THE GOVERNMENT’S INFLUENCE ON PRIVATE

PRODUCERS

The influence of different government policies on the economy

and private producers in terms of:
• fiscal policy,
• monetary policy,
• supply side policies,
• subsidies and taxes,
• competition policy,
• price controls
• regulation
• Partnerships between the public and private sector.
CONFLICTS BETWEEN GOVERNMENT AIMS

The main conflicts between government aims:

• unemployment
• economic growth and inflation
• environmental policy
• the balance of payments
• The importance of supply side policy in achieving government
objectives.
• How governments can improve the effectiveness of their policies
• Using multiple policies
• Avoiding time delays
• Improving information, specifically with regards to the multiplier effect.
THE CURRENT MACROECONOMIC POLICY FRAMEWORK

• A brief overview of macroeconomic policy in the UK:

• Monetary policy
• The Bank of England (Central Bank) sets interest rates on a monthly basis.
• Since Spring 2009 they have also used Quantitative Easing (QE) i.e. increasing
the supply of money.

• Fiscal policy
• The government controls spending and taxation in the economy.
• During the recession the government used increased spending and lower
taxation to cushion the economy.
 CONFLICTS BETWEEN MACROECONOMIC
OBJECTIVES

• It is rare for a country to achieve all of its objectives at the same

time.
• There are often conflicts between different aims/objectives, as
a result different objectives have to be given priority.
• The objectives and priorities will vary depending on the country –
some countries are in different stages of economic
development or different stages in the economic cycle.
 ECONOMIC GROWTH AND INFLATION

• How would the government use fiscal policy

to boost aggregate demand and economic
growth?
• Increase spending.
• What might the effect of this increased
aggregate demand be on inflation?
• Inflation might increase beyond the target rate
of 1-3%.
• This is one of the issues the government in
China has had to try to control. The Chinese
economy has been growing at an extremely
fast rate, avoiding inflation whilst maintaining
growth has been a key concern.
 ECONOMIC GROWTH AND ENVIRONMENTAL
SUSTAINABILITY

• Why might there be a conflict between the

objective of protecting the environment and
increasing economic growth?
• Rapid economic growth often puts extra
pressure on scares environmental resources
• Clean air
• Water pollution
• Deforestation.

• This can threaten the living standards of

future generations.
 UNEMPLOYMENT AND INFLATION

• Unemployment and economic growth

are inversely related – rising economic
growth is usually related to increasing
employment.
• As with economics growth, more
employed people leads to higher
aggregate demand, which can cause
inflation.
 THE BALANCE OF PAYMENTS
AND ECONOMIC GROWTH

• A high growth in GDP (i.e. economic growth) as a

result of a strong demand for goods and services may
lead to a worsening of the trade balance.
• Consumers may demand more imported goods than
the country is exporting, so the trade balance is worse.
 PRIORITIZING GOVERNMENT POLICY

• Different objectives will be more important to different

governments.
• For example, many governments priorities economic
growth over environmental sustainability.
• High unemployment and low economic growth are very
unpopular, whereas voters tend to care less about the
environment, especially if the damage is not visible.

• Which aim is given priority depends on the size of the

problem, the consequences of the problem, and
what the citizens of the country care most about.
 GOVERNMENT AIMS AND SUPPLY SIDE POLICY

• Why is supply side policy important for

achieving macroeconomic aims?
• Think about economic growth (potential and
actual), employment, output, inflation, and the
balance of payments.
• Increasing AS at the same time as AD allows
the economy to grow without high levels of
inflation.
• What supply side policies can you think of for
improving human capital?
• Increasing/improving education and training.
• What is likely to be the effect on aggregate
demand and aggregate supply?
• How about unemployment?
 GOVERNMENT AIMS AND SUPPLY
SIDE POLICY

• What is likely to be the effect of an increase in the

productive capacity of an economy on the balance of
payments (the number of imports versus the number of
exports)?
• More efficient capital and labor will lower the costs of
production, making the economy as a whole more
competitive. This is likely to increase exports.
 DOWNSIDES TO SUPPLY
SIDE POLICY

• How quickly are the effects of supply side policies

likely to be felt?
• For example, increases in spending on education…
• Policy likely to take a long time to take effect.

• Supply side policies are also likely to be expensive –

building new schools, increasing expenditure on
teacher training, providing tax breaks to incentivize
investment.
• It is also not guaranteed that the policies will be
effective.
 THE MULTIPLIER EFFECT

• If the government increases spending by

$100 million, the economic effects will be
much larger than $100 million.
• This is because after the government has
spent the $100m, the people receiving the
$100mn will spend most of it.
• If the marginal propensity to consume
(opposite of savings rate) is 80%, $80mn of
the $100mn will be re-spent.
• Then $64m (80%) of that $80m will be
spent. This effect continues throughout the
economy.
 INCREASING THE EFFECTIVENESS OF
MACROECONOMIC POLICIES
• From what you have just heard about the multiplier
effect, why might it be important for government fiscal
policy to know the size of the multiplier effect in an
economy?
• Government may spend too much, leading to inflation in
the economy.
Accurate information is very important for achieving
government policy objectives – without information the
government doesn’t know what problems need fixing in the
economy or whether previous policy has been successful.
 INCREASING THE EFFECTIVENESS OF
MACROECONOMIC POLICIES

• The government can increase it’s achievement of

macroeconomic objectives by using many policies
at the same time.
• By using many policies the government can target
many specific aims at the same time.
• Ensuring there is no time delay between
deciding on an objective and implementing a
policy. If there is a long delay then the situation in
the economy may have changed, making the policy
ineffective.