The Role of Government
The public sector in every economy plays a major role, as a producer and employer. Governments work locally, nationally and internationally. Here are the roles they play in the economy:
Government as a Producer
- merit goods (educational institutions, health services etc.)
- public goods (streetlights, parks etc.)
- welfare services (unemployment benefits, pensions, child benefits etc.)
- public services (police stations, fire stations, waste management etc.)
- infrastructure (roads, telecommunications, electricity etc.)
Government as an Employer
- It provides- at all levels of government- employment to a large population, who work to provide the above mentioned goods and services. It also creates employment by contracting projects, such as building roads, to private firms.
- Support agriculture and other prime industries that need public support
- Help vulnerable groups of people in the society through redistributing income and welfare schemes
- Manage the macroeconomy in terms of prices, employment, growth, income redistribution etc.
- Governments also manage its trade in goods and services with other countries by negotiating international trade deals
Government’s four macroeconomic objectives that they strive to achieve are
- Economic Growth
- Balance on International payments
Employment (Full Employment / Low Unemployment)
Unemployment occurs when people are willing and able to work and actively seeking work but are unable to find. Higher employment is a macroeconomic aim because it helps boost GDP and increase living standards within the country. Full or High employment ensures that greater efficiency of the economic resources of the country.
Inflation (Low Inflation & Stable prices)
Inflation is a sustained increase in the average price level of goods and services in an economy. With inflation in the country, consumers won’t be able to buy as many goods or services as they do before because their real income has reduced. Business costs increase as the prices of goods and services they purchase increase, workers might have to demand higher wages or salaries so that they can keep up with rising prices.
Economic growth refers to an increase in the total output of goods and services overtime. It is important to have a sustained economic growth within an economy as it reflects on the living standards of its citizens. Economic growth can also be portrayed by an outward shift of the Production Possibility Curve, to achieve this a combination of an increase in quantity and quality of inputs would move the PPC in an outward direction as shown below
Balance on International Payment
International trade involves the exchange of goods and services across national borders. The balance of payment of a country provides a record of the value of all its international and financial trade with other countries. It is expected that balance of payment must always balance (theoretically) as you have to spend what you have earned.
In real life situations, there would be balance of payment deficit where the country imports more than it exports which can lead to massive job losses or a fall in currency value or a balance of payment surplus where export is more than import which can lead to economic growth or an increase in living standards for their citizens.
Possible conflicts between macroeconomic aims
Its almost impossible for government to achieve all its aims with conflicting each other , this is because a lot of these macroeconomic aims leaves government with a trade off. the possible conflicts are:
- Full Employment vs Inflation: In a bid to ensure that there is employment for everyone, it is possible for the economy to experience inflation as people would have more money to spend which result in demand pull inflation. It could also lead to cost push inflation as firms finds it difficult to employ skilled labour with another firm and would have to increase their wage rate which would lead to an increase in average cost of production.
- Full employment vs Balance of International Payment: As employment level increases, individuals becomes more wealthier with more purchasing power and ability to import more goods into the country which might lead to a balance of trade deficit.
- Economic growth Vs Balance of International Payment: An increase in economic growth as a result of consumer spending might also lead to a deficit balance of international trade, this is because an increase in consumer spending might be as a result of an increase in imported goods which might also result in inflation in a bid to reduce such imported good or service.