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Macro Report Print

Uploaded by

llonesrics gg
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© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Role of Government in Macro Economy

Some of the main government aims for economy are as follows: 1. Full
Employment 2. Price Stability 3. Economic Growth 4. Redistribution of
Income 5. Balance of Payments Stability. The main government aims for
the economy are full employment, price stability, economic growth,
redistribution of income and stability of balance of payments. A
government can operate a range of policy measures to achieve these
aims and it is judged on their success or otherwise.

Performance of the economy, however, is influenced not just by


government policies. In a market, which is becoming increasingly global,
one economy’s macroeconomic performance is being affected more and
more by the dynamics of other economies.

1. Full Employment:
Most governments try to achieve full employment. This means that people
who are willing and able to work can find employment. Of course, not
everyone wants to work or is able to work. These people are not in the
labour force. They are said to be economically inactive and are dependent
on those in the labour force.

They include children, the retired, those engaged in full time education,
home makers and those who are too sick or disabled to work. Those who
are in work or are unemployed but actively seeking work, form the labour
force and are said to be economically active.

2. Price Stability:
Governments aim for price stability because it ensures greater economic
certainty and prevents the country’s products from losing international
competitiveness. If firms, households and workers have an idea. About
future level of prices, they can plan with greater confidence. It also means
that they will not act in a way that will cause prices to rise in the future.

Firms will not raise their prices because they expect their costs to be
higher, households will not bring forward purchases for fear that items will
be more expensive in the future and workers will not press for wage
increases just to maintain their real disposable income. In seeking to
achieve price stability, most governments are not aiming for a zero
percentage change in price. A common target is a stable inflation rate of
2%. They do not aim for unchanged prices, for two main reasons. One is
that measures of inflation tend to overstate rises in prices.
3. Economic Growth:
When an economy experiences economic growth, there is an increase in
its output in the short run. This is sometimes referred to as actual
economic growth. In the long run, for an economy to sustain its growth,
the productive potential of the economy has to be increased. Such an
increase can be achieved as a result of a rise in the quantity and/or quality
of factors of production.

4. Redistribution of Income:
A government may seek to redistribute income from the rich to the poor.
The more money someone has, the less they tend to appreciate each unit.
A rich person with an income of $10,000 a week is unlikely to miss $100
but that sum would make a huge difference to someone currently
struggling on $20 a week.

Governments redistribute income by taxing and spending. The rich are


taxed more than the poor. Some of the money raised is spent directly on
the poor by means of benefits such as housing benefit and unemployment
benefit. Other forms of government expenditure, such as that on
education and health, particularly benefit the poor.

Without the government providing these services free of cost or at


subsidized prices, the poor may not find them accessible. Governments
are unlikely to aim for a perfectly equal distribution of income. This is
because taxing the rich too heavily and providing too generous benefits
may act as a disincentive to effort and enterprise.

5. Balance of Payments Stability:


Over the long run, most governments want the value of their exports to
equal the value of their imports. If expenditure on imports exceeds
revenue from exports for a long period of time, the country will be living
beyond its means and will get into debt. If export revenue is greater than
import expenditure, the inhabitants of the country will not be enjoying as
many products as possible.

Governments also seek to avoid sudden changes in other parts of the


balance of payments. This is because they can prove to be disruptive for
the economy. For instance, there may be a sudden and unexpected
movement of money out of the country’s financial institutions into
financial institutions of other countries. Such a movement can have an
adverse effect not only on the banks of a country but also on the country’s
exchange rate and eventually on the price of the country’s imports.

Prepared by:
Rics Chester L. Llones BSED-II

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