role of government

as a producer , provides as an employer , provides

?
a
merit goods e. g . schools , hospitals .

job for large population ,

work to provide

•
public goods streetlights , parks

.
welfare services pensions , unemployment benefits support agriculture & prime industries that need

public services police station , fire station public support

°
infrastructure roads , electricity & welfare schemes

help vulnerable groups of people -

redistribute income

manage macro economy -

prices , employment , growth , etc

manage trade in goods d services with other countries -

negotiate international trade deals

government macroeconomic alms

•
economic growth :
the increase of gross domestic product ( GDP )

target =
grow z -
3% a year
-
more output = economic growth
-

fall in output causes fall in employment , incomes , living standards

fall in tax revenue ,

cut in
government spending

fall in revenue & profits of firms

low investments

°
price stability : inflation -
continuous rise In price levels

target
=
2 - 3%

if prices rise too quickly can cause reduction Ip purchasing power , buy less than before

hardship for the poor

increase business costs ,

workers demand higher wages
less

makes products more expensive compared to other countries , competition

•
full employment
3%
target -
-
=

only those actively seeking work considered

unemployment rate =
( unemployed ÷ labour force ) x 100

-
high unemployment causes fall in total national output

government have to provide unemployment benefits ,

increase pubic expidenture

while income tax falls -

cause budget deficit

public unrest
&
anger towards government
•
balance of payments stability
-

exports > imports =

surplus in Bop

exports < Imports = deficit in Bop

target =
exports & imports roughly same ,
avoid deficit

deficit in Bop causes economy to run out of foreign currency to buy further imports

of currency to fall other foreign imports

value against currencies ,
make expensive

( surplus cause currency to rise , makes exports more expensive )

income redistribution : reduce the inequality of income among citizens

can impose tax on rich ,

to finance welfare schemes for poor

higher level of poverty

-

inequality causes

restricts from productive

economy reaching maximum
capacity

comfits of alms

•
full employment vs price stability
-

low unemployment boosts incomes of businesses d workers

rise in incomes means higher demand d consumption

-

cause firms to raise prices -

inflation

growth Bop
economic vs stability
•

incomes rise from growth & low unemployment

-

economic

people will import more foreign products consume less domestic products
-

-
rise in imports ,
deficit may arise

°
economic growth vs full employment
-

when economic growth is continuous ,

firms may invest in more capital

cause labour to be replaced , unemployment increases

government spending

why governments spend

supply goods & services that the private sector fail to do , e.g .
public goods ,
merit goods
•
achene supply side Improvements ,
e. g .
spend on education to improve labour productivity
°
spend on policies to reduce negative externalities , e.g .
pollution control

•
subsidise industries which may need financial support , usually agriculture related industries

°
help redistribute income

inject spending to aid economic growth

•

effects of government
spending

higher demand aid

leads to economic
growth
•
.

• read to inflation it increasing demand causes prices to rise faster than output

increase productivity a growth

•

•
reduce inequality , by increasing living standards
•
too much spending causes reduces private investments

large government borrowing will drive up interest rate , discourage private investment

types of taxes

direct tax : tax on income

•
income tax :
paid from individuals income . low income tax encourages spending , higher production

a
corporate tax :
paid on
company 's profits . T tax = lower profits to expand d produce more .

discourage investments , decrease economic growth

.
capital gains tax :
taxes on any profits or gains that arise from the sale of assets held for more than a
year
.
inheritance tax : tax levied on inherited wealth

o
property tax : tax levied on property I land

advantages :
high revenue

reduce Inequalities -

progressive , more tax on rich than poor

a receive unemployment benefits

p
tax unproductive workers
disadvantages : reduce work incentives -
rather stay unemployed than pay income I

reduce enterprise incentives - firms having to pay corporate tax

tax evasion -
people find ways to avoid paying tax
indirect tax : tax on goods & services sold

•
GST I VAT : included in the price of goods & services

°
customs duty :
import and export tariffs on goods d services flowing between countries

excise tax demerit goods to reduce demand

duty
:
*
on

advantages : cost effective

expanded tax -
base -

paid by all people

can achene specific aims

flexible

disadvantages :
inflationary
regressive

may encourage illegal smuggling of demerit good

takes larger of wealth as income increases income tax

progressive proportion
:
e.g .

regressive : takes larger proportion of wealth as income decreases e. g . indirect tax

neutral I proportional : takes same proportion of income from all e. g .

corporate tax

impacts of taxation

consumers : less disposable income ,

can reduce incentive to work

work becomes less attractive than leisure , prefer to work less

may feel the need to work longer hours to maintain desired level of income

producers : less incentive to produce if corporate taxes are too high

( of demand economy )
economy :
aggregate demand sum all in the

AD =
C + I t G t X -
M

=
consumption + investment + gov spending + exports -

imports
(individuals ( expanding ' ( sold to ( purchased
'T
consume ) buy new foreign from fore
.
Stuff ) buyers ) buyers )

n n
p p
s + tax s + tax

s s

! .gg#ggBBGeg
burden
consume
on L

Atg bionsduenme: ' egos.

TBB.TT/
_g&3IpgEg
burden on
burden on "
produce producer D

D
) )
Q Q
 fiscal policy :
government policy which adjusts government spending and taxation to influence the economy

•
budget in surplus -

government revenue >

government spending

economy not in full potential

expansionary fiscal
-

policy

government spending increase tax rates cut

-

°
budget in deficit -

government exp , denture > government revenue

govt have to burrow and be in debt

contraction any fiscal policy

-

government spending cut , tax rates increase

-

expansionary fiscal policy will stimulate growth , employment and help increase prices

contract unary fiscal policy will help control inflation resulting from too much growth

-
a government policy controls money supply ( availability & cost ) in an
economy in order to attain growth
and stability
controlled by central bank -

price stability , unemployment rate , economic growth

expansionary monetary policy

-
government increases money supply by cutting interest rate

-
means more people will spend than save

-
businesses will invest more

-
higher money supply = increased economic activity

economic growth
-

improve balance of payments

-

employment increase

contraction any monetary policy

-
government decreases money supply by increasing interest rates

-
means more will save than spend
-
businesses invest less

-
lower money supply = reduce economic activity

-
slows economic growth
-
reduce inflation

may cause unemployment

 aimed at increasing supply and productivity in the
-
macroeconomic policies economy
to enable long term economic growth

policies :

-
public sector investments : infrastructure e. g .
transport , communication .
Facilitate faster growth

-
improving education and vocational training :
education & skills training -

improve labour , more productive

-
spending on health : accessible , affordable , good quality -
workers recover faster , productivity wont decrease

-
privatisation
:
increase efficiency ,
increase output -

private sector aims for high profit

tax cuts willingness to work increase

increase supply
:
-
income ,

-
subsidies : more money to produce more ,
increase supply
-
deregulation : remove laws & regulations needed to start business -
more output ,
less cost more invests
,

-
remove trade barriers : more imported ,
increase productivity & efficiency . reduce export duties to increase

exports , encouraging domestic firms to produce more

-
labour market reforms : make laws that reduce trade union powers ,
reduce business cost t increase output

minimum wages reduced ,

more jobs .

Unemployment benefits reduced , ppl wants job

also increases incentive to invest

growth budget deficit

-

increase economic however , may run

-

unemployment privatisation reduce govt intervention

-

reduce
-

improve balance of payments market failure