Core Objectives of Government Economic Policy

Posted on Oct 13, 2025 in Economy

Key Government Economic Policies

The Role of Government in the Economy

Government as a Producer

Governments often produce or provide:

  • Essential goods and services
  • Merit goods
  • Public goods

They also act to control monopolies.

Government as an Employer

The government is a major employer and aims to manage the national employment level.

Understanding Employment Metrics

Unemployment Rate: Calculated as (Number of Unemployed / Labour Force) x 100.

Full Employment: A situation where most people who want a job have one, but there are enough people out of work to prevent wages from rising at an increasing rate. This balances worker happiness with wage stability, as some unemployment is needed so wages don’t rise a lot.

Addressing Types of Unemployment
  • Temporary: Publicize job vacancies.
  • Seasonal: Not necessarily a problem that requires intervention.
  • Technological: Provide educational and training opportunities focusing on new technical skills required for new jobs.
  • Frictional: Offer training in job areas where there are shortages of supply and reduce the period of search unemployment.
  • Structural: Encourage people and businesses to move into growth areas of the economy.
  • Cyclical: Lower business taxes to reduce costs and encourage the employment of more labor.

Maintaining Price Stability

Inflation occurs when there is a general rise in the price of goods and services in the whole economy. Average prices are measured by the government using the Consumer Price Index (CPI).

Problems Caused by Inflation

  • It may reduce the value of the sum that is eventually paid on credit. This makes businesses reluctant to supply goods on credit.
  • Inflation will reduce the value of taxes received.
  • When prices of domestic products rise, they become less competitive when compared to imports.

Causes of Inflation

Cost-Push Factors
  • Food costs: High food prices lead to higher costs for other businesses.
  • Raw material costs: They are the center of modern economies, so as their prices rise, there is an effect on many other prices.
  • Wage costs
  • Land costs
  • Exchange rate costs
Demand-Pull Inflation

This occurs when rising demand pushes up the price of goods. This happens when people have more to spend. Businesses compete for resources, and this will lead to a rise in prices.

Consequences of Inflation

Inflation results in a loss of value of units of currency. People lose confidence in money, and businesses push up prices because they see money as being less valuable.

The reverse of inflation is DEFLATION, when prices start to fall. It discourages businesses, who may restrict supply for markets.

Government Policies for Price Stability

  1. Direct control of prices: The government can set prices and impose limits on wage increases. However, the price system no longer operates as an efficient system for signaling the preferences of consumers, and there may be conflict between the government and businesses that want to raise prices, and trade unions that want increases in wages.
  2. Fiscal policy: The government could reduce its own spending and raise taxes. This lowers the demand for goods in the economy, leading to falls in prices. Taxpayer incomes fall, and they have less to spend, leading to a fall in demand and a fall in prices.
  3. Monetary policy: The central bank can control the quantity of money available for spending by printing less money and raising the interest rate.

Fostering Economic Growth

Living standards grow if there is a growth in Gross Domestic Product (GDP). It measures the total value of goods produced in the economy in a given period. It is important for a country’s economy that the GDP per head of population is increasing (calculated by dividing the country’s GDP by the number of people).

Rising GDP means that incomes within a country are rising, the standard of living of people within a country is rising, and the government is able to raise more in taxes to use this money to meet its objectives.

Sustainable Economic Growth

Sustainable economic growth occurs when the growth is maintained over a period of time. There must be an investment for future generations. It can be in roads, ports, railway lines, etc., to make the economy more productive. It can also be social and welfare investment.

The Trade Cycle and Recessions

Economies experience a cycle of growth and recession. A recession is characterized by:

  • Depression of demand
  • Depression of supply
  • Depression of prices
  • Decreasing employment

Government policy tries to prevent recession and to stimulate growth. Growth can be encouraged by:

  • Making it easier for businesses to conduct business.
  • Providing incentives in growing industries.
  • Employing people in productive activities in the public sector.
  • Encouraging investment by the private and public sectors.

Redistribution of Income

Poverty is a key concern. Someone is considered poor if their income falls below the poverty line (e.g., US$1.25 per day).

Methods of Income Redistribution

Income is redistributed through government spending, subsidies, and taxation.

  • Government spending: Using money to spend on goods and services that benefit the poor, like roads to remote rural communities, public education, and health systems.
  • Subsidies: The government pays a sum of money to a consumer or a producer. The government could pay a subsidy to a producer so they can supply a product to the market at a lower price.
  • Taxation: Taxing the rich and redistributing this income.

Managing the Balance of Payments

This tracks monetary transactions between a country and the rest of the world. The most important part is the Current Account Balance, which compares a country’s exports with its imports.

  • SURPLUS: The value of exports is higher than the value of imports. This is good for a growing economy. It lets countries earn foreign currency to buy essential raw materials to develop the country.
  • DEFICIT: The value of imports is higher than the value of exports.

In the short term, it doesn’t matter if a country has a surplus or deficit in the balance of payments. In the longer term, if you have a few years of deficits, you would want to turn this into surpluses to pay off the deficits.

Deficits may mean that a country is not competitive in the international market. To ensure that the economy remains competitive, this might involve:

  • Providing subsidies to industries.
  • Protecting the domestic market against foreign imports.
  • Encouraging consumers to buy domestically produced products.