriate level of the expansionary and contractionary fiscal policy. Expansionary and contractionary fiscal policy, these two main types play an important role in the economies, expansionary fiscal policy happened when the government increase in spending but lower the taxes collection. It will lead the government to borrowing from the banking sectors and also the government would issuing bond to get revenue in the ways that also can lead government economies to have a risk of the inflation. Contractionary is the second main types of the Fiscal policy that indicate the spending of government are less than taxation and will run a budget surplus in the economies. Behind of these concerns, the government will pay down the debt and leaves the bond, which had issued, by point out to get some fund to make any investment to influence in the economies (Dodge, 2011). 

   II.            The Importance of Fiscal Policy

Fiscal policy is important when there is a recession or inflation in the economy. It is used as a tool by the government to stabilize the economic activities. Most governments around the world always want to stabilize their economy by maintaining a sound price level, employment rate and moderate economic growth.

If any of these areas is distorted, one of the two types of fiscal policy can be taken into action in order to mitigate the situation. Fiscal policy can be used to either stimulate growth in one economy or vice versa. The changing of government spending and tax will directly affect aggregate demand and aggregate supply. It is the most useful tool for government to manipulate the economy when the tools of monetary policy loss its effectiveness. For example, during the economic down turn in 2008 and 2009, the Federal Reserve cut its  target interest rate to almost zero in which the monetary policay is no longer useful. Hence, the only availble and powerful tool for the U.S government during that time to increase aggregate demand is expansionary fiscal policy (Mankiw, 2011).

III.            The Roles of Fiscal Policy in the Economy

The role of fiscal policy is to stimulate growth and stabilize the economy of a nation or region through an increase or decrease in government spending and taxation. Fiscal policy is an alternative tool to monetary policy and it is widely used by many governments around the globe to intervene a destabilize economy.

When an economy is sluggish, the governments can use an expansionary fiscal policy to increase economic activities. With expansionary fiscal policy, citizens will have more money in hand and also get higher disposable income as the government increases spending and reducing tax. Hence, the consumption and investment will increase which in turn the government can collect more tax from sales for both local and national level. On the other hand, when the economy grows too fast out of control or faces hyperinflation, the governments can slow it down by using a contractionary fiscal policy. A reduction in government spending will directly decrease the aggregate demand curve by reducing government demand for goods and services, whereas the increase in taxation will slow down growth and reduce consumers’ demand and investment which indirectly reduce aggregate demand (Forsythe, 2012). In addition, fiscal policy has role can one economy both in short-term and long term. The long-term goal of fiscal policy is to reduce poverty and ensure sustainable growth in one nation; while in short term, it plans to redeem a sluggish economy (Cartmell, 2013).  

IV.            The Effects of Fiscal Policy

Fiscal policy is one of the major policies that use by government to control the stability of the economy as whole by focus on taxation and government expenditure. But how does it effect on public finance management? Public finance is all about how the government makes control over the economy to make it stabilize, basically it talks about what is the role of the government in the economy. Fiscal policy has a big impact on public finance management by changing the aggregate demand or supply of the market to certain level. How does it do that? In case of government expenditure, if, for instance, the government orders cars from Crysler for 10 million dollars, hence, it will create more jobs and more income to many households and shift the aggregate demand and supply. When this 10 million inject to the circulation, it’s not only increase by 10 million, but instead there is multiplier affect where this money could create 50 or 60 million more, for example. On the other hand, changing tax system also effect market system as whole. Take for grant, if the government decrease income tax on workers, thus workers will bring more money to their home, which they have more money in hands. As a consequence, they will enjoy spending to buy consumer goods more.

  V.            Conclusion

All in all, fiscal policy is one of the government tools used to intervene and manipulate economy either to increase the economic performance or slow down the growth. By changing spending and taxing level, government can directly or indirectly affect aggregate demand in the economy. Despite fiscal policy is a powerful tools for organizing economy, it is not 100 percent effective. Consider the time of recession, fiscal policy may face some problems due to time lag before the new policy is recognized. Likewise, it will take time to put the policy into action base on the approval in legislative and administrative process. Lastly, there is another difficulty for the same policy to show result after implementation (Forsythe, 2012). Moreover, if the consumer positively respond to the policy, the policy and economy will work well. In contrast, most consumers have negative respond when the government increases spending that will likely to incur tax burden in the future. Consequently, consumers are willing to save more rather than spending in order to anticipate higher tax in the future, and it will lead to decrease in aggregate demand.  

VI.            References

Cartmell, P. (2013, November 10). What Is the Role of Fiscal Policy? (E. E. Hubbard, Editor, & Conjecture Corporation) Retrieved November 10, 2013, from wise GEEK: http://www.wisegeek.com/what-is-the-role-of-fiscal-policy.htm

Dodge, E. R. (2011, March 4). Expansionary and Contractionary Fiscal Policy Review for AP Economics. (McGraw-Hill, Producer) Retrieved November 20, 2013, from Education : http://www.education.com/study-help/article/expansionary-contractionary-fiscal-policy/

Forsythe, A. (2012). Fiscal Policy. Retrieved November 10, 2013, from Economic Foundamental Finance: http://economics.fundamentalfinance.com/fiscal-policy.php

Mankiw, N. G. (2011). Principles of Macroeconomics (6th ed.). CENGAGE Learning.

Knowledge Development Cycle: Knowledge identification, Validation, Creation, and Acquisition

A lot of organizations around the globe start to realize the potential of knowledge as there are more and more competitions in today business world. Knowledge is the main source to build competitive advantages for many organizations around the globe.  Without sufficient knowledge in the business areas such as customers, product/service, process, people, and technology, organizations are likely to fail in the future as it loses competitive advantage to the competitors. Every organization needs to manage its knowledge effectively and efficiency in order to survive in our contemporary knowledge economy. Knowledge Management (KM) plays an essential role for the success of one business. According to KM book, it defines KM as the process for developing knowledge and knowledge assets to build knowledge strategy, supporting first to build strategy and then its implementation (Jawadekar, Knowledge Management, 2011, p. 67). Knowledge Management is designed into a system where it goes through a range of specific processes. KM System (KMS) is a system for managing knowledge in the organization for supporting identification, creation, acquisition, codification, and dissemination of intellectual capital to implement the operation of a business. It is divided into two cycles: knowledge development (KD) cycle and knowledge management (KM) cycle; they are interrelated from one to another. In this essay, I would like to discuss only about the KD cycle which is about identification, validation, creation, and acquisition of knowledge. I will explain each phase in the KD cycle, and illuminate the differences and challenges of each process.

Knowledge identification is the first step in KMS. It identifies the source of knowledge and determines whether the current knowledge needs to be updated. The quest for new knowledge is very practical these days as the world keeps changing most of the time. A high competitive pressure in modern business environment has called for an innovation in most organizations. Organizations that are well detected the existing knowledge and put effort in updating the knowledge can increase competitive advantages and outperform the competitors.  There are many ways in which organization can use to identify new knowledge. For explicit knowledge, organization can use information technology (IT) as a tool to capture new knowledge. IT is very useful to unveil hidden knowledge by analyzing and studying the correlations of existing data and information (Frost, 2010). For example, Apple Company can use data of its sales to learn about when and where it usually makes high volume of sales. Identifying tacit knowledge is quite a challenge for many organizations as it requires careful attention and observation from managers. Managers need to have a deep understanding of what their organization’s employees actually know and how to divert their knowledge into explicit knowledge.  Qualitative and quantitative tools such as knowledge interviews, surveys, and questionnaire can assist managers to innovate/identify tacit knowledge. Managers in some organization also use IT to seek for experts and communities within their organization. For instance, Nike installed an intranet in its organization in mid-1997 to learn about a project in which it brought many experts in many countries to make product design decisions (Kenneth & Jane, 2010).  Some problems generally arise during knowledge identification process. There are times when it is very hard to identify the source of knowledge. In this way, knowledge is not only exist within the organization; it can locate somewhere outside the organization as well. Even the organization identifies the source, but it may also incomplete or maybe there are lots of data and information which are useless. In order to avoid such problems, knowledge experts needs to have a real understanding about the business.

Knowledge validation is another step of KD cycle. The purpose of this step is to ensure the highest level and appropriateness of identified knowledge for designing business strategy and dealing with the current problems of the business. There are plenty of reasons that we need to control the quality of knowledge before we can encode it into a system. Firstly, knowledge engineers sometimes misinterpret the expert’s knowledge or maybe fail to capture the whole expert’s insight. There are also some instances in which experts provide wrong information and this in turn will tremendously affect the usefulness of that information. In order to deal with the problems in validation of knowledge, a knowledge that was identify needs to evaluate, test for validation, and verify before managers can use it to deal with particular problem(s) within the organization. Evaluation of knowledge requires judging an expert’s system overall value and analyzing the level of usefulness, efficiency, and cost of the knowledge system (Efraim Turban and Jay E. Aronson, 2001). The validation of the identified knowledge deals with the performance of the system by comparing the knowledge system to the expert’s system. The knowledge needs to test for the level of accuracy to know whether the right system was build or not.  After testing the validity of the identified knowledge, knowledge teams need to verify the consistency and completeness of this knowledge. Once the identified knowledge has been successfully come across the verification process, then the identified knowledge is useful to implement in business operation.

Knowledge creation is the next step in KMS. It aims to develop and generate new knowledge to enhance organization success and economic well-beings. Knowledge creation is very important since it is the driver of innovation in most organizations and there are many unsolved problems that existing knowledge cannot resolve. There are varieties of methods in which organizations can develop new knowledge. Organizations\ can purchase knowledge from other entities such as competitors, researchers, partners, and consulting firms if knowledge exists outside the organization. It is easy to acquire knowledge from others if they are willing to share. However, most organizations are not willing to sell/share its tacit and/or private knowledge and even if they sell, they will sell it at a very high price. Another way to create new knowledge is through research and development projects, experimental, and observations. These methods are frequently used to seek for nonexistent knowledge. Billions of dollars have been spent every year to search for new knowledge. The stiff competition in today business world has coerced many organizations to seek for new ideas most of the time in order to cope with competitions. Besides acquiring and engaging in research/experiments, organizations can also create new knowledge by learning from their previous information/data. Some valuable knowledge may lie in the existing data, but they might have forgone by experts as it was store in an unorganized form. It is hard for knowledge engineers to understand and capture information from the unprocessed data. Organizations should invest in information management system since this system facilitates organization’s employees in understanding and extracting knowledge from previous data. New knowledge generally arises during the movement of tacit and explicit knowledge. In socialization process where tacit knowledge creates from tacit knowledge, people can gain new knowledge through working with other person(S). For externalization process, new concepts are generally built as more and more people access to the now explicit knowledge. People will try to divert the now explicit knowledge into other new ideas and theories. The combination process occasionally creates new explicit knowledge as the data/information combines together to unveil useful information. Internalization process is where knowledge creation happens mostly since it delivers explicit knowledge to each individual to make it tacit knowledge. SECI model is very useful in facilitating knowledge creation in the organization. Without this model, new knowledge will not exist.

Knowledge acquisition is the last step in KD cycle. It is defined as the process of extracting, structuring and organizing knowledge from one source, usually human experts, so it can be used in software (Jones, 1989). Knowledge acquisition typically supported by knowledge creation process. The acquisition of knowledge usually begins with the process of receiving new information. Once organization received new information, it will send it to knowledge experts to evaluate and determine the usefulness of that information to build knowledge strategy for supporting business operation. When experts completed their valuation and found out that the information is useful, they will encode the new information into a system for later use. There are five main sources of knowledge acquisition: customers, suppliers, competitors, partners/alliances, merges and acquisitions (Frost, 2010). These sources of knowledge are very important in designing business strategies. For example, Sony Corporation uses knowledge about its customer to improve marketing and design decisions. Knowledge acquisition focuses on three main topics (Jawadekar, Knowledge Management, 2011). First, the business domain and problem domain need to assess the appropriateness of the knowledge in designing business strategy. Second, the source of expertise must be identified and evaluate to ensure the application of the knowledge required by the organization. Lastly, the specific techniques and participants need to be identified to engage knowledge initiative. A lot of organizations are facing problems with the acquisition of knowledge. In this respect, some experts hesitate to share their knowledge or might not easy to cooperate. On other occasion, the method of acquisition is not fully refined and complicated. Some methods are implicit, unclear, and weak which could cause the evaluation of knowledge ineffective.  Testing knowledge is also complicated task as there are many sources to test and/or there might be some incomplete information. At times, Knowledge engineers who extract the knowledge from experts may have problems in interpersonal communication which leads to inconsistent of information gathering. As there are many problems associated the acquisition phase, organization needs to experiment the new knowledge attentively before encodes it into the organization system.

   To sum up, knowledge management is very important for our contemporary knowledge economy. Organizations need to manage their knowledge effectively and efficiency in order to gain competitive advantages. As there is a stiff competition in today business environment, many organizations around the globe have called for knowledge management system. KMS is a system for supporting KM; it is split into two different cycles: Knowledge Development cycle and Knowledge Management Cycle. In this essay, I am interested to discuss only about the first cycle which is about identification, validation, creation and acquisition of knowledge. The KD cycle begins with the identification of knowledge. An appropriate knowledge needs to be identified in order to move on to the validation phase. The knowledge that has been identified prerequisites to test for its validation before knowledge engineers can integrate it into systems and processes of the organization. Knowledge creation is the next step of KD cycle; it is where new knowledge is created. Organization can develop new knowledge through purchasing or, research and development projects. Knowledge creation is a dynamic activity that can enhance organization success and economic well-being. Knowledge acquisition is quite similar to knowledge creation and it is about taking or capturing knowledge from a source in order to store in a system. The acquisition of knowledge usually support by knowledge creation process. There are usually some problems arise during each process of the KD cycle. Organizations that fail to avoid or solve those problems will not be able to manage its knowledge effectively and efficiently. It will be better for organization to design a specific knowledge teams or information management system in order to cap with those problems and make an effective use of its knowledge.

 

Bibliography

Efraim Turban and Jay E. Aronson. (2001). Validation and Verification of the Knowledge Base. New Jersey. Retrieved 11 19, 2013, from http://www.google.com.kh/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&ved=0CD0QFjAD&url=http%3A%2F%2Fwww.prenhall.com%2Fdivisions%2Fbp%2Fapp%2Fturban%2Fdss%2F6e%2Fppt%2Fch11.ppt&ei=-3iLUuv6IJGgiQfI64GABA&usg=AFQjCNF55wIRCowUoIqC0ZlCF_xeqLi7AQ&sig2=_xs

Frost, A. (2010). An Educational KM Site. Retrieved 11 19, 2013, from Knowledge Discovery and Detection: http://www.knowledge-management-tools.net/knowledge-acquisition.html

Jawadekar, W. S. (2011). Knowledge Management. Delhi: Tata McGraw Hill Education Private Limited.

Jawadekar, W. S. (2011). Knowledge Management. New Delhi: Tata McGraw-Hill.

Jones, P. (1989). Knowledge Acquisition. Retrieved 11 20, 2013, from College of Engineering: https://engineering.purdue.edu/~engelb/abe565/knowacq.htm

Kenneth & Jane. (2010). A New Supply Chain Project Has Nike Running for Its Life. Retrieved 11 19, 2013, from ESSONTIALS OF MANAGEMENT INFORMATION SYSTEMS: http://wps.prenhall.com/bp_laudon_essmis_6/21/5556/1422513.cw/-/1422575/index.html

Advantages and disadvantages of virtual organization

From the past up to now, the organization has changed a lot in order to make the jobs and employees to become more effective and efficient. Among these changes, we have noticed many organizations nowadays try to restructure their organization’s structure to move toward “virtuality”. According to the Modern Management book, virtual organizations refer to as network organizations or modular corporation (Samuel & S. Trevis, 2012). There are both pros and cons for having a virtual organization.

To begin with the positive points, organizations can reduce the cost by having a virtual organization. In this way, they can reduce some cost for working spaces and as well as utility expenses such as rent, maintenance, insurances, water, electricity, and raw materials. Secondly, some employees may find themselves to work faster at home rather than in the company’s office. Working at the office can sometimes be very disturbed as there can be a lot of people in one office. Thus, virtual organization can increase productivity for those who like to work at home or in a silent place. Finally, virtual organization allows firms to redesign jobs to make employees more effective and efficient. For example, some jobs do not require employees to come to office every day as the jobs require employees to work directly with customers, so it is not important for them to be present at the office every day. As a consequence, they can get access to the customer more quickly and save time.

Moving onto the negative points, first, it is difficult to build a desired corporate culture in a virtual organization. In this respect, it is hard for employees and employers to work and understand about each other in a virtual organization which could create a complex corporate culture workplace as they are coming from different cultures or geographies. There is a high possibility that conflicts could exist in a virtual organization as well. For example, Cambodians find it is not appropriate or impolite to speak something bad directly with the managers, whereas, westerners like to complain about something directly.  Difficulty for managers to control workers is another disadvantage of virtual organization. Managers are hard to measure the performance and commitment of their employees as they work at their own places rather in the traditional office which managers could see their workers every day. Lastly, it makes communication more difficult for virtual offices because there are less physical interactions and we need to arrange the actual time and date for an online meeting.  Similarly, workers who are working in different time zones will even find it more difficult in order to communicate with other employers or employees. Due to all the above reasons, managers need to consider attentively before making the decision to implement virtual organization structure.

In conclusion, virtual organizations are getting attention from many contemporary managers as they find it is beneficial since it can cut some expenses for the organizations, increase workers’ productivity, and allow firms to redesign jobs to make employees more effective and efficient. However, employers also need to be aware for the drawbacks of virtual organization. As discussed above, virtual organization creates a complex corporate culture, difficulty for managers to control workers, and makes communication more difficult. Most mangers find that the advantages of virtual organization seems outweigh the disadvantages, and that is why many organizations around the world commence to adopt virtual organization structure.

Reference

-          C. Certo, S., & Certo, S. T. (2012). Modern management. (12th ed., p. 354). London: PEARSON.