Roles of Government

• Nearly every economy in the world is a mixed economy & has varying degrees of government intervention
• Governments intervention is necessary for several reasons
• Role of govt depends on the type of economic system

  • planned economy - govt in full control
  • market economy - govt has no control
  • mixed economy - govt has varied amounts of control
• Government intervention occurs on three levels

  • Local intervention
  • National (macroeconomic) intervention
  • International intervention
• Role in mixed economies

  • own industries e.g. utilities, healthcare
  • control wages of their industries e.g. rubbish collection, teaches
  • the wage increase influences private sectors
  • subsidise private sectors
  • collect taxes
  • correct market failures
• Governmnets negotiate to form partnerships with private sector firms

  • e.g. healthcare system and pharmaceuticals, govt builds train tracks and private company maintains trains
• local - local health services, refuse collection, parking fines, local prosecutions, parks & recreation, public services
• local governments - responsible for delivering government services on a town/regional basis and has the authority to determine and execute policies within an area of a country

  • usually receive funding from the central government or taxes & are held accountable for the quality of goods/services provided by voters in their area
  • focuses on local issues e.g. rubbish collection, road repairs, libraries, parks
  • local government branches are often referred to as 'councils', 'federal' or 'state'
• national governments - determining the best combination of policies that will help them to meet all of their macroeconomic aims
• national - central government, fiscal policy, monetary policy, supply-side policy

  • fiscal policy - using government spending and taxation to influence the economy and achieve macroeconomic objectives
  • monetary policy - adjustment of interest rates and money supply to infleunce total demand and meet inflation target
  • supply-side policy - aim to improve the quantity/quality of the factors of production, raising potential output
• International trade - vital to economic growth in many economies

  • Governments have a role to both protect domestic industry & to help it compete internationally
• Government negotiate trade deals with other countries
• Trade Bloc - a group of countries that work together to provide special deals for trading amongst themselves e.g. European Union, NAFTA

  • govts can block trading with other countries too
• international - exchange rate interventions, protectionism

  • protectionism - govt policies that restrict internatinal trade to protect domestic trades e.g. tariffs
• Main objectives of Govts:

  • economic growth
  • low unemployment
  • price stability
  • trade balance (imports = exports)
  • redistribution of income
• Economic Growth - increase in the amount of goods and services produced over a period of time

  • actual economic growth - actual increase in the output of an economy
  • potential economic growth - increase in an economy’s productive capabilities
• Full employment - lowest possible level of unemployment

  • Hard to get 0% unemployed as people will continuously be changing jobs
• Unemployment Rate - percentage of labour force that is willing and able to work, but that cannot find a job

  • unemployed people/ labour force x 100
• Price Stability - consistent price level in an economy over a significant period of time so the price do not change much
• Inflation Rate - rate at which prices of goods and services increase over a certain period of time

  • results in a fall in the value of money
• Balance of Payments - difference between all money flowing into and out of an economy in a particular period of time

  • Trade surplus - more exports than imports
  • Trade deficit - more imports than exports (can lead to debt)
• Balance of Payments Deficit:

  • country imports more goods, services & capital than it exports
  • must borrow from other countries to pay for imports
  • short-term - economic growth
  • long-term - debt to pay for consumption
• Balance of Payments Surplus

  • country exports more goods than imports
  • country provides enough capital to pay for domestic production
  • short term -surplus boosts economic growth
  • long term - too dependent on export-driven growth
• Redistribution of Income - leveling of wealth or income in a society through a direct or indirect transfer of money from the rich to the poor

  • Done through taxation, welfare, spending on public services like education and healthcare
  • Large wealth gaps between the rich and poor can cause social unrest
  • Over taxing wealthy and very generous benefits may discourage enterprise/labour
• Aggregate Demand - the total demand for goods and services produced in an economy

  • Effects economy on macro-scale
• Aggregate demand is impacted by:

  • Population Changes
  • Interest Rates
  • Exchange Rates
  • Consumer Confidence
• • Aggregate Supply - the total amount of goods and services produced in an economy
  • Curve because perfectly inelastic as all resources are being allocated = production cannot increase

  
• • Potential macro-economic conflicts:
  • economic growth vs inflation
  • unemployment vs inflation
  • economic growth vs current balance of payments
  • budget deficit vs economic growth
  • economic growth vs environment
• Full employment vs Stable Price (conflict in govt aims)

  • As aggregate demand increases due to increase disposable incomes prices will increase
  • Lower supply of workers = higher price for labour (increase wages) = increase production costs = price increase
• Define protectionism

  A policy to restrict foreign competition
• Why does the government provide public goods in a mixed economy?

  To solve market failures and provide essential services
• What are the roles of a government in a mixed economy?

  • own industries e.g. utilities, healthcare
  • control wages of their industries e.g. rubbish collection, teaches
  • the wage increase influences private sectors
  • subsidise private sectors
  • collect taxes
  • correct market failures
• What are examples of national government intervention?

  fiscal policy, monetary policy, supply-side policy, central government
• Explain exchange rate intervention

  The central bank is able to influence the exchange rate through buying or selling its own currency which influences the level of exports/imports