Lecture Notes: The Role of Government and Macroeconomic Aims

The Role of Government

Influence on the Local Economy

• Local areas may depend on specific industries, possibly state-owned.
• Government decisions impact local communities through production and wages.
• Local governments provide services (e.g., refuse collection, libraries) funded by taxes or grants from the national government.

Functions of Government

• Owner of industries and assets.
• Producer of essential or under-produced goods.
• Regulator of markets and activities.
• Tax collector and director of economic activity.

Government as a Producer

• Produces key, strategic, or essential goods and services.
• Natural monopolies may be state-run to protect consumers.
• Partnerships with private sector for project funding and operation.

Government as an Employer

• Employs workers in state-owned enterprises to reduce unemployment.
• Can set an example in employment practices.

International Role

• Promotes or restricts free international trade.
• Policies towards foreign MNCs vary.
• Member of trade blocs and international organizations (e.g., WTO).

Macroeconomic Aims of Government

Economic Growth

• Increase in output (actual growth) or productive potential (potential growth).
• Illustrated by a production possibility curve or shifts in aggregate demand/supply.
• Goals: improve living standards, reduce poverty, increase government revenue.

Low Unemployment

• Full employment: lowest possible unemployment.
• Economically active: those in work or seeking work.
• Unemployment rate: percentage of labor force unemployed.

Price Stability

• Maintain stable price levels to prevent loss of international competitiveness.
• Target inflation rate often around 2% to allow for price index inaccuracies.

Balance of Payments Stability

• Equal value of exports and imports over the long term.
• Avoids debt and ensures maximum domestic product consumption.

Redistribution of Income

• Taxing the rich more than the poor to reduce inequality.
• Benefits and services aimed at supporting the poor.
• Avoid excessive inequality to prevent poverty and social unrest.

Conflicts Between Aims

• Full employment vs. price stability: low unemployment can lead to inflation due to increased demand and competition for labor.
• Balancing growth, employment, and price levels is a key challenge.