Economics: Explain the role of the government

in managing the economy and economic

growth.
IMMERSE ESSAY COMPETITION 2023

By Hiba Hassan
A government acts as a driving force and manager for a smooth operation and economic
development via the application of macroeconomic policies such as fiscal, monetary, and
supply-side.

Governments have specific functions as well as goals. They wish to attain what are known as
"macroeconomic goals," which include stable prices, high employment, a favorable balance of
payments situation, and sustainable economic growth. Depending on geopolitical, religious,
financial, and visionary circumstances, each government employs different macroeconomic
strategies to accomplish these objectives. The provision of public goods and services and
keeping stability are duties of the government as a significant economic agent of a country. The
level of government interference in the economy depends on the dominant economic system.
Unlike in a market economy, where the private sector will be more prominent, in a planned
economy, the government will play a significant role.

The supply-side policies are concerned with increasing the aggregate supply in the economy to
promote economic development by facilitating an increase in the quantity and quality of factors
of production. It is achieved by influencing taxation policies and increasing the country’s GDP
(Gross Domestic Product) through various reforms. Japan is considered a developed country
where its government invested in the education and healthcare sectors, as shown clearly in the
graph below, creating a healthy, literate, adept workforce that became the backbone of its
economic growth.1

Figure: 1 Government Healthcare Expenditure (Japan) (1900-2020) 2

Healthcare spending in Japan has increased. With a $39,048 GDP(per capita) (as of 2022), it is the third-largest economy
worldwide. 3
1 (United Nations, World economic situation and prospects 2022 | Department of Economic and Social Affairs 2022)
2(Government health expenditure as a share of GDP 2022)
3 (Seth, Top 15 countries by GDP in 2022, 2022)
4 (Estimated impact of the American Recovery and Reinvestment Act on ... - CBO 2012:Page 1)
5 (Twitchett, The role of the Government 1998)
6 (DATA, Government health expenditure as a share of GDP 2022)
Monetary policy aims to control the money supply in the economy by influencing interest rates
to meet employment and price stability goals. Fiscal policy alludes to the utilization of
government expenditures and taxation arrangements to impact economic conditions. An example
of monetary policy is how the USA dealt with the Great Recession(2007-2009). In response to
the crisis, Federal Reserve (Central Bank USA) reduced interest rates from 5.25% to 0% by 2008
to reduce the cost of borrowing. The government also increased its expenditure totaling $831
billion, on education, unemployment benefits, and infrastructure.4

Furthermore, efficient resource usage and planning reinforce economic growth in a nation.
China, one of the world's top economies, is the best example of effectual planning on the part of
the necessary authorities.5 Occasionally, governments have to intervene in the market to prevent
consumer exploitation, redistribute income, and elevate the economy.

A significant component of economic growth is the balance of payments(BOP). The government

must ensure that the balance of payments is satisfactory. Exports of low-value goods while
importing capital goods will result in a high deficit of BOP. One of the prime instances is
Pakistan, which relies on exporting low-value agricultural goods while importing high-value
machinery and therefore had a deficit of $12.26 billion in 2021. 6 To avoid this, governments
should diversify their export range and control imports by implementing policies that support
strategic industries.

Good governance is imperative for economic stability and growth. By establishing strategies
following comprehensive planning, governments can play their roles in managing a stable
economic environment conducive to fostering strong and sustainable economic growth.

1 (United Nations, World economic situation and prospects 2022 | Department of Economic and Social Affairs 2022)
2(Government health expenditure as a share of GDP 2022)
3 (Seth, Top 15 countries by GDP in 2022, 2022)
4 (Estimated impact of the American Recovery and Reinvestment Act on ... - CBO 2012:Page 1)
5 (Twitchett, The role of the Government 1998)
6 (DATA, Government health expenditure as a share of GDP 2022)
 BIBLIOGRAPHY

Bamford, C. G., & Grant, S. (2021). Cambridge International AS & A Level Economics.

Cambridge, Massachusetts: Cambridge University Press.

Commonwealth Parliament, C. (2013, November 4). The tools of macroeconomic policy-A short
primer.
https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pub
s/BriefingBook44p/MacroeconomicPolicy (Accessed 21 December 2022)

Estimated impact of the American Recovery and Reinvestment Act on - CBO. (2012, February).
https://www.cbo.gov/sites/default/files/cbofiles/attachments/02-22-ARRA.pdf (Accessed 21 November
2022)

IMF (Ed.). Current account balance (BOP, current US$) - Pakistan

https://data.worldbank.org/indicator/BN.CAB.XOKA.CD?locations=PK (Accessed 21 December
2022)

Nations, U. (2022, January 13). World economic situation and prospects 2022 | Department of
Economic and Social Affairs. Retrieved December 22, 2022, from
https://www.un.org/development/desa/dpad/publication/world-economic-situation-and-prospects-20
22/ (Accessed 21 December 2022)

Seth (Ed.). (2022, April 26). Top 15 countries by GDP in 2022.

https://globalpeoservices.com/top-15-countries-by-gdp-in-2022/ (Accessed 21 December 2022)

Twitchett, D. C. (Ed.). (1998, October). The role of the Government.

https://www.britannica.com/place/China/The-role-of-the-government (Accessed 21 December
2022)

1 (United Nations, World economic situation and prospects 2022 | Department of Economic and Social Affairs 2022)
2(Government health expenditure as a share of GDP 2022)
3 (Seth, Top 15 countries by GDP in 2022, 2022)
4 (Estimated impact of the American Recovery and Reinvestment Act on ... - CBO 2012:Page 1)
5 (Twitchett, The role of the Government 1998)
6 (DATA, Government health expenditure as a share of GDP 2022)