Paper-2

The Government and the Economy (macroeconomics)

Book chapter (25 to 34)

1 Macroeconomics Objective(Follow Book Chapter-25)

(1) To increase economic growth
(2) To reduce unemployment
(3) To control inflation (price level decrease)
(4) To reduce balance of payment deficit (Export increase
but import decrease)
(5) To protect environment
(6) Redistribution of income (reduce inequality)

2 Economic growth (Follow Book Chapter-25)

Gross Domestic Product (GDP)
The total value of all the goods and services produced with in a country over the period
of time.
Year GDP
2019 500
Economic growth

The increase in real Gross Domestic product over the period of time.

Year GDP
2019 500
2020 550/450

Economic growth rate

The % increase in real Gross Domestic product over the period of time.

Economic growth rate =Change in GDP x100

GDP
= 550-500 x100
500
= 10% (positive) Economic growth increase
Or = -10% (negative) Recession/ Economic growth fall
?
Answer
When the economic growth rate is negative that means falling GDP.
Reference
July 2012 to July 2013 GDP /economic growth rate -0.5.-0.8,-0.3,-0.1
But recession fall
Economic growth rate can be
1 Positive GDP increase
2 Negative GDP decrease

Positive GDP rate can be

1 lower rate (10% to 5%)
2 Higher rate (5% to 12%)
3 constant rate(5% to 5%)

Factors /causes / ways/ Government policy to increase economic

growth
9/12 marks
(1) government expenditure increase -Demand increase
(2) Rate of interest decrease - Demand increase
(3) Education and trading development – Supply increase
(4) Introduce new technology – supply increase
(5) Investment increase -supply and demand increase
6 tax decrease- demand increase
7Subsidy to domestic firm- supply increase
8 land improve – supply crease

Effect of economic growth

Advantages /benefits Disadvantages/costs

(1) standard of living increase (1) environment damage (pollution increase)
(2) unemployment decrease (2) inflation(price rise)
(3) Govt tax revenue increase (3) non-renewable resources run out
(4) Better public/social service (4) import increase(more use foreign goods)
(5) Per head income increase

Per head/Per capita income =Total GDP/ Total population

 The economic cycle
(Boom, downturn, recession, recover)
?
Boom
During a boom, GDP is growing fast because the economy is performing well.
Features
1 New firms will be entering the market
2 Demand will be rising
3 Jobs will be created
4 Salary will be rising
5 Price increase
Downturn
The economy is still growing but at a slower rate
Features
Demand will stop increasing
Unemployment will start to rise
Many firms will stop expanding
Some firms will leave the market
Profit will fall Price will fall
Recession
At the bottom of the economic cycle, where the GDP starts to fall.
Reference -1%
Features
Demand will start to fall
Unemployment will rise
Business confidence is very low
Price will fall
Recovery
When GDP starts to rise again
Features
Demand starts to rise
Unemployment starts to fall
Price will start to rise
 Boom Where GDP is growing at its fastest

Downturn Where GDP grows but more slowly

Recover Where GDP starts to rise again.

Recession Where GDP starts to fall / GDP rate negative

3 Unemployment (Follow Book Chapter-27)

Involuntary unemployment
The people (workforce) who are willing to work at the market wage rate but do not
get job.
Voluntary unemployment
The people who are not willing to work at the market wage
rate but at higher wage rate they will take the job.
Causes /factors
(1) High unemployment benefit (2) higher income tax.

Types of unemployment (Involuntary)

(1) cyclical / demand deficient unemployment
When the unemployment arises to fall in demand.
Causes /factors
Recession in a country,
Recession in Global economy.
(2) structural unemployment
Unemployment caused when by changes in the structure of the economy such as the
decline in an industry.
Factors /causes –decline demand, technological progress, substitute goods, foreign
competition, sector change.
(3) frictional Unemployment
When workers are unemployed for a short period of time as they move from one job to
another job.
(4) seasonal unemployment
Unemployment caused when seasonal workers such as those in holidays industry are
laid off because the season has ended. e.g. –tourist guide, agriculture worker.

Costs /Disadvantages of unemployment

(1) standard of living fall(2)Government tax revenue fall
(2) Government expenditure increase (4) demand fall (5) social crime increase
Factors /causes / ways/ Government policy to reduce unemployment
1 government expenditure increase -Demand increase
(2) Rate of interest decrease - Demand increase
(3) Education and trading development – Supply increase
(4) Investment increase -supply and demand increase
5 tax decrease- demand increase
6Subsidy to domestic firm- supply increase
(7) Increase small firm
(8)Mobility of labour increase
(9)Job Information center
(10)set up retraining cente
4 Protection of the environment (Follow Book Chapter-29)
Method of protection
(1)Taxation (2) Subsidy to recycling industry
(1) Government regulation (4) Pollution permits (5) Road pricing and charges
(6)International targets (7) fine (8) government provision of parks (9) Ban- plastic
bags, smoking on public place(Tobacco), Old car,
 5 Inflation(Follow Book Chapter-26)
Inflation
Persistent rise in general price level
Deflation
Deflation is the term used to describe a fall in average price level.
Rate of inflation
The % increase in general price level over the period of time.
Year RPI/CIP/Price Level
2019 100
2020 110/90
Rate of inflation= 110-100 x100
100
= 10% (positive) inflation (price level increase)
Or = - 10% (negative) deflation (price level decrease)
?
Rate of inflation can be 1 positive
2Negative
Positive rate can be
1 lower rate (10% to 5%)
2 Higher rates (5% to 12%)
3 Constant rates (5% to5%)

Retail price index (RPI)/Consumer price index (CPI)

It measures rate of inflation /cost of living.

(1) Demand pull inflation (2) cost push inflation

Inflation caused by too much demand Inflation caused by rising business costs.
in the economy relative to supply When business are faced with rising costs by
(Demand >Supply) increasing price of raw material, labour, rent
they put up their prices to protect their profit.

Causes Causes
Rising consumer spending, Wage increase,
Taxation decrease, Oil price increase,
Government spending increase, Raw materials price increase.
Rate of interest d

Consequences of inflation or effect of inflation (Follow Book Chapter-33)

Price 100 to 200

(1) Wage increase-

(2) menu costs (3) shoe leather costs
(4)fixed income group - loser
(1) money lender-loser, money borrower-gainer
(2) saver-loser
(7) Four function of money -money value decrease
(8) Employment
If demand pull inflation -unemployment decrease
If cost push inflation -unemployment increase
(9)Balance of Payment - export decrease
Import increase
So Balance of payment deficit
(10)Uncertainty (11) business and consumer confidence (12) Investment (13)
price

Money
Four function of money
(1) A medium of exchange
(2) A store of value
(3) A measure of value
(4) A standard for deferred payments
Government policy to control inflation/reduce price level (110 to 100)
1Supply increase (Supply side policy)
(a)Subsidy to firms
(b) Deregulation
(c) labour productivity increase
(d) introduce new technology
(e) discover new resources
(f) Education and training development
(d) set up job information

2Demand decrease (Demand side policy)

(a)Taxation increase (Direct tax and indirect tax)
(b)Government expenditure decrease
(c)Rate interest increase
 Balance of payment (BOP) (Follow Book Chapter-28)
A record of all transactions relating to international trade.

International trade
When the goods are exchanged between two countries.

Balance of payment = export - import

Export – sell to foreign country/money inflow
Import –buy from foreign country/money outflow

Balance of payment

Deficit surplus
Export <Import Export >Import
BOP = Export-import BOP = export- import
= 3000 - 3500 = 3500 - 3200
= - 500 = 300

Export
Goods and services sold foreign market

Visible export -BD garments sold to USA

Invisible export -USA people spending holidays in BD

Import
Goods and services bought from foreign market
Visible import
BD car bought form USA
Invisible import - BD people spending holidays in USA

Visible -goods
Invisible –service
Terms of BOP
(A) Balance of trade
Or Balance of visible trade=visible export - visible import
=3000 - 3500
= -500(deficit)
(B) Balance of invisible trade = invisible export-invisible import
=3000-2800
=200(surplus)
A+B
Balance of current account = visible trade +invisible trade
= -500+200
= -300 (deficit)
Or
Balance of current account =( visible export +invisible export) –(visible import+
invisible import)
=(3000+3000)-(3500+2800)
=6000-6300=-300
Question
1Visible trade=visible export - visible import
2Visible trade deficit
When the visible export is less than visible import
3Visible trade surplus
When the visible export is greater than visible import

Relationship between current account and exchange rate?

Reasons for deficit and surpluses

(1)Quality of domestic goods
(2) Price of domestic goods
(3) Quality of foreign goods
(4) Price of foreign goods
(5) exchange rates between countries

Reasons for deficit

(1)Lower Quality of domestic goods
(2)Higher Price of domestic goods
(3) Better Quality of foreign goods
(4) Lower Price of foreign goods
(5) Currency appreciation/ value of currency rise

Effects of a current deficit(export less but import more)

(1)A rise in unemployment
(2)An increase in international debt
(3)It may reflect structural weaknesses
(4)Downward pressure on the exchange rate (currency depreciation)
$1 = 36TK
$1 = 90 TK
?

From 2013 to 2014

Balance of payment deficit increase from $5bn to $10bn.So BOP worsen.
From 2014 to 2015
Balance of payment deficit decrease from $10bn to $3bn. So BOP improved.

Govt policy to reduce BOP deficit(Export increase but import fall)

1For export increase

1Supply increase (Supply side policy)

(a)Subsidy to firms
(b) Deregulation
(c) labour productivity increase
(d) introduce new technology
(e) discover new resources
(f) Education and training development
(d) set up job information

2Demand decrease (Demand side policy)

(a)Taxation increase (Direct tax and indirect tax)
(b)Government expenditure decrease
(c)Rate interest increase

Overall inflation control (price fall) so export increase

2For import decrease
(a) Tariff (b) Quota(c)subsidy to domestic (d) domestic goods better quality

7 Macroeconomics Objective(Follow Book Chapter-25)

(1) To increase economic growth
(2) To reduce unemployment
(3) To control inflation
(4) To reduce balance of payment deficit
(5) To protect environment
(6) Redistribution of income

Government Policy
(To gain macroeconomics Objectives
(1) To increase economic growth –Demand &supply increase
(2) To reduce unemployment- Demand &supply increase
(6) Redistribution of income- Demand &supply increase

(3) To control inflation- Demand decrease but supply increase

(4) To reduce balance of payment deficit- Demand decrease but supply increase
(5)To protect environment-Demand decrease &supply decrease

x(6) Redistribution of income- Demand &supply increase

1 Demand side policy (demand increase or decrease)
(a) Fiscal Policy

*Taxation
*Government Expenditure

(b) Monetary policy

* Rate of interest
*Money supply
2 Supply side policy (supply increase or decrease)

(1) Education and training development

(2)Increase small firm
(3) Privatization
(4) Deregulation
(5)Increase mobility of labour
(1)Government objective
(1) To increase economic growth - Demand &supply increase
(2) To reduce unemployment- Demand &supply increase
Government policy(Demand side policy)
Fiscal policy Monetary Policy
Taxation decrease Rate of interest decrease
Government expenditure increase

So demand increase
(2)Government objective
(1) To control inflation (decrease price level)- Demand decrease but supply increase
(2) To reduce balance of payment deficit (increase export and decrease import)- Demand
decrease but supply increase
(3) To protect environment- Demand decrease &supply decrease
Government policy( Demand side policy)
Fiscal policy Monetary Policy
Taxation increase Rate of interest increase
Government expenditure decrease

So demand decrease.

(3)Government objective
(1) To increase economic growth- Demand &supply increase
(2) To reduce unemployment- Demand &supply increase
(3) To control inflation- Demand decrease but supply increase
(4) To reduce balance of payment deficit- Demand decrease but supply increase
Supply side policy
Education and training development
Increase small firm
Privatization
Deregulation
Set up job information center
Set up retraining center
Infrastructure spending
Lower business taxes
Lower income tax rates to encourage working

So supply increase

8 Relationship between Macroeconomics objectives and Macro Policies

(Follow Book Chapter-34)
Conflict between objectives

(1)Expansionary policy (demand increase)

Expansionary fiscal policy that means:
Taxation fall
Government expenditure increase

Expansionary monetary policy that means

Rate of interest decrease
Money supply increase
Effect of expansionary policy
Advantages/ Positive
Economic growth increase
Unemployment decrease

Disadvantages/Negative
Inflation
Balance of payment deficit
Environment damage (pollution)
 (2)Contractionary policy(demand decrease)
Contractionary Fiscal policy that means
Taxation increase
Government Expenditure decrease

Contractioary Monetary policy that means

Rate of interest increase
Money supply decrease
So demand decrease
Effect of Contractionary policy
Advantages/positive
Control inflation
Reduce balance of payment deficit
Protect environment
Disadvantages/Negative
Economic growth fall
Unemployment increase
 9 Taxation (Follow Book Chapter-31)
1 Direct Taxation
The tax which impose on income, wealth and profit.
(a) Income tax is a direct tax on the amount earned by an individual.
(b) Corporation tax is levied on the profits made by limited companies. Others types of
business such as partnerships and sole traders pay income tax.
(c) Capital gains tax is levied on any financial gains made.
(d) Inheritance tax is paid on money that is inherited from people that die.
(e) National insurance contributions

2 Indirect Tax
The tax which impose on goods and services/ Spending.
(a)Value added tax (VAT)
(b)Duties
(c)Vehicle excise duty
(d)Customs duties
(e)Council tax
(f)Business rates
(g)Stamp duties
Progressive
When the tax rates increases with the increase in income.
Income Tax % Total Tax
10000 10% 1000
20000 15% 3000
30000 20% 6000

Regressive
When the tax rates decreases with the increase in income.
Income Tax % Total Tax
10000 10% 1000
20000 8% 1600
30000 6% 1800

Proportional
When the tax rates remain the same at level of the income.
Income Tax % Total Tax
10000 10% 1000
20000 10% 2000
30000 10% 3000
 10 Budget (Follow Book Chapter-31)
The government’s spending and revenue plans for the next year.
Budget = Government Revenue - Government Expenditure
= 3000 - 5000
= -2000 (Deficit)

Budget Deficit
When the government expenditure is greater than the government revenue
Budget Surplus
When the government expenditure is less than the government revenue

From 2013 to 2014 budget deficit increase 5b to 10b. So worsen.

From 2014 to 2015 budget decreases 10b to 3b. So improved.

Source of Government Revenue/Income

(1)Taxation
Direct tax, Indirect tax
(2)Non Taxation
Fine, Privatization (Government ownership firm sell to individual ownership),
Registration fee
Source of Government of government Spending
(1)Infrastructure development (Road, Power supply, Water supply, Communication)
(2)Health care and education (3) Social welfare benefit (child benefit, old age pension,
unemployment benefit) (4) subsidy to firm (5) defense

11 Limitation of GDP as a measure of growth (Follow Book Chapter-25)

(1)Inflation (price level increase)
(2) Population change
(3) Statically errors
(4) The value of home produced goods
(5) The hidden economy
(6) GDP and living standards
(7) Negative externalities (pollution/ environment damage)

12 Function of Money (Follow Book Chapter-)

(1)A Medium of exchange
The main function of money is that it acts as a medium of exchange. This means that
money can be exchanged for goods and services when buyers and sellers trade.
(2)A store of value
This means that money can be stored for a period of time and used a later date. For
example money received today can be used in ten years time to make a purchase.
This encourages people to save.
(3)A Measure of value
Money is used to measure the value of goods and services. This means that
comparisons can be made between the different values of goods and services.
(4)Standard for deferred payments
This means that money can be used to settle a debt. Payment for some goods is
deferred. This means that goods are bought and then paid for at a later date. This is
because the seller is quite happy to accept money in the future as payment.
 13Redistribution of income (Follow Book Chapter-30)
Income inequality
Income inequality difference in income that exist between the different groups of earners
in society that is the gap between the rich and the poor

Absolute poverty
Absolute poverty where people do not have enough resources to meet all of their basic
human needs.

Relative poverty
Relative poverty poverty that is defined elative to existing living standard for the average
individual

Reasons for inequality

(1)Skills, valuable work experience and a good education (2) natural talent (3)
Unemployment (4) Own assets such as property, shares and capital will enjoy extra
income such as rent and interest.(5) Inheritance (6) less Competition

Reasons to reduce poverty and inequality

Meet basic needs
Raise living standard
Ethical reasons

Government intervention to reduce poverty and income inequality

(Govt policy)
Progressive taxation
Progressive
When the tax rates increases with the increase in income.
Income Tax % Total Tax
10000 10% 1000
20000 15% 3000
30000 20% 6000

That means rich people will pay more Tax

Redistribution through benefit payments
Example for Unemployment benefit, Child benefit, Old age pension

Investment in education and health care

Education development, Health care development