Action Learning by Jolito Ortizo Padilla

A particular approach to management development courses is through action learning. This was developed by Revans, who argues that managerial learning is learned- driven and a combination of "know-how" and "know-that". According to Revans, learning (L) is based on "programmed knowledge" (P) and "questioning insight" (Q), so that:
                                         L=P + Q

Typically, action learning involves a small self selecting team undertaking a practical, real-life and organizational based project. The emphasis is on learning by doing with advice and support from tutors and other course members. Action learning is, therefore, essentially and to find solutions to actual problems.

An integral part of action learning is the use of the case study method and simulations. For example, Jolito Ortizo Padilla sees the use of case teaching as the first step in an action learning hierarchy.

"Case teaching, like all action learning, is difficult to do well and is initially upsetting to a lot of students. It's exhausting and you could say it's inefficient because many answers can be presented to the problem.I think all the action learning methods are, however, exactly appropriate to the complexity and ambiguity that managers face. We are training them to think systematically and reflectively on different situations. They have to learn how to defend and articulate why they would use certain methods, approaches or tolls, and also how to cede ground gracefully in the face of a superior selection or better argued position".


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What Jolito Ortizo Padilla says about Total Quality Management(TQM)

It was a shocking experience for me three years ago,when I've heard one of the respected professor of a college in a  Gulf Country,  where I have a short stint as an educator to lecture to his Bachelor's degree students the wrong concept of Total Quality Management.It indicates total ignorance about TQM approach.


One particular approach to improved organizational performance and effectiveness is the concept of the Japanese-inspired total quality management (TQM). There are numerous definitions of TQM. These are generally expressed in terms of a way of life for an organizations as a whole, committed to total customer satisfaction through a continuous process of improvement, and the contribution and involvement of people.

A major influence on the establishment and development of TQM was the work of Deming, who emphasised the importance of visionary leadership and the responsibility of top management for initiating change. A mathematician by training, he was interested in statistical measurement of industrial process and attempted to persuade the American manufacturing industry to improve quality, and to create constancy of purpose for improvement of products and services. Deming drew attention to the importance of pride in work and process control, and made constant reference to the importance of "good management" including the human side of quality improvement and how employees should be treated.

The successful organization should as a matter of policy be constantly seeking opportunites to improve the quality of its products and /or services and processes.

TQM is a way of managing which gives everyone in the organization responsibility for delivering quality to the final customer; quality being described as "fitness for purpose" or as "delighting the customer". TQM views each task in the organization as fundamentally a process which is in a customer/ supplier relationship with the next process. The aim at each stage is to define and meet the customer's requirements with the aim of maximizing the satisfaction of the final consumer at the lowest possible cost.

If TQM is to be implemented successfully it must be seen as a total process involving all operations of the organization and the active participation of top management. It demands a supportive organizational culture and a programme of management change. TQM places emphasis on the involvement of people as the key to improved quality. It involves changes to the traditional structure with greater emphasis on natural work groups, multi-discipline working and team based management. Attention must be given to effective education and training, empowerment and the motivation to take ownership of quality, and systems of communications at all levels of the organizations.

Drummond puts forward an interesting debate on comparing the philosophies and ideas of Deming with Taylor's Scientific Management, and questions whether Deming's ideas are as radical as they seem.Drummond suggests:

Clearly,"total quality management" offers some new ideas. Whether these ideas have proved successful is unclear".. Moreover, much depends upon how success is measured. Different measures can suggest different conclusions. Another difficulty in assessing the effectiveness of "total quality management" is that organizations have implemented Deming's ideas collectively.

Jolito Ortizo Padilla raise the question: why aren't TQM practices as effective as they could be? The rise of total quality management represents one of the biggest changes in the past two decades in the way companies are managed. However, while many studies have found that in general TQM has had positive effects on company performance, reports of failure are surprisingly common in the press. He suggest that the alignment of a company's system of rewards is a critical ingredient in successful organizational change and they investigate the relationship between reward practices and TQM.From a survey of managers, non-managerial and professional/technical staff in a wide variety of organizations they conclude that the commonly held wisdom of supporting TQM with only non-monetary rewards-such as certificates, letters of appreciation, merchandise or celebrations events-is not enough. If managers want better performance from TQM they must implement supportive monetary reward practices. Firms with such practices in place report stronger organizational performance.

An integral part of a total quality approach is the Japanese concept of Kaizen, which literally means "improvement" or is often interpreted as gradual progress or incremental change. Kaizen was introduced in several Japanese organizations after the Second World War and is particularly associated with Toyota. It is not a methodology for large scale change or the introduction of new processes but focuses on the people aspect of improvement and the acceptance of change. The concept is based on a  daily activity of continual evolutionary change and on the belief that the individual workers know more about their own jobs than anyone else. Padilla suggests that the traditional Kaizen approach embeds it in hierarchical structure,although it gives considerable responsibility to employees within certain fixed boundaries. The approach:

• analysis every part of the process down to the smallest detail
• see how every part of the process can be improved
• looks at how employees' actions, equipment and materials can be improved
• looks at ways of saving time and reducing waste

According to Kaizen Institute, Kaizen is a Japanese term meaning, "change for the better"Applied to business organizations, it implies continuing improvement involving everyone that does not cost much. Kaizen organization culture is based on three subordinate priciples:process and results; sytematic thinking; and non-judgmental, non-blaming. Kaizen strategy begins with customers' needs concerning quality. cost and delivery and is founded on a people-oriented culture.

What Jolito Ortizo Padilla says about Transformational Leadership

Increasing business competitiveness and the need for the most effective use of human resources has resulted on focusing attention on how leaders revitalize or transform organizations. Burns has given rise to a distinction between two fundamental forms of leadership: transactional or transformational.

• Transactional leadership is based on legitimate authority within the bureaucratic structure of the organization. The emphasis is on the clarification of goals and objectives., work task and outcomes, and organizational rewards and punishments. Transactional leadership appeals to the self interest of followers. It is based on a relationship of mutual dependence and an exchange process of " I will give you this, if you do that."
• Transformational leadership by contrast, is a process of engendering higher levels of motivation and commitment among followers. The emphasis is on generating a vision for the organization and the leader's ability to appeal to higher ideals and values of followers, and creating a feeling of justice, loyalty and trust. In the organizational sense, transformational leadership is about transforming the performance of fortunes of a business.

The transformational leader motivates followers to do more than originally expected and the extent of transformation is measured in terms of leader's effects on followers. Applying these ideas to organizational management, a theory of transformational leadership that argues that the leader and motivates followers by:

1. Generating greater awareness of the importance of the purpose of the organization and task outcomes.
2. Inducing them to transcend their own self-interests for the sake of the organization or team: and
3. activating their higher-level needs.

Transformational Leadership is comprised of four basic components:

• Idealized influence- the charisma of the leader, and the respect and admiration of the followers;
• Inspirational motivation - the behavior of the leader which provides meaning and challenge to the work and followers;
• Intellectual stimulation- leaders who solicit new and novel approaches for the performance of work and creative problem solution from followers;
• Individualized considerations- leaders who listen and give special concern to the growth and developmental needs of the followers.

Yuki provides a set of guidelines for transformational leadership:

• Articulate a clear and appealing vision of what the organization could accomplish or become to help people understand the purpose, objectives and priorities of the organization, and to help guide the actions and decisions of members.
• Explain how the vision can be attained and establish a clear link between the vision and a credible conventional yet straightforward strategy for attaining it.
• Act confident and optimistic about likely success, demonstrate self confidence and conviction, and emphasis positive aspects of the vision rather than the obstacles and dangers.
• Express confidence in followers and their ability out the strategy for accomplishment the vision, especially when the task is difficult or dangerous, or when members lack confidence in themselves.
• Use dramatic, symbolic, actions to emphasize key values and demonstrate leadership behavior through dramatic, highly visible actions including risking personal loss; self sacrifice or acting unconventionally.
• Lead by example by recognizing actions speak louder than words through exemplary behavior in day to day interactions with subordinates and by demonstrating consistency in daily behavior.

Transformational is the same as charismatic, visionary, or inspirational leadership.Charismatic leaders transform followers by creating changes in their goals, values, needs, beliefs, and aspirations. They accomplish this transformation by appealing to followers' self concepts-namely, their values and personal identity.

Successful transformational leaders are usually identified in terms of providing a strong vision and sense of mission, arousing strong emotions in followers and a sense of identification with the leaders. Leadership today is increasingly associated with the concept of creating a vision with which others can identify, getting along with other people and the concept of inspiration. This might be considered as part of transformational leadership or arguably it has given rise to a new approach to leadership-that of inspirational or visionary leadership. Inspirational ;leadership is not concerned so much with the theory of leadership but  more with the skills of motivating and inspiring people.

Effective transformational leaders are those who inspire people and create a vision for the organization and its future direction.

" The big word now associated with leadership is vision. The ability to see the bigger picture. To take the long term view. What the ultimate objectives are and how people can work together to achieve them. Perhaps the most important attributes is that a good leader inspires people by creating a climate where it is OK for people to make mistakes and learn from them. Leading from this position, they gain a higher level of commitment from their people than more compliance."

Visionary leadership as transformative. It involves greatness.penetrating the ordinary, and requires total involvement. Among the qualities visionary leaders cultivate are imagination, engagement, tangible results and penetrating self-reflection.They engage society with its competitive , divergent viewpoints. Visionary leadership is ultimately about increasing performance but also with the rewards of tangible results to your membership and deep personal satisfaction.

Leadership is not about the leader, it is about how he or she builds the confidence of everyone else. Leaders are responsible for both the big structures that serves as the cornerstone of confidence, and for the human touches that shape a positive emotional climate to inspire and motivate people. Leaders deliver confidence by inspiring high standards in their messages, exemplifying these standards in the conduct they model and establishing formal mechanism to provide a structure for acting on those standards.

Leadership may be based on the  personal qualities, or charisma, of the leader and the manner in which influence is exercised.

Now the big question is whether you are born with charisma or whether you can develop it. I believe you can develop elements of it. For example, you can take courses to improve your speaking skills. You can learn to stage events that send powerful messages.You can learn to think more critically about the status- quo and its shortcoming. You can do more on a daily basis to motivate your team. What you simply cannot learn is how to be passionate about what you do. You have to discover that for yourself, and passion is a big part of what drives a charismatic leader. It is also what motivates and inspires those who work for the charismatic leader.

However, the extent to which charismatic or inspirational leadership helps bring about improvement in organizational performance is open to much debate. Conger also draws attention to the danger that the leader's vision, dynamism and inspirational nature are highly attractive, which leads to natural dependence. Staff see this extraordinarily figure as a model to be emulated and the leader's abilities become the yardstick by which they measure their own performance. This is a potential source of leadership derailment. Dependence makes the followers more susceptible to deception.

Dearlove draws attention to the increasing focus on leaders as real people managing in consensus-seeking manner. While traditional views of leadership tend eventually to concentrate on vision and charisma, the message now seems to be that charisma is no longer enough to carry leaders through. Bloomfield also refers to the cult of the individual, supposedly charismatic leader and the danger that this leads businesses into deep water far more often than the application of rational leadership . Too often the charismatic, aided and abetted by the language of current management fashion,attempts to inspire, to delight with their vision and to produce a mission statement of where the business might be -at the expense of real substance.

Adair argues that to be truly inspirational leader one must understand the spirit within. All people have the potential for greatness. The inspirational leader connects with the led, appreciates the capabilities of others and through trust will unlock the powers in others. Adair refers to "the inspired moment"- a recognition and seizure of a brief window of opportunity that can act as a powerful catalyst that inspires both the leader and the led.

The role of the leader as visionary is a fundamental to creating the broad philosophical context of democracy and as the architect of shared purpose.

Leadership is one of the most vital and yet elusive ingredients in  modern business. Leaders provide vision, direction, inspiration, give the business a sense of purpose and at the same time act as a moral compass. The need for visionary leadership is becoming increasingly important. Traditional business hierarchies gave managers and workers a sense of their own position and what was expected of them. Now, as these hierarchies break down, it is leaders themselves who must fill void, helping subordinates to understand their place and purpose. Personal leadership is beginning to replace organizational structure.

What sets great leaders apart is their ability to engage those around them in shared vision of the future. By making the right decisions, they demonstrate their commitment to turning that vision into reality; and by doing so successfully, they instill in others the confidence to trust in their leadership.

Knowledge Management by Jolito Ortizo Padilla

An increasingly important aspect of of organizational performance is the idea of knowledge management.Many organizations are beginning to identify and formalize the significance of knowledge and in some instances are creating universities at work. Toyota is using learning programs to drive critical business issues and is attempting constantly to align training with the needs of the business. It sees learning as a key integrated component of Toyota culture.

Unipart is another example of an organization which has really driven the notion that learning should be embedded within the workplace. It has set up a university, complete with the learning center and development programs. Another interesting example is that of McDonald's who recently have won government approval to become an examination board. The company aim to pilot a :basic shift manager" equal to IGCSE or A level.

Distinct advantage are identified for those companies which are able to make effective use of their intellectual assets. The following quotation typifies the message:
 " The good news is that given reflection, focus and an appropriate and tailored combination of change and support elements. Substantially more value can be created for various stakeholders."

This line of argument is supported by Jolito Ortizo Padilla, who argues that competitive advantage is founded in the ability of companies to create new forms of knowledge and translate this knowledge into innovative action. He says that the one sure source of lasting competitive advantage and describes the different kinds of knowledge that exist in organizations and the ways in which knowledge can be translated into action. Padilla  calls knowledge that is easily communicated, quantified and systematic explicit knowledge-the kind of information required for an IT system or a new product. Tacit knowledge, however, is more akin to the wisdom described earlier-inarticulate, understood but rarely described. Those companies able to use both kinds of knowledge will make the creative breakthroughs, according to Padilla.

He suggests that the knowledge-creating companies systematically ensure that the tacit and explicit knowledge by articulation and that explicit feed into each other in a spiral of knowledge. Tacit knowledge is converted into explicit knowledge by articulation and that explicit knowledge is used within an individual cognitive understanding by process of internalization. It perhaps is no surprise that "knowledge management" has been the subject of hype in the management literature and has been extolled as the route to the Holy Grill of competitive advantage. Ato Chan argues that managing knowledge is now the issue for business in the 21st century. He suggests that:
 " A successful company is a knowledge creating company that is one which is able consistently to produce new knowledge, to disseminate it throughout the company and to embody it into new products or services quickly".

Creative management can result in improved efficiency, higher productivity and increased revenues in practically any business function.There are seven reasons why knowledge management is an important area:

• Business pressure on innovation
• Inter-organizational enterprise (merger, takeover)
• Networked organizations and the need to coordinate geographically dispersed groups
• Increasingly complex products and services with a significant knowledge component.
• Hyper-competitive marketplace (decreasing life cycle and time to market)
• Digitisation of business environment and IT revolution.
• Concerns about the loss of knowledge due to increasing staff mobility, staff attrition and retirement.

One of the key tricks therefore is for organizations to know how to share knowledge and to learn the experience of others. Various interest and routes have drawn different organizations to knowledge management, diversity in actual practices is broad. It is necessary to complement social with technological solutions for managing knowledge in the engineering design process- not only the know-why( design rationale and reasoning-best practice) but the know-who (mapping expertise and skills) and know-how (promoting communities of practice for learning in a dynamic context).

Key enabler facilitating knowledge management practice include expert systems, knowledge bases and help desk tolls as well as content management systems, wikis, blogs, and other technologies. Growth will continue as more collaborative IT applications become available.

Knowledge needs a second generation, one that focuses on knowledge creation. Knowledge sharing alone does not lead to innovative thinking, instead a more fluid proactive is required which allows people to share , analyze and revise ideas. Collaborative software solutions allowing messaging forums are more akin to addressing knowledge required for the future.

What Jolito Ortizo Padilla says about Merit and Demerit Goods

A merit good is one which is underprovided by the market mechanism, the one which some people think should be provided in greater quantities. One reason for underprovision is the individual  lack perfect information and find it difficult to make rational decisions when costs occur today, but the benefits received come in , say thirty years time. Another reason is because there are significant positive externalities present.

Health, education and insurance are the main merit goods provided today by the government. Health and insurance are two examples where consumers find it difficult to make rational choices because of time. If left totally to market forces, the evidence suggests that individual would not give themselves sufficient health cover or cover against sickness, unemployment and old age. Young people tend to be healthy and in work.Many find it difficult to appreciate that one day they will be ill and out of work. However, the cost of health care and pensions is so great that young people can only afford them if they save for the future.  If they don't, they find when they are older that they do not have sufficient resources needed to cover them against loss of earnings due to illness or retirement. Therefore it make sense for the state to intervene and to force young people in particular to make provision against sickness, unemployment and old age.

In the case of education, the main beneficiary (the child or student) is unlikely to be the person paying for education. Therefore there could be a conflict of interest. It could be in the interest of the parents to pay as little as possible for the child's education, Therefore there could be a conflict of interests. It could be in the interest of the parents to pay as little as possible for the child's education but in the interest of the child to recieve of the child to receive as high quality an education as possible. Others in society also  have an interest. Children who, for instance, cannot read or write are an economic liability today. They are more likely than not to receive support from others rather than contribute to the nation's welfare. This is an example of a principal agent problem, where those benefiting or losing from a decision are not the same as those making the decision and where the objectives, and outcomes for, the two groups are different.

There are many other examples of goods with a merit elements. Lack of industrial training, for instance, is seen as a major problem. Individual firms have an incentive not to train workers, not only because it is costly but also because their trained workers can be poached by companies. Rather, they go into the market place and recuit workers who have been trained at other firm's expense. It is an example of the free rider problem. It is partly countered by the government funding for the organizations which provide training in local areas.

A demerit good is one which is overprovided by the market mechanism. The clearest examples of demerit goods are drugs- everything from hard drugs such as heroin to alcohol to tobacco. Consumption of these goods produces large negative externalities Crime increases, health costs rise, valuable human resources are destroyed, and friends and relatives suffer distress. Moreover, individual themselves suffer and are unable to stop consuming because they are addictive. Therefore it can be argued that consumers of drugs are not the best judges of their own interests.

Government intervene to correct this market failure. They have three main weapons at their disposal: they can ban consumption as with hard drugs: they can use the price system to reduce demand by placing taxes: or they can try to persuade consumers to stop, for instance through advertising campaigns.

Merit goods are more controversial, partly because they contain a private good element. The main beneficiaries of health care and education, for instance, are patients and students. Government can attempt to increase the provision of merit goods in a variety of ways:

• Direct Provision- Government can supply public and merit goods directly to consumers free of charge. In Bahrain, primary and secondary  school education, visits to the doctor and roads are provided in this way. The government may choose to produce the good or service itself, as with the primary and secondary education, or it may buy in the services of firms in the private sector. General practitioners, for instance work for themselves and the government buys their services.
• Subsidies- the government may pay for part of good or service (a subsidy) but expect consumer to pay the rest. Agricultural and meat products are subsidised in this way in the Kingdom of Bahrain.
• Regulation- the government may leave provision to the private sector but force consumers to purchase a merit good or producers to provide a merit good. For example, motorists are forced to buy a car insurance by law. There is ongoing debate in industrialised countries about whether workers should be forced to pay into private pensions.

How to Manage Organizational Stress by Jolito Ortizo Padilla

There appears little doubt that stress at work is one of the biggest problems in most of the Asian, European and US companies and one of the major adverse influence on the quality of working life and work performance. Stress is a complex and and dynamic concept. It is a source of tension and frustration , and can arise through interrelated influences on behavior, including individual, group, organizational and environmental factors.

The Health and Safety Executive (HSE) defines stress as: The adverse reaction people have to excess pressure..It isn't a disease. But if stress is intense and goes on for some time, it can lead to a mental and physical ill health like depression, nervous breakdown and heart disease.

Despite all the business speak, people get seriously vague when it comes to definitions and raises question: What is stress? Is it a new name for an old fashioned condition such as unhappiness or overwork, or is it peculiar to our uniquely pressured times? There is something in the idea that stress isn't just about hard work or unhappiness, but about conflict, confusion and frustration. It's about the anxiety generated by multi-tasking and balancing priorities, meeting contradictory demands, about knowing where to start and papering over the cracks when you want to do much.

An increasing number of survey reports, perceived or actual, increases in levels of stress. There have also been a number of highly publicised reports of successful legal claims based on the effects of stress.  Understandably, however, there is also a level of scepticism about the amount of emphasis placed on stress, and a number of press and other articles feature the "myth" of work stress.

An interestting report from the Institute for Social and Economic Research suggests that claims of workplace pressure may be misplaced. Levels of jobs and mental distress vary systematically according to the day of the week on which respondents are interviewed. It tended to be because employees were working too few or too many hours. Stress appear on Friday and Saturday.When genuine dissatisfaction was found, it tended to be because employees were working too few or too many hours.However , the main cause of stress was money difficulties; caused by unemployment or debt. The research casts a question mark over the generous compensation regularly handed out by the course to employees claiming they suffer from stress.

Stress, however, is very personal experience, as is the response of each individual to it and their belief. Questions about the prevalent view among managers in Asia which seems to be that stress at work is something to be avoided after all. Although stress appears to have become public health enemy number one and is viewed as the culprit of myriad complaints, the term is badied about far too readily and there is a need to stand back and attempt to get things into some sort of perspective. A measure of stress is natural. A degree of stress at work is no unhealthy thing and without it nothing would ever get done. However, it is important to bear in mind that stress can potentially be very harmful.

A certain amount of stress may arguably not necessarily be seen as a bad thing and may even help  promote a higher level of performance. But what is the distinction between pressure and stress? "Pressure can be sen as a positive factor that may be harnessed to help people respond to a challenge and function more effectively. " Stress" may be regarded as a continuous negative response arising from extreme pressure of other demands and the individual's inability to cope.

Personal performance may improve with pressure, up to a certain point.Beyond that point, continuous pressure leads to a fail in  performance as the person is no longer to cope. Signs of this are fatigue, poor judgment and bad decision making . In turn, this can lead to serious business problems.

Research by organization such as the Health and Safety executive have identified stress, anxiety and depression as among the most commonly the most reported illnesses, and wider research has also indicated that stress, brought about through work intensification and conflictss between home and work, is related to the risks of disease and ill health.

"The result of unrelieved stress on the individual and on business are worrying. The result may be higher accident rates, sickness absence, inefficiency, damaged relationships with clients and colleagues, high staff turnover, early retirement on medical grounds, and even premature death... The cost of stress is huge. It is devastating to the individual and damaging to the business at a time when the need to control business costs and ensure an effective and healthy workforce is greater than ever. It is everyone's interest to tackle the taboo on talking about emotional problems because it is this which inhibits from seeking help".

Coping with stress
There are a number of measures by which individuals and organizations can attempt to reduce the causes and effects of stress. There are also many suggested techniques to help individual's bring stress under control- for example, changing your viewpoint , identifying causes of distress, laughing and telling jokes, working on stress reduction and appreciating that some stress can be useful. However, there are not always easy remedies for stress and much depends upon the personality of the individual. Techniques such as relaxation therapy may help some people, although not others, but still tend to address the symptoms rather than the cause.

 Stress inducing hazards are hard to pin down, much less eliminate. It is important to know how people feel about the things that cause them stress as well as which "stressor" are most common in a particular industry and occupation. Human resource policy should include several stress management building blocks within the organization structure including management education, employee education, counselling and support, critical incident briefing, and good sound management. Organizations also need to give greater attention to training, support and counselling and to the work organization and job design.

Effective communications at all levels of the organization are clearly important in helping to reduce or overcome the level of stress. However, in addition to good communications. The ability to hold good quality conversations is becoming a core organizational and individual skills. Unlike communication, conversation are intrinsically creative and roam freely across personal issues, corporate gossip and work projects. "Conversations are a defense against stress and other mental health problems. People with good social relationships at work are much less likely to be stressed or anxious".

A growing number of organizations are introducing an e-mail, facebook, twitter or social networking- free day to encourage staff to use the telephone or walk across the corridors to talk more with one another.

What Jolito Ortizo Padilla says about Fiscal Policy and Demand Management.

Fiscal Policy concerns the decision of government about spending, taxation and borrowing. Fiscal policy is an instrument of policy used to achieve three main policy goals or objectives:

• To improve macroeconomic performance- fiscal policy is used to achieve lower employment, lower inflation, higher economic growth and an improved balance of payments situation. It does this either by influencing the demand side of the economy, which is subject of this unit; or by influencing the supply side of the economy.
• To achieve a more desirable distribution of income and wealth- taxes and government spending are important ways in which government can affect the distribution of income and wealth. It can use fiscal policy to reduce or increase inequality.
• To correct market failure at the microeconomic level- government spending and taxes are used to correct a wide range of market failures including the provision of public and merit goods, discouraging the consumption of demerit goods, improving the mobility of labor and increasing competition in product market.

Demand management
 Fiscal policy can be used to manipulate the level of aggregate demand. A larger budget deficit or a smaller budget surplus will increase the government injection into a circular flow of money. There will be a multiplier impact according to Keynesian economists, where every $1 of extra deficit or reduced surplus will lead to a more tha $1 increase in final GDP. Because of this increase in GDP, policy which leads to larger budget deficit or smaller budget surpluses is known as expansionary fiscal policy.

In contrast, there is deflationary fiscal policy when the government decides to reduce a budget deficit or increase a budget surplus. This reduces the level of aggregate demand by reducing the government injection into the circular flow.

Expansionary fiscal policy should be used when there is a negative output gap and the economy  is in recession. In this situation, the level of GDP is below what the long term trend growth of GDP would predict. Unemployment is likely to be above average whilst inflation is low. The rate of growth of GDP may be below average. On the other hand, the current account position may be better than would be the case if the economy were at full employment, a level of employment where there is neither a negative or positive output gap. This is because in a recession, imports will be reduced due to lack of spending both by consumers and firms. Conversely, deflationary fiscal policy should be used when there is a positive output gap and the economy is in boom. GDP is above its long term trend rate, unemployment is below average, inflation is above average whilst the current account position is deteriorating.

Automated stabilisers
In the 1930s, large falls in export earnings and investment spending led to the Great Depression. Today, any reduction in export earnings or investment would have less impact on the economy become automatic or built-in stabilisers are greater. Automatic stabilisers are expenditures which automatically increase when the economy is going into a recession. Conversely, they automatically fall when national income begin to rise.

Government spending and taxation are both automatic stabilisers. When the economy goes into recession and unemployment rises, the government automatically increases its social security spending, paying out more in unemployment benefits and other related benefits. The fall in aggregate demand is therefore less than it would otherwise have been. Tax revenues fall too at a faster rate than the fall in income. This is because tax rates tend to be higher on marginal income than on average income.For instance, a worker paid on commission may sell less in a recession. Her tax rate might then fall from the higher rate of 40 percent to the basic rate of 20 percent.If household spending has to be cut, then it is likely that consumption items such as consumer durables taxed at 17.5 percent VAT will see falls rather than zero rated food. With the government collecting less tax, disposable incomes are higher than they would be the case without this automatic stabiliser.

When the economy goes into a boom, government spending falls as the benefit budget falls automatically. Tax revenue increases at a faster rate than the increase in income. An unemployed person will pay very little tax. Once unemployed person get jobs, they start to pay substantial amounts of direct and indirect tax> so aggregate demand is lower than it would otherwise be with these economic stabilisers.