Sunday, January 24, 2010

government as a producer
-ensure key industries do well.
e.g. suez canal owned by egypt.

-provide essential products/public goods
govt provide affordable housing to rent, provide free healthcare
==>hence without essential goods the country, country cannot survive

- aid in production of merit goods
merit goods are goods which the govt considers beneficial to the society but will be under consumed if left to market forces.
under-allocation of resources as people do not see the importance of it.
for example, healthcare/vaccinations. people do not see the importance of vaccinations as they have been infected, so they would not pay to get vaccine. govt subsidise vaccinations to stimulate consumption of merit goods.

-natural monopolies ran by govt.
so that govt would have control over natural resources such as diamond mines.
the current operating firm already has overwhelming cost savings, the capital cost makes entry into the indstry difficult. this means that there will be a monopoly. so govt controls natural resources so as to prevent consumers being exploited by high prices.
max efficiency is also reached with a single supplier.

Macroecon aims of govt.
-achieve low rate of unemployment
the labour force consists of those that are willing and able to work.
working age >15

price stability
--> inflation/deflation
sustained a low stable increment of price levels of G&S.

sustained economic growth
--> economic growth is measured in terms of GDP
-->continuous increase in value of goods and services
potential econ growth
-ppc shift out
-max amt we can produce
actual econ growth
= actual amount produced.

Redistribution of income
--> lessen income gap
--> tax the rich and subsidise the poor.

BOP stability
--> value of exports = value of imports
BOP surplus --> X>M
BOP deficit --> M>X

conflict between government aims
inflation and eg/unemployment
when there is inflation, government increases taxes to reduce the consumption of goods. this will cause AD to fall and a fall in national income, which leads to a fall in economic growth and higher level of unemployment which conflicts with governments aims

balance of payments and eg/unemployment
bop deficit M>X. government will increase income taxes or tariffs to reduce household's consumption on imports. however, this will also reduce spending on domestically produced products as well as lead to high unemployment and slowing down of eg.


to minimize conflicts between govt aims, govt introduce supply side policies by providing more R&D training to increase productivity of workers, which will lead to an increase in potential output. this will cause AS to increase, therefore inflation would be reduced.
however, there is a time lag before the supply side policy can take effect, and that R&D training are usually quite ex.

Labels: macro econs sec 3.