Role of Government in an Economy

• Acts as a producer - produces public goods at an affordable price, provides basic services

• Government acts as an employer in different sectors of the economy

• Acts as a consumer - spend in the country, purchases FOPs to produce goods as well and purchases finished goods. To be able to provide different facilities to the people, the government also needs to act as a consumer.

Public Spending

1. Current expenditure - on purchasing raw materials and paying salary of government or public sector workers

2. Capital expenditure - spending based on building fixed capital. Government investments in long term fixed assets such as roads, schools, hospitals, dams.

Public expenditure - made by government

• Not secretive in nature

• Can be debated in the parliament

• Spend first, think about how to recover money later

Private expenditure - expenditure made by individuals

• Secretive in nature

• First income is looked at then spending takes place

Role as a lawmaker and regulator

Set price floors, price ceilings for certain goods to regulate demand and stop exploitation of consumers. Governments will set and enforce laws and regulations that govern the way people and firms should behave from laws governing murder and other violent acts. Markets that would otherwise produce outcomes considered socially or economically undesirable will often be regulated by governments through price controls and quality and safety control and other productive practices.

Tax collector and settler

Tax is a major source of revenue for the government and thus governments must determine what taxes should be paid and by whom and also must ensure the taxes are collected. Most tax goes to raising public revenue but some taxes may be used to control what and how much consumers buy.

Assume the role of a provider

Provide certain benefits to the people (underprivileged) for free. People on low incomes may be provided free or low cost housing and travel, subsidized dental care, etc.

Roles differ at different levels

Local, regional and national. The central government of a country is responsible for

• managing the nation's currency

• maintaining diplomatic and trading relationships with other countries

• negotiating international treaties

• representing the interests of their countries in global organisations

Local and regional governments are responsible for low level decision making on issues that affect towns and cities.