Why is the government involved..

Why is the government involved in the economy

Some abbreviations used:

X = exports
M = imports
B of P = balance of payments
GDP = gross domestic product

INTRODUCTION

1. Why does the government become involved in the economy?

Since John Maynard Keynes’ work, published in the 1930s, we know how we can intervene to reduce unemployment etc., – we have a good theoretical model that helps us to understand how the economy works.

Increasingly since World War Two (1939-45) it is seen as a task of the government to intervene and work more actively to improve things in general. Interventionism is now expected.

The natural working of the economy can sometimes give undesirable or unacceptable results, such as mass unemployment or inflation.

Because what is happening, or government fears is about to happen, is not wanted. For example, inflation is felt to be too high or there is a fear that it will increase; or balance of payments is worsening.

Note: since the time of Prime Minister Margaret Thatcher (UK) and President Ronald Reagan (US), in the late 1970s and the 1980s, efforts have been made to reduce the amount of government intervention. However, it sometimes seems rather difficult to reduce the share of government in the gross domestic product. The use of freer markets has definitely increased – but the government share of GDP seems to have increased too.

2. At the micro level: the government wishes to make the market mechanism work better.

What main areas of the micro-economy does the government look at or tackle?

Monopoly elements or market dominance. Externalities.

Public goods. Public goods. Merit goods.
De-merit goods. Information failures. Factor immobility.
Undesirable income and wealth distribution.

That is, the government looks at all the major elements that we are studying!

3. At the macro level : the government wishes to modify some important areas.

What does the government look at or tackle at the macro level?

Inflation (usually they prefer a low figure, e.g. below 3% ). Unemployment (they usually prefer it to be low, e.g., below 4%).
Economic growth (they usually prefer it to be reasonably high, e.g., above 2.5%).

Balance of payment (they usually prefer a balance of exports and imports, or perhaps a small export surplus).

The value of the currency which means the price of the pound in international markets (politicians usually prefer it to be high, although a lower figure means that industry benefits as our export goods will be cheaper and so easier to sell abroad).

Allocation of resources (they usually prefer a market solution but it can be whatever the government feels it wants).

Distribution of income (the Labour Party usually prefers a narrow distribution; the Conservative Party perhaps wider? But New Labour seems to accept that a wider distribution of income is quite acceptable).

Standard of living (they usually prefer high).

Taking care of the environment (a relatively new area of concern).

Unwanted fluctuations in any of the above, e.g., if any are felt to be undesirable at the level they are at, the government may step in and try to alter and improve them.