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Government’s Role in the Economy Essay

The system of internal calculations allows to analyze the economic situation of the country. Various indicators that form the internal calculation system allow to measure the volume of production at any given time and to disclose factors that directly determine the functioning of the economy. Thus, for example, comparing the levels of GDP for the definite period of time, economists can construct a curve describing the functioning of the economy in the long run, as well as to determine how its rise or decline will affect the rate of national growth.

The internal income calculation provides information, which is the basis for the formation and implementation of public policies aimed at improving the functioning of the economy. The economy without such calculations would be based on an intuition. Thus, national income accounts provide the tables of economic health of society and allow reasonably determine the policies that would help to improve it. The most important indicator of economic conditions is the gross domestic product (GDP).The GDP is defined as the total market value of products and services produced in the United State in a given year (Amadeo, 2009).

The GDP is reported quarterly by the Bureau of Economic Analysis. Economic growth is defined as the percentage of change in the GDP from one period to another. Businesses tend to monitor changes in economic growth, which may signal a change in the demand for their products or services. When there is a rise in the GDP, then there is an expansion in the business cycle of the country. When the GDP growth slows or declines, then the business cycle goes into a recession and depression. There are many negative effects on businesses when GDP growth declines such as high unemployment rate, increased business bankruptcy, and overall drop in living standards (Amadeo, 2009).

Since the periodic rises and falls in the economy cause different kinds of disruptions to businesses, the government tries to minimize such impacts. The government uses fiscal policy to keep the economy stable. Fiscal policy consists of the decisions taken by the government authorities to change the government spending and taxation. Its main tasks are the following: smoothing the fluctuations in the economic cycle, ensuring the sustainable economic growth, achieving a high level of employment, and inflation reducing. Depending on the purpose, it is used either a stimulating or restraining fiscal policy. In times of recession, it is needed to increase government spending, lower taxes, or do both, that is conduct the stimulating fiscal policy. In the short run, it softens the business cycle. In the long run, tax cuts could lead to economic growth.

The restraining fiscal policy is used in order to decrease inflation. It reduces government spending, increases taxes or a combination of other measures. In the short run, the restraining fiscal policy allows to reduce an aggregate demand and thereby helps to lower inflation. In the long run, it could lead to declining production and rising unemployment (Pettinger, 2008).

Taxes are necessary, because with their help the government influences on many economic and social processes. Tax rates help to promote or inhibit certain economic activities, guide the development of any industries and regions, regulate the amount of funds and currency, influence the investment activities of entrepreneurs, the operation of the securities market, the balance between the aggregate demand and the aggregate supply.

Accrued through the taxation money, the government spends on the building of highways, large business sites, public facilities (hospitals, schools, kindergartens, swimming pools, and libraries), on the maintenance of science and environmental protection. Part of the funds goes to health and development of medicine: to improve the production of medical equipment, pharmacy, health protection of mother and child, and medical research. Significant part of the money goes to development of general secondary, special and higher education, including the salaries of teachers and scholarships for students. As well, the government provides a home, paying pensions and disability benefits. The government helps the sick and disabled members of society, maintain a state apparatus, army and law enforcement authorities. The role of budgeting in the state economy is significant. It is part of the money that is controlled by the government, so with the help of the budget money the government is able to intervene in market mechanisms. Secondly, the budget is a way of accumulation of money to deal with large, global economic projects. Thirdly, the availability of the budget allows to solve complex social problems as poverty, unemployment, hunger, literacy, health of the nation, and etc.

Bibliography

  • Amadeo, K. (2009). What Exactly IS the U.S. Economy? Retrieved 25 May, 2009, from http://useconomy.about.com/od/grossdomesticproduct/p/GDP.htm
  • Pettinger, R. (2008). US Fiscal Policy – Will It Help Economy? Retrieved May 25, 2009, from http://ezinearticles.com/?US-Fiscal-Policy-Will-It-Help-Economy?&id=992667
June 27, 2012Tags: , ,