Role of government in developing economies

Topics: Economics, Monetary policy, Inflation Pages: 5 (1240 words) Published: March 24, 2014
As with many issues pertaining to globalization, concerns and hopes about international investment revolve in many ways around what governments may do. This means both what governments may do to regulate foreign investment, perhaps to make it less volatile, as well as actions government may take simply to get out of the way of the market, clearing the existing barriers to capital. Every government has got some aims to maintain the rate of GDP ( gross domestic product) that having a stable economy. Here are some common aims of government which everyone country has to take care of :

Keep inflation under control
Inflation creates uncertainty and results in the fall in the value of money in terms of goods and services. Inflation also creates uncertainty. Therefore, the governments use macroeconomic policy instruments to keep inflation under control. Maintain a high level of employment

High unemployment is bad for the economy. Unemployment means resources are not being utilized properly. Therefore governments take measures to increase employment. Economic Growth
If economy grows, people can enjoy higher standards of living. Therefore it is always an important aim of government policies. Redistribution of income
The market system sometimes allows the rich people to become richer and the poor people to become poorer. When the gap between the rich and the poor widens, the national indicators no longer reflect the situation of the average individuals. Maintaining a healthy balance of payment

Balance of payment is the difference between a country’s exports and imports. If increases in incomes result in increases in imports while there is no equivalent increases in export revenue, it will result in the balance of payment deficit. a sustained balance of payment deficit for many years will lead to the country to become indebted to the rest of the world.

Demand-side policies: Macroeconomic policies undertaken by a government aimed at increasing or decreasing Aggregate Demand (The total amount of goods and services demanded in the economy at a given overall price level and in a given time period) in the economy.

Fiscal policy: Changes in government spending and/or taxation aimed at increasing or decreasing aggregate demand. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy: •Aggregate demand (AD) and the level of economic activity. •The pattern of resource allocation.

The distribution of income.

Expansionary fiscal policy is used to increase the Aggregate demand in the economy. Government will either increase its spending or reduce taxes (or both) in order to stimulate the aggregate demand. However, this might also lead to higher prices/inflation in the economy.

Contractionary fiscal policy involves the reduction of government spending and increase taxes as a measure to control inflation/AD in the economy. With reduced government spending, the AD will fall and thus reduce pressure on the economic resources and the average price level in the economy will come down.

In this case the government can use contractionary fiscal policy to control inflation and bring down the AD.

An Monetary expansionary policy increases the total supply of money in the economy and is traditionally used to combat unemployment in a recession by lowering interest rates. This will shift the AD to the right and result in higher real output and more employment.

Monetary Contractionary policy decreases the total money supply and involves raising interest rates in order to combat inflation. The result will be that investment will fall, and consumption will fall. All of these changes will shift the AD to the left.

Supply-side policies: Macroeconomic policies taken by a government or central bank aimed at increasing productivity, lowering firms' costs, and increasing the level of aggregate supply in the economy.

Reduction in...
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