Unit 4 Last Minute Notes(Economics)

ROLE OF THE GOVERNMENT AS;

A PRODUCER	AN EMPLOYER
Key industries Natural monopolies Provide essential goods Provide public goods Provide merit goods	Employ workers and managers to operate its state owned enterprises This helps government to achieve their aims To reduce unemployment To reduce inflation

AIMS OF GOVERNMENT POLICIES

FULL EMPLOYMENT	A situation where people actively seeking for work remains employed
PRICE STABILITY	A situation where inflation is kept under control
ECONOMIC GROWTH	An increase in the real output of goods and services overtime
REDISTRIBUTION OF INCOME	Reducing the gap between rich and poor
BALANCE OF PAYMENT STABILITY	Balancing between imports and exports

POLICIES OF THE GOVERNMENT

FISCAL POLICY	Regulation of taxation and government spending to influence an economic activity. Expansionary fiscal policy is ↑ government expenditure ↓ tax Contractionary fiscal policy ↑ tax ↓ government expenditure This is a policy of the government
MONETARY POLICY	Regulation of interest rate and money supply to influence an economic activity. Expansionary monetary policy is ↑ money supply ↓ interest rate Contractionary monetary policy ↑ interest rate ↓ money supply This is a policy of the central bank
SUPPLYSIDE POLICY	Policies used to increase the national output. For examples Privatization Improving education and training Reduce power of trade union Selective subsidies Tax incentives Polices to reduce anti-competitive behaviour

CONFLICTS OF AIMS

Price stability and full employment
Economic growth and price stability
Economic growth/full employment and balance of payment stability
Redistribution of income and economic growth

TAXATION

A compulsory payment imposed by the government from people and businesses

REASONS FOR TAX

Revenue
Reduce inflation
To reduce inequality
To reduce harmful goods
To achieve BOP surplus
To control monopoly
To reduce external cost

TYPES OF TAX

DIRECT TAX	Tax on income and wealth of the people and profits of business Are progressive Burden cannot be transferred to another person Paid directly to the revenue department Income tax, wealth tax, corporation tax
INDIRECT TAX	Tax on spending goods and services Are regressive Burden can be transferred to another person Paid indirectly, first paid to seller and they pay to government GST, VAT, Import duty
PROGRESSIVE TAX	Are usually direct tax The % of tax increases with increasing income Most fair
REGRESSIVE TAX	Are usually indirect tax The % of tax decreases with increasing income Unfair
PROPORTIONALTE TAX	The % of tax are same for all income earners

BUDGET

Financial statement which shows estimated revenues and expenditures of the government for the coming year in a given period of time

TYPES OF BUdGET

SURPLUS BUDGET:- estimated revenue greater than expenditure
DEFICIT BUDGET:- estimated expenditure greater than revenue
BALANCED BUDGET: – estimated revenue and expenditures equal.

GOVERNMENT INFLUENCE ON PRIVATE PRODUCERS

Tax
Subsides
Regulation

RETAIL PRICE INDEX (RPI) / CONSUMER PRICE INDEX (CPI)

Instruments used to measure the rate of inflation

HOW CPI IS CALCULATED?

BASE YEAR

CURRENT YEAR

PROCESS OF INFLATION CALCULATION

Survey
Base year (100)
Basket of goods
Weights
Weighted average price
Comparison

INFLATION

MEANING	A persistent rise in the general price level of goods and services overtime
TYPES	Creeping :- low rate of inflation Suppressed :- when AD > AS Hyper :- an uncontrolled high rate
CAUSES	Demand pull:- caused due to increase in aggregate demand Cost push:- caused due to increase in costs of production Monetary :- caused due to increase in money supply Imported:- caused due to increase in the price of imports
EFFECTS	Purchasing power falls Money value falls BOP deficit Fall in real value of saving , loans and investment Fixed income negatively effected Lenders lose borrowers gain Varied income group gains Businesses gain
POLICIES TO REDUCE	Fiscal policy Increase direct tax Decrease indirect tax Decrease government expenditure Monetary policy Increase interest rates Decrease money supply Supply side policy Give subsides to reduce cost Tax incentives to reduce cost Improve education to improve productivity

DEFLATION

MEANING	A persistent fall in the general price level of goods and services over time
CAUSES	Their market supply has increased relative to demand. Competition between firms to supply them has increased. Labour productivity rises, increasing output and reducing average costs. Technological advance has reduced their cost of production. Market demand for them has fallen.
CONSEQUENCES	Consumer will delay many spending decisions as they wait for prices to fall further. Stock of unsold goods accumulates so firms cut their prices and this reduces their profits and incentive to invest. Firms cut their production and reduce the size of their workers. Household incomes fall as unemployment rises, further reducing demand for goods and services. The value of debt held by people and firms rise in real terms as prices fall and this increases the burden of making loan repayments. Firms stop investing in new plant and machinery as demand falls and the cost of borrowing rises. This will reduce future growth in the economy. The real cost of public spending rises but tax revenues fall as economic activity slumps. This means the government must borrow more money despite the rising the real cost of doing so. Eventually the economy goes into a deep recession.
POLICIES TO REDUCE	It is therefore hard to break out of the downward spiral that can occur in a deflation and it will require a major boost to consumer demand and confidence if it is to be achieved. The first line of defense used by a government is usually to cut interest rates to a low level. However, if prices are falling this means real interest rates will be rising, even if the nominal rate is zero. A government may also print more money to pump more currency into the economy during deflation but people and firms may not increase their own spending as a result if they expect most prices to continue to falling. The additional money supply however be used by the government to fund projects that will draw more people back to employment. Expansionary fiscal policy may also involve tax cuts on incomes and profits to boost demand.

UNEMPLOYMENT

A situation where people actively seeking work remain jobless

MEANING	A persistent fall in the general price level of goods and services over time
TYPES/CAUSES	Frictional/search:- short term unemployment caused when people search for a new job Seasonal:- unemployment caused due to changes in the season Structural/regional/technological:- unemployment caused due to permanent decline in the demand for a good in a particular industry Cyclical/general/demand deficient: – due to decline in total demand in a country. Also job losses due to recession
EFFECTS	Loss of skills Loss of output Loss of tax revenue Social problems Poverty increase Fall in standard of living
POLICIES TO REDUCE	Job centers and job information Government assistance Reduce direct tax Lower interest rates Education and training Privatization