5 Main Aims of Government for Economy Development

1. Full Employment:

Most governments try to achieve full employment. This means that people who are willing and able to work can find employment. Of course, not everyone wants to work or is able to work. These people are not in the labour force. They are said to be economically inactive and are dependent on those in the labour force.

They include children, the retired, those engaged in full time education, home makers and those who are too sick or disabled to work. Those who are in work or are unemployed but actively seeking work, form the labour force and are said to be economically active.

The unemployment rate is calculated as a percentage of the labour force, i.e.:

Unemployed / Labour force X 100

So if 5 million people are unemployed out of a labour force of 40 million, the unemployment rate is:

5m / 40m X 100 = 12.5%

Most economists think that full employment is not actually 0% unemployed. They usually put the figure at approximately 3%. This is because they think that even in a strong economy with demand for labour equalling the supply of labour, there will always be some workers changing jobs and being unemployed for short periods.

2. Price Stability:

Governments aim for price stability because it ensures greater economic certainty and prevents the country’s products from losing international competitiveness. If firms, households and workers have an idea. About future level of prices, they can plan with greater confidence. It also means that they will not act in a way that will cause prices to rise in the future.

Firms will not raise their prices because they expect their costs to be higher, households will not bring forward purchases for fear that items will be more expensive in the future and workers will not press for wage increases just to maintain their real disposable income.

In seeking to achieve price stability, most governments are not aiming for a zero percentage change in price. A common target is a stable inflation rate of 2%. They do not aim for unchanged prices, for two main reasons. One is that measures of inflation tend to overstate rises in prices.

A price index , for instance, might indicate that the general price level has risen by 1% but in practice, prices might not have changed and might have even fallen slightly. Some of the prices paid by people are lower than those appearing in the official price level indices, as people buy some products at reduced prices in sales and also make second hand purchases.

Price rises can also hide the improvements in products. A car may cost $100 more this year than last year, but it may incorporate a number of new features such as satellite navigation. So the question arises, is the car actually more expensive or is it a different car?

A second reason is that a slight rise in prices can provide some benefits. It can encourage producers to increase their output, as they may think that higher prices will lead to higher profits. It can also enable firms to cut their wage costs by not raising wages in line with inflation. The alternative to such a move might be a cut in employment.

3. Economic Growth:

When an economy experiences economic growth, there is an increase in its output in the short run. This is sometimes referred to as actual economic growth. In the long run, for an economy to sustain its growth, the productive potential of the economy has to be increased. Such an increase can be achieved as a result of a rise in the quantity and/or quality of factors of production.

The difference between actual and potential economic growth can be shown on a production possibility curve. On Fig, the movement from point A to point B represents actual economic growth – more capital and consumer goods are made. The shift outwards of the production possibility curve from YY to ZZ represents potential economic growth – the economy is capable of producing more.

Actual and Potential Economics Growth

In analyzing economic growth and other macroeconomic issues, economists also make use of aggregate demand and aggregate supply diagrams. Aggregate demand (AD) is the total demand for an economy’s products and consists of consumption (C), investment (I), government expenditure (G) and exports minus imports (X-M).

Aggregate supply is the total output of producers in an economy. Aggregate supply is perfectly elastic if the economy has a significant number of unemployed resources, as then more can be produced without a contingent rise in costs of production and prices.

The curve becomes more inelastic as the economy approaches full employment since then the firms will be competing for resources and this will push up their costs and, as a result, the price level. At full employment of resources, aggregate supply becomes perfectly inelastic, since at this point further increase in output is not possible.

Fig. 2 shows actual economic growth. The rise in AD has resulted in a rise in the country’s output (see unit 40 on real GDP) and a small rise in the price level.

Actual Economic Growth

Fig. 3 shows potential economic growth. The maximum amount, that the economy can produce, has increased.

Potential Economic Growth

In this case, the rise in the quantity and/or quality of resources has no impact on output. If, however, an increase in productive potential occurs when an economy is operating close to full employment, it can cause a rise in the country’s output and a fall in the price level as shown in Fig. 4.

Potential Economic Growth Causing a Rise in National Output

Governments want to achieve economic growth because producing more goods and services can raise people’s living standards. Economic growth can indeed transform people’s lives and enable them to live longer because of better nutrition, housing and health care.

The determinant of a country’s possible economic growth rate is its level of output, in relation to its current maximum possible output and its growth in productive capacity.

If, for instance, an economy is growing at 2% below its maximum possible output and its productive capacity is expected to increase by 3% this year, it’s possible economic growth rate is 5%. Most governments would like their economies to be working at full capacity and their actual economic growth rate to coincide with their potential economic growth rate.

4. Redistribution of Income:

A government may seek to redistribute income from the rich to the poor. The more money someone has, the less they tend to appreciate each unit. A rich person with an income of $10,000 a week is unlikely to miss $100 but that sum would make a huge difference to someone currently struggling on $20 a week.

Governments redistribute income by taxing and spending. The rich are taxed more than the poor. Some of the money raised is spent directly on the poor by means of benefits such as housing benefit and unemployment benefit. Other forms of government expenditure, such as that on education and health, particularly benefit the poor

Without the government providing these services free of cost or at subsidized prices, the poor may not find them accessible. Governments are unlikely to aim for a perfectly equal distribution of income. This is because taxing the rich too heavily and providing too generous benefits may act as a disincentive to effort and enterprise.

5. Balance of Payments Stability:

Over the long run, most governments want the value of their exports to equal the value of their imports. If expenditure on imports exceeds revenue from exports for a long period of time, the country will be living beyond its means and will get into debt. If export revenue is greater than import expenditure, the inhabitants of the country will not be enjoying as many products as possible.

Governments also seek to avoid sudden changes in other parts of the balance of payments. This is because they can prove to be disruptive for the economy. For instance, there may be a sudden and unexpected movement of money out of the country’s financial institutions into financial institutions of other countries. Such a movement can have an adverse effect not only on the banks of a country but also on the country’s exchange rate and eventually on the price of the country’s imports.