© edco 2012. positive economics chapter 24. © edco 2012. positive economics economic objectives/...

© Edco 2012. Positive Economics

Chapter 24


Economic Objectives/Aims of the Government

Achieve full employment

Control government finances

Improve infrastructure

Control price inflation

Broaden the tax base

Care for the environment

Achieve sustainable economic growth


Economic Objectives/Aims of the Government cont.

Promote balanced regional development

Create a just social environment/ensure equal distribution of wealth

Maintain state services

Stabilise the banking sector

Achieve equilibrium of balance of payments


Economic Benefits of a Full

Employment Economy in

Ireland

Economic Difficulties of a Full

Employment Economy in Ireland

Reduced social welfare bill Possible labour shortages

Increased aggregate demand

within the economy/economic

growth

Wage demands

Increased standard of living Inflationary pressures

Increased government tax

revenues

Pressure on the state’s

infrastructure

Increased investment

Deterioration/loss of services


Governments can achieve economic growth by implementing the following strategies:

Provide an economic infrastructure in which private industry can survive and flourish

Adopt fiscal and monetary policies that stimulate private industry, e.g. low rate of taxation of corporation profits, low rate of interest on credit

Promote government policies designed to encourage the private sector, e.g. grants and financing training schemes from public funds

Sponsor state trading corporations


Positive Economic

Consequences of Economic

Growth

Negative Economic

Consequences of Economic

Growth

Increased employment Inflationary pressures

Improved government

finances

Labour shortages

Effect on balance of payments Demand for wage increases

Improved standard of living Increased demand for imports

Effects on migration Pressure in the housing market

Investment opportunities Pressure on state infrastructure

Increased

immigration/displacement of

population


Positive Economic

Consequences of an Economy

in Decline

Negative Economic Consequences

of an Economy in Decline

Lower Inflation Increased unemployment

Labour shortages Falling government finances

Falling demand for wage

increases

Lower standard of living

Reduced demand for imports Effects on migration

Less pressure in the housing

market

Investment opportunities

Expectations of citizens Funding difficulties for

infrastructure


Policies to Achieve Balanced Regional Development

Decentralise the public serviceInvest in the infrastructureDevelop/promote educational opportunities Ease planning restrictionsGovernment spatial strategy Tax and other incentives to attract industryInvest in communications Improve access to and from other regions Provide leadership programmes


To ensure a high standard of living, generate economic growth and attract foreign direct investors, it is imperative that there is continued development in infrastructure in the country, such as:

The development of road infrastructure

The provision of public transport

The development of airports and seaports

A significant increase in the quality of telecommunications infrastructure

Improve Infrastructure


Social policy refers to the provision of income and/or services for those who, for one reason or another, would find it difficult to provide for themselves if exposed to the full rigours of the market economy.

Create a Just Social Policy/Ensure Equal Distribution of Wealth


Control Price Inflation/Price Stability

Stabilises the cost of living

Prevents demands for wage increases

Keeps Irish industry internationally competitive

Loss of competitiveness: A situation where our goods abroad are less attractive to foreign buyers.


Positive Consequences of a

Government Policy to Increase

Public Service Charges

Negative Consequences of a

Government Policy to Increase

Public Service Charges

Less pressure to increase

taxes

or borrowing

Increased cost of living

More efficient use of services Increased inflation

Target the use of resources

more economically

Affects lower-income groups the

most

Pressure to improve quality of

service

Viability of partnership agreements

Lower tax base Inequity/fairness

Uses of revenue collected Higher costs for business


Instruments in Achieving Economic Aims and Objectives

Monetary policy

Fiscal policy

Exchange rate policy

Direct intervention

Deregulation

Prices and incomes policy

Economic planning


Monetary policy is actions by the European Central Bank that influence:

– Money supply via changing the amount of money in circulation.

– Interest rates via changing the ECB base rate on which all variable rates depend.

– The availability of credit via changing the rules on issuing loans.


Fiscal policy is any action taken by the government that influences the timing, magnitude and structure of current revenue and expenditure. It is carried out by increasing or decreasing tax and increasing or decreasing government spending.

Exchange rate policy is directly controlled by the ECB and refers to the devaluation (making the currency worth less) and revaluation (making the currency worth more) of the euro in terms of other currencies.


Direct intervention refers to the government’s ability to directly intervene in the economy in order to achieve its aims and objectives achieved by passing legislation and setting up semi-state bodies.

Deregulation is regarded as a form of direct intervention and involves the government changing laws and practices that it deems detrimental to competition.


Prices and incomes policy is a method used by the government to control inflation by restraining prices and incomes. It is implemented by imposing wage freezes or strict limits on wage increases, setting maximum prices for certain essential items and government approval on price increases for companies.


Nationalisation means taking an industry or assets into public ownership by a government.

Nationalisation


Economic Arguments in Favour

of the Nationalisation of Banks

Economic Arguments

against the

Nationalisation of Banks

Stability to the

economy/investor confidence

Unnecessary state

interference

Availability of credit Shareholders penalised

Rationalisation of banking

services

Increased taxation

Employment/consumer

protection

Opportunity costs

Development of ethical banking

practices

Profit motive diminished

Continued provision of banking

services to the

community/prevent foreign

ownership

Financial cost


Privatisation is used to describe the sale or transfer of public sector assets to the private sector.

Privatisation


Economic Arguments in Favour of

Privatisation

Economic Arguments Against

Privatisation

Improved quality/choice of services Loss of non-profit-making

services

More competitive prices Standards of service

Continuity of supply Preference to meet shareholders’

demands

Employment opportunities Loss of jobs/reduced job

security/increased social welfare

bill

More rewards/incentives for

innovation

Curtailment in pay/pension

increases/working conditions

Revenue from sale may help

reduce current/future

taxes/opportunity cost

Loss of valuable state resource

Costs of sale

Foreign ownership of Irish

companies


Physiocrats (1750–1800)Agriculture was the only productive sector of

the economy – the trade and industry sectors were sterile

Free trade was favoured

State intervention should be kept to a minimum

Advocated a self-interest approach (laissez-faire economic system)


Produced Tableau Économique in 1785 (Economic Table), similar to what we now refer to as the circular flow of income.

Quesnay’s analysis showed that agriculture was the only sector of society producing a surplus and the other sectors consumed what they produced.

François Quesnay (1694–1774)


Law of diminishing returns in agriculture

An advocate of non-governmental intervention in economic affairs

Turgot suggests that the value of an item depends on its utility to the buyer

Jacques Turgot (1727–81)

© edco 2012. positive economics chapter 24. © edco 2012. positive economics economic objectives/...

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