GOVERNMENT

AND THE
MACROECON
OMY
– By Divisha Ingavale, F5E
 TABLE OF CONTENTS

The role of Macroeconomics

4.1 government 4.2 aims of government

Monetary
4.3 Fiscal Policy 4.4 Policy
 TABLE OF CONTENTS

Supply-side Economic
4.5 Policy 4.6 growth

Employment and Inflation and

4.7 unemployment 4.8 Deflation
 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:

As a producer, it provides, at all levels of government:

• 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.).

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 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.
 The Role of Government-CASE STUDY

• The government provides the legal framework and the services needed for a market economy to
operate effectively. The legal framework sets the legal status of business enterprises, ensures the
rights of private ownership, and allows the making and enforcement of contracts. Government
also establishes the legal "rules of the game" that control relationships among business, resource
suppliers, and consumers. Discrete units of government referee economic relationships, seek out
foul play, and impose penalties.

• Government intervention is presumed to improve the allocation of resources. By supplying a

medium of exchange, ensuring product quality, defining ownership rights, and enforcing
contracts, the government increases the volume and safety of exchange. This widens the market
and fosters greater specialization in the use of property and human resources. Such
specialization promotes a more efficient allocation of resources.
 The Role of Government- CASE STUDY

• The government improves the operation of a market system by maintaining competition.

Competition is the basic regulatory mechanism in the market system. It is the forcer that
subjects producers and resource suppliers to the dictates of consumer sovereignty. With
competition, buyers are the bosses, the market is their agent, and businesses are their servants.
On the other hand, if a monopoly takes place, the monopolist is able to charge a higher-than-
competitive price. Producer sovereignty then supplants consumer sovereignty.
• In the United States, the government has attempted to control monopoly through regulations and
through antitrust. However, a few natural monopolies exist; for instance, some firms that
provide local electricity, telephone, and transportation services .
The macroeconomic aims of government

● Inflation, defined as a sustained and inordinate increase in the

general price level, could have
harmful effects both socially and economically. A rising price level
creates uncertainties and complicates
decision- making, thus may hamper economic growth. Fluctuations
in the level of prices makes information conveyed by prices harder
to interpret.

● Consumer, firms, and the government may face a tough time in

allocating funds or resources for the future in an inflationary
environment.
The macroeconomic aims of government

● Furthermore, as the society strives to maintain its real value of

income by keeping up with rising price level
and competing with other social classes, the country’s social fabric could
be severely strained. The mere
existence of inflation means that the real value of money is falling.
● Thus, it will be necessary for the
government to intervene in the economy in order to prevent
hyperinflation from happening. The countries
that experienced the most extreme examples of trotting Inflation are
Argentine, Brazil and Russia. The slow
growth brought about eventually crippled virtually the entire
economic system.
 4.3-4.4

Monetary and Fiscal Policy

Case studies and overall review
 Fiscal Policy

• There are three main justifications for imposing a tax on a specific good.
 It raises money for the government.
 its use inflicts costs on third parties that are not factored into its price.
 The third rationale for imposing sin taxes is to discourage the use of undesirable goods. Critics
of such taxes have argued that they are ineffective because the goods they target tend to be
addictive, making consumers relatively unresponsive to changes in price. In fact, study after
study has shown that sin taxes do tend to reduce consumption.

• Without intervention from the government, the economy will produce too many goods that foul
up the atmosphere and that benefits both manufacturers and consumers but harms everyone who
breathes in the by-products. Proponents of so-called “sin taxes” apply this logic to goods
deemed to be socially undesirable. Many studies have a tendency to overstate the magnitude of
such externalities since they present gross costs instead of net ones.
 Monetary Policy

• The average growth of money supply in the economy may slip to 9% in the near term if
25-30% of unaccounted currency does not flow back into the banking system post-
demonetization move. Based on the result of the demonetization that took place in 1978; if 25-
30% of unaccounted/uncleared money does not come back in the system that is Rs. 3.5 trillion
to Rs. 4.3 trillion, it will impact growth in money supply by about 3%, the report said. However,
it noted that in case the RBI decides to print the entire 86% of the high denomination notes, the
money supply will pick up with the new notes being gradually circulated over some time.

• On the evening of November 8, the government announced that Rs. 500 and Rs. 1,000 notes
would no longer be legal tender, as part of its move to eradicate black money or terrorist
activities.
 Supply – side policies
Supply-side policies are government economic policies aimed at making industries and markets operate
better and more efficiently so that they contribute to greater underlying rate of GDP (gross domestic
product) growth. Lawmakers who pursue supply-side policies believe in supply-side economics. Any policy
that improves a country’s economy’s productive potential and its ability to produce, is within the umbrella of
supply-side policies.

During the 1980s, US President Ronald Reagan and British Prime Minister Margaret Thatcher were great
believers in supply-side policies, as opposed to Keynesian policies, which boosted demand. Reagan and Thatcher
insisted that real wealth was created by finding ways to boost supply, unlike Keynes’ policies which pushed up
inflation.

People who support supply-side policies say that economic growth is more effective when there is more
investment in capital, and when barriers on the production of goods and services are lowered.

The concept of supply-side economics was promoted strongly by Robert Mundell, a Nobel-Prize winning
Canadian economist, during the Reagan administration.
 Supply – side policies

The Indian economy saw its worst contraction in decades,

with Gross Domestic Product (GDP) shrinking by a record
23.9% in April to June quarter in comparison to the same
period last year. The contraction reflects several impacts of
COVID-19 lockdown, which halted most economic activities,
as well as the slowdown trend of the economy even pre-
COVID-19.

The Indian economy is in a deeply vicious cycle, where

demand is contracting so heavily, while the capacity to
neutralize this contraction has also contracted equally
because of tax revenue contraction.
 Supply – side policies

Agriculture was the only sector which recorded modest growth of

3.4% in year-on-year terms. All other sectors saw a contraction, with
the sleepest fall coming from the 50% in construction, and 47% fall
in trade, hotels, transport, and communication. Manufacturing
shrank more than 39%, while mining and quarrying dropped 23%.

On the expenditure side, private consumption fell 26.7%, while

investments, as reflected by gross fixed capital formation plunged
47%, and exports contracted almost 20%. Government final
consumption expenditure grew 16.4%.
 Economic Growth
The Economic growth is the increase in the value of an economy's goods and services, which creates more
profit for businesses. As a result, stock prices rise. That gives companies capital to invest and hire more
employees.

As more jobs are created, incomes rise. Consumers have more money to buy additional products and services,
and purchases drive higher growth. For this reason, all countries want positive economic growth. This makes
economic growth the most-watched economic indicator.

The U.S. economy in the 1980s. After two economic contractions in the first three years of the decade, the
economy began to boom. Almost 19 million jobs were added over the decade, although unevenly. Sectors such as
manufacturing and mining lost jobs, but others, such as service and retail, expanded rapidly. More women
entered the workforce during the 1980s, too. This soaring productivity plus a weakening dollar abroad helped
U.S. companies meet the increased demand for exports and revenue rose accordingly.1

By the decade's end, gross domestic product (GDP) had skyrocketed from $2.8 trillion in 1980 to $5.5 trillion by
1989.
 Economic Growth

India’s balance of payments this year is going to be “very very strong” on the back of
significant improvement in exports and a fall in imports said Commerce and Industry
Minister Piyush Goyal. He said that “good” green shoots are visible in the economy
and exports have shown a “good” turnaround. “We are in July at about 91% export
level of July 2019 figures. Imports are still 7–71% level of July 2019. So, broadly our
balance of payments this year is going to be very strong, that is why we feel confident
that the Indian industry will see opportunities for themselves, will see opportunities of
growth,” he said at a FICCI webinar.
 Economic Growth

India’s exports fell for the fourth straight

month in June as shipment of key segments
like petroleum and textiles declined but the
country’s trade turned surplus for the first
time in 18 years as imports dropped by a
steeper 47.59%. The country posted a trade
surplus of USD 0.79 billion in June.
 Employment and unemployment
Measuring employment:

As an economy develops, it undergoes a structural change as output and employment shifts from
primary sector to manufacturing and then to the tertiary (services) sectors. This can be seen in
rapidly developing countries like India where there employment in agriculture and allied industries
are rapidly falling and people are moving towards the fast-growing service sector, especially IT and
retail.

In the same way, employment moves from the informal sector (formally unrecognised trades such
as street vending- output is not included in GDP and incomes are not taxed) to the formal sector
(recognised – included in GDP and taxes) as economies develops. People who previously worked
as street vendors may work in registered firms, as the economy develops.
 Employment and unemployment
Measuring unemployment

Economies periodically calculate the number of people unemployed in their economies, to check
the unemployment rate and see what policies they should implement to reduce it if it is too high.
They can do this in two ways:

• Claimant count: unemployed people can file for unemployment claims (benefits/allowances
provided to the unemployed job seekers) by the government. The government can count the
total number of unemployment claims made in the economy to measure unemployment.

• Labour surveys: economies conduct surveys among the entire labour force to collect data about
it. This will include data on the number of people unemployed.
 Employment and unemployment
This study was carried out to examine the causes of unemployment
in Nigeria and its effects on the economy of the country. Data were
sourced from the Central Bank of Nigeria, Statistical Bulletin (2017),
National
Bureau of Statistics (NBS), Internet, CIA site, Index Mundi and past
studies. The study covered period of 18
years, 1999 to 2017. EViews version 7 was used to analyse the data
gathered, while Ordinary Least Squares
(OLS) method was adopted. This study discovered that the
unemployment in Nigeria is the major
contribution to the poverty level in the country. Money supply and
credit to private sector were recognised to
have significant effect on unemployment level in the economy.
 Employment and unemployment

It is also discovered that gross domestic

product and unemployment rate in Nigeria has
positive relationship which is an indication that
growth in GDP does not amount to overall
development in Nigeria. This study recommend
that government should make credit available
to private sector, increase money in circulation
and try to reduce external debt which
drain away the wealth of the nation through
interest payments to reduce poverty rate in
Nigeria.
Inflation and deflation
● Inflation is a quantitative measure of how quickly the price of goods in an
economy is increasing. Inflation is caused when goods and services are in high
demand, thus creating a drop in availability. Supplies can decrease for many
reasons; a natural disaster can wipe out a food crop, a housing boom can exhaust
building supplies, etc.

● Deflation occurs when too many goods are available or when there is not
enough money circulating to purchase those goods. As a result, the price of
goods and services drops. For instance, if a particular type of car becomes
highly popular, other manufacturers start to make a similar vehicle to compete.
Soon, car companies have more of that vehicle style than they can sell, so they
must drop the price to sell the cars.
 Inflation and deflation

Most central banks including the Reserve Bank of India (RBI) keep a target of low and constant
inflation rate, so as to maintain a good balance in the economy. Moderate inflation rates are
considered beneficial for the overall financial health of an economy.

However, post pandemic and since the end of 2021, inflation rates have been rising around the
globe, as seen in many of the world’s regions. Turkey, by far is experiencing the highest inflation
rate in the first quarter of 2022 which is standing at 54.8%. After Turkey, Israel is another nation
where inflation rate has grown rapidly over the last two years. Similarly, the U.S. inflation rate has
increased fourfold over the past two years. Large increases in inflation rate are also recorded in
Japan and the UK due to increase in the prices of food and energy in the year 2022.
 Inflation and deflation
However, in India the inflation rate has been in double
digits for the past 17 consecutive months. India’s
wholesale inflation eased to 12.41% in August 2022
compared to 13.93% month on month. To know more
on India’s inflation rate, read our story on Inflation
rate in India for more such details.

In India, the inflation is measured on the basis of

Wholesale Price Index (WPI) and Consumer Price
Index (CPI). The former measures the changes in the
price of goods and services at the wholesale level,
whereas the latter measures the changes in the price of
goods and services at the retail level.
 REFERENCES

• https://graduateway.com/
• https://theniconomics.com/
• https://www.freecasestudysolutions.com/
• https://studentshare.org/
• https://marketbusinessnews.com/
• https://igcseaid.com/notes/economics
• https://www.thebalancemoney.com/
• https://www.physicsandmathstutor.com/
• https://www.academia.edu/
THE
END