Government Objectives

Define Imports:

Imports refer to goods that are bought from one country to another

Define Exports:

Exports refer to goods that are sold by one country to another

Government Economic Objectives
There are four primary objectives that every country’s governments strive to reach. These objectives are:

Low Inflation
Low Unemployment
Economic Growth
Balance of Payments (between exports and imports)

Low Inflation:
Inflation comes from the rise in average prices for goods and services. Low inflation is always good to have since it ensures that the prices of goods and services is easily accessible to the general public. If prices were to increase rapidly, it could cause devastating issues for nations.

Problems if it isn’t achieved:

Goods will become so expensive that workers’ wages wouldn’t be able to sufficiently cover the cost to buy these products.
Prices of locally-produced goods in the countries would increase, meaning the country will import more goods than they export. This would cause high unemployment as well
Businesses will be unable to expand nor create new jobs in the near future, causing the general public’s living standards to fall

Low Unemployment
Unemployment refers to when there is a percentage of the population that wants to work but is unable to find a job anywhere. Low unemployment can help the working force to be able to buy more goods and services and can export more products. However, if unemployment is high, there could be many issues.

Problems if it isn’t achieved:

The total level of output in the country will be a lot lower due to the fact that unemployed people will produce fewer goods or services
The government usually pays an unemployment benefit to those without jobs. A high level of unemployment would become a financial burden on the government.

Economic Growth:

Economic growth comes when the level of output of goods and services increase. Specifically, the value of these goods and services are what indicates good economic growth. The value is known as the gross domestic product (GDP). As the GDP of a country increases, so does the standard of living, allowing the population to access better quality infrastructure and leisure.

Problems if it isn’t achieved:

If output were to fall, fewer employees would be needed, causing mass unemployment
The number of goods and services that someone can buy will decline, hence so will the quality of life
Business owners will be unable to expand their firms since they don’t have enough money to pursue their products

Balance of Payments:

A balance of payments refers to the aim in which governments try to ensure that the exports and imports of a country are equal. Exports aid in bringing foreign currency into the country whereas imports must be purchased with foreign currency. If there is an imbalance of payments (typically more imports than exports), it is known as a “balance of payments deficit”

Problems if it isn’t achieved:

A country’s currency may get weaker causing exchange rates to fall
A country may ‘run out’ of foreign currencies and it may have to borrow from abroad

Business Cycle:

The economic growth of a country is usually depicted through a graph, and this graph is never a straight line upwards nor downwards. There are times when the GDP of a country will fall, and when it picks itself back up. The business cycle (or a trade cycle) has four main stages: Growth, Boom, Recession, and Slump

Growth:

GDP is starting to rise
Unemployment is starting to fall
Businesses mostly do well during this time

Boom:

Caused by too much spending
Prices start rising quickly
Shortages in Skilled Workers

Recession:

Caused by too little spending
Workers begin losing jobs
Businesses experience falling demand and profits

Slump:

Unemployment starts rising quickly
Prices begin falling
Businesses will fail to survive

Define ‘Disposable Income’

Disposable Income refers to the amount of money that a consumer has that can be used to buy luxuries in the form of goods or services.

Direct Taxation:

This is a form of taxation that is imposed to give the money directly to a country’s governments. There are two main forms of direct tax – income tax and corporate tax.

Income Tax:
This is a tax that is based on the amount of money you make in a year. Depending on your salary, the government will take a certain percentage away.

Corporate Tax:

This is a tax that is imposed on corporations and businesses and is based on the amount of money a business makes in a year.

Indirect Tax:

Taxes added on the price of goods or services that are purchased, rather than taxes on people’s income. VAT and Import tariffs are part of indirect taxing.

Value-Added Tax (VAT)

VAT is a form of tax in which governments add a certain percentage to a company’s products in order for businesses to pay a higher corporation tax to the government

Define ‘Import Tariffs’ & ‘Import Quotas’

Import Tariffs:
Taxes on products that are imported from a foreign country.

Import Quota:
A physical limit to the quantity of a product that can be imported.

Purpose of Import Tariffs

Many governments try to reduce the imports of products from other countries by putting special taxes on them. These are called import tariffs and raise money for the government. Many international organizations are trying to reduce the number of governments that do this.

Effects of Import Tariffs:

Firms will benefit if they are competing with imported goods. These will now become more expensive leading to an increase in sales of home-produced goods.
Businesses will have higher costs if they have to import raw materials for their own factories. These will now be more expensive
Other countries may now take the same action and introduce import tariffs too. This is called retaliation. A business trying to export to these countries will probably sell fewer goods than before.

Fiscal & Monetary Policy

Fiscal Policy:
The level of tax and how much the government spends is called its fiscal policy.

Some governments prefer high tax and high public spending (e.g. Sweden, which spends a lot on roads, public schools, and hospitals)
Others prefer to keep taxes low and not spend as much on public services (US)

Monetary Policy

The main part of monetary policy is interest rates.
It is the cost of borrowing money from a bank
The government (or central bank) can put interest rates up or down: Making it more expensive or cheaper for businesses to take out a loan.

Interest Rates
Interest Rates refer to a certain amount of money that a company or person must pay back to the bank if they borrow any money.

If Interest Rates are Higher:

Higher cost of interest on loans
A consumer’s disposable income falls
Could lead to higher exchange rates
Less consumer borrowing to buy expensive products
Businesses may be less willing to borrow to pay for investment or expansion

If Interest Rates are Lower:

Businesses will be more willing to borrow money
More consumer borrowing to buy products
Could to lower exchange rates
Disposable Income rises

Changes In Government Spending

Governments in most countries spend the tax revenue they receive on programs such as education, health, defense, law and order, roads, and railways.

When governments want to boost economic growth, they can increase their spending on these programs. This will create more demand in the economy, more jobs (all of whom work and pay taxes), GDP will increase.

For example, if governments want to save money, they will often cut government spending: these cuts will have a considerable impact on jobs and businesses which, for example:

Produce equipment for schools and hospitals and defense equipment
Build roads, bridges, highways, and railways.

Other Ways To Improve Economy

As well as increasing government spending (fiscal) or lowering interest rates (monetary), the government can also use supply-side policies to improve the economy:

Privatization:
Now very common, the aim is to use the profit motive to improve business efficiency

Improve training and education:
This is a government plan to improve the skills of the country’s workers. This is particularly important in those industries such as computer software which are often very short of skilled staff.

Increase competition in all industries:
This may be done by reducing government controls over an industry or by acting against monopolies.

Define ‘Monopoly’

A monopoly refers to a company that dominates a certain market. Nowadays monopolies refer to companies that make up 25% of the industry