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 CHAPTER 13
ROLE OF GOVERNMENT

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 ECONOMIC FUNCTION OF GOVERNMENT

IMPORTANT FUNCTIONS OF
GOVERNMENT

Adjust the allocation of resources

Assist private sector to ensure economic stabilization

Create a business environment

Redistribute income and wealth among the

population

Provide a legal and social framework for the

effective operation of an economy

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 TYPES OF BUDGET

1. BALANCED 2. SURPLUS 3. DEFICIT

BUDGET BUDGET BUDGET
   

The government’s The government’s The government’s

total expenditure total expenditure total expenditure
is equal to its is less than its is more than its
total revenue. total expenditure. total revenue.

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 GOVERNMENT REVENUE

TAX
TAX REVENUE
REVENUE NON-TAX
NON-TAX REVENUE
REVENUE

SOURCES OF
SOURCES OF
REVENUE
REVENUE

NON-REVENUE
NON-REVENUE RECEIPTS
RECEIPTS

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 GOVERNMENT REVENUE (cont.)

OBJECTIVES OF TAXATION

INCOME

EQUITABLE DISTIBUTION OF INCOME

REDUCTION OF HARMFUL
CONSUMPTION

REGULATION OF FOREIGN TRADE

CONSERVATION OF RESOURCES

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 TYPES OF TAXES

DIRECT TAXES
• Tax paid by the person on whom it is levied which cannot
be passed on to another person.

TYPES OF TAXES

INDIRECT TAXES
• Burden of tax can be passed on to another person.

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 TYPES OF TAX STRUCTURE

Tax Rate PROPORTIONAL TAX

Tax which is imposed at the

same rate for all income levels.

Income

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 TYPES OF TAX STRUCTURE (cont.)

Tax Rate PROGRESSIVE TAX

Tax which is imposed at the

increasing rate for all income
levels.

Income

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 TYPES OF TAX STRUCTURE (cont.)

Tax Rate REGRESSIVE TAX

Tax which is imposed at the

decreasing rate for all income
levels.

Income

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 GOVERNMENT EXPENDITURE

GOVERNMENT OPERATING
EXPENDITURE

GOVERNMENT DEVELOPMENT
EXPENDITURE

General Defense and

administration Economic
Social services security
services

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 PUBLIC DEBT

The debt which a government owes to its

nationals of other countries.

INTERNAL SOURCES OF
EXTERNAL
SOURCES PUBLIC DEBT
SOURCES

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 INTERNAL SOURCES

1. Borrowing from citizen

2. Borrowing from financial institutions
3. Loans from the central bank
4. Loans from commercial bank

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 EXTERNAL SOURCES

1. International money market

2. Currency loans from foreign government
3. Loans from international financial institutions

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 GOVERNMENT POLICY

MONETARY FISCAL
POLICY POLICY

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 To
To achieve
achieve aa balance
balance
of
of payment
payment
equilibrium
equilibrium
To
To achieve
achieve
To
To maintain
maintain full
full
domestic
domestic employment
employment
price
price stability
stability of
of resources
resources

To
To maintain
maintain aa
continuously
continuously low
low To
To achieve
achieve higher
higher
structure
structure of
of rate
rate of
of economic
economic
interest
interest rates
rates growth
growth
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 EXPANSIONARY MONETARY POLICY
• Increasing money supply in the economy

TYPES OF MONETARY POLICY

CONTRACTIONARY MONETARY POLICY

• Decreasing money supply in the economy

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 INSTRUMENTS OF MONETARY POLICY

Quantitative Qualitative
Instruments Instruments

1.Open market 1. Selective credit

operations
2. Control
2.Legal cash reserve
3. Interest rate
requirement
4. Special directive
3.Bank or discount
rate
4.Funding

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 Securing
Securing efficient
efficient Attaining
Attaining and
and
allocation
allocation of
of economic
economic maintaining
maintaining full
full
resources
resources employment
employment

Controlling
Controlling the
the Accelerating
Accelerating the
the
equitable
equitable distribution
distribution rate
rate of
of economic
economic
of
of income
income and
and wealth
wealth growth
growth

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 EXPANSIONARY FISCAL POLICY

TYPES OF FISCAL POLICY

CONTRACTIONARY FISCAL POLICY

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 INSTRUMENTS OF
FISCAL POLICY

AUTOMATIC
DISCRETIONARY
FISCAL POLICY
FISCAL POLICY
1. Transfer payments
1. Government expenditure
2. Taxes
2. Taxes

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