1. © Edco 2012. Positive Economics Chapter 24

2. © Edco 2012. Positive Economics Economic Objectives/ Aims of the Government Achieve full employment Control government finances Improve infrastructure Control price inflation Broaden the tax base Care for the environment Achieve sustainable economic growth

3. © Edco 2012. Positive Economics Economic Objectives/ Aims of the Government cont. Promote balanced regional development Create a just social environment/ensure equal distribution of wealth Maintain state services Stabilise the banking sector Achieve equilibrium of balance of payments

4. © Edco 2012. Positive Economics Economic Benefits of a Full Employment Economy in Ireland Economic Difficulties of a Full Employment Economy in Ireland Reduced social welfare bill Possible labour shortages Increased aggregate demand within the economy/economic growth Wage demands Increased standard of living Inflationary pressures Increased government tax revenues Pressure on the state’s infrastructure Increased investment Deterioration/loss of services

5. © Edco 2012. Positive Economics Governments can achieve economic growth by implementing the following strategies: Provide an economic infrastructure in which private industry can survive and flourish Adopt fiscal and monetary policies that stimulate private industry, e.g. low rate of taxation of corporation profits, low rate of interest on credit Promote government policies designed to encourage the private sector, e.g. grants and financing training schemes from public funds Sponsor state trading corporations

6. © Edco 2012. Positive Economics Positive Economic Consequences of Economic Growth Negative Economic Consequences of Economic Growth Increased employmentInflationary pressures Improved government financesLabour shortages Effect on balance of paymentsDemand for wage increases Improved standard of livingIncreased demand for imports Effects on migrationPressure in the housing market Investment opportunitiesPressure on state infrastructure Increased immigration/displacement of population

7. © Edco 2012. Positive Economics Positive Economic Consequences of an Economy in Decline Negative Economic Consequences of an Economy in Decline Lower InflationIncreased unemployment Labour shortages Falling government finances Falling demand for wage increasesLower standard of living Reduced demand for importsEffects on migration Less pressure in the housing market Investment opportunities Expectations of citizensFunding difficulties for infrastructure

8. © Edco 2012. Positive Economics Policies to Achieve Balanced Regional Development Decentralise the public service Invest in the infrastructure Develop/promote educational opportunities Ease planning restrictions Government spatial strategy Tax and other incentives to attract industry Invest in communications Improve access to and from other regions Provide leadership programmes

9. © Edco 2012. Positive Economics To ensure a high standard of living, generate economic growth and attract foreign direct investors, it is imperative that there is continued development in infrastructure in the country, such as: The development of road infrastructure The provision of public transport The development of airports and seaports A significant increase in the quality of telecommunications infrastructure Improve Infrastructure

10. © Edco 2012. Positive Economics Social policy refers to the provision of income and/or services for those who, for one reason or another, would find it difficult to provide for themselves if exposed to the full rigours of the market economy. Create a Just Social Policy/Ensure Equal Distribution of Wealth

11. © Edco 2012. Positive Economics Control Price Inflation/ Price Stability Stabilises the cost of living Prevents demands for wage increases Keeps Irish industry internationally competitive Loss of competitiveness: A situation where our goods abroad are less attractive to foreign buyers.

12. © Edco 2012. Positive Economics Positive Consequences of a Government Policy to Increase Public Service Charges Negative Consequences of a Government Policy to Increase Public Service Charges Less pressure to increase taxes or borrowing Increased cost of living More efficient use of servicesIncreased inflation Target the use of resources more economically Affects lower-income groups the most Pressure to improve quality of service Viability of partnership agreements Lower tax baseInequity/fairness Uses of revenue collectedHigher costs for business

13. © Edco 2012. Positive Economics Instruments in Achieving Economic Aims and Objectives Monetary policy Fiscal policy Exchange rate policy Direct intervention Deregulation Prices and incomes policy Economic planning

14. © Edco 2012. Positive Economics Monetary policy is actions by the European Central Bank that influence: – Money supply via changing the amount of money in circulation. – Interest rates via changing the ECB base rate on which all variable rates depend. – The availability of credit via changing the rules on issuing loans.

15. © Edco 2012. Positive Economics Fiscal policy is any action taken by the government that influences the timing, magnitude and structure of current revenue and expenditure. It is carried out by increasing or decreasing tax and increasing or decreasing government spending. Exchange rate policy is directly controlled by the ECB and refers to the devaluation (making the currency worth less) and revaluation (making the currency worth more) of the euro in terms of other currencies.

16. © Edco 2012. Positive Economics Direct intervention refers to the government’s ability to directly intervene in the economy in order to achieve its aims and objectives achieved by passing legislation and setting up semi-state bodies. Deregulation is regarded as a form of direct intervention and involves the government changing laws and practices that it deems detrimental to competition.

17. © Edco 2012. Positive Economics Prices and incomes policy is a method used by the government to control inflation by restraining prices and incomes. It is implemented by imposing wage freezes or strict limits on wage increases, setting maximum prices for certain essential items and government approval on price increases for companies.

18. © Edco 2012. Positive Economics Nationalisation means taking an industry or assets into public ownership by a government. Nationalisation

19. © Edco 2012. Positive Economics Economic Arguments in Favour of the Nationalisation of Banks Economic Arguments against the Nationalisation of Banks Stability to the economy/investor confidence Unnecessary state interference Availability of creditShareholders penalised Rationalisation of banking servicesIncreased taxation Employment/consumer protectionOpportunity costs Development of ethical banking practices Profit motive diminished Continued provision of banking services to the community/prevent foreign ownership Financial cost

20. © Edco 2012. Positive Economics Privatisation is used to describe the sale or transfer of public sector assets to the private sector. Privatisation

21. © Edco 2012. Positive Economics Economic Arguments in Favour of Privatisation Economic Arguments Against Privatisation Improved quality/choice of servicesLoss of non-profit-making services More competitive pricesStandards of service Continuity of supply Preference to meet shareholders’ demands Employment opportunities Loss of jobs/reduced job security/increased social welfare bill More rewards/incentives for innovation Curtailment in pay/pension increases/working conditions Revenue from sale may help reduce current/future taxes/opportunity cost Loss of valuable state resource Costs of sale Foreign ownership of Irish companies

22. © Edco 2012. Positive Economics Physiocrats (1750–1800) Agriculture was the only productive sector of the economy – the trade and industry sectors were sterile Free trade was favoured State intervention should be kept to a minimum Advocated a self-interest approach (laissez-faire economic system)

23. © Edco 2012. Positive Economics Produced Tableau Économique in 1785 (Economic Table), similar to what we now refer to as the circular flow of income. Quesnay’s analysis showed that agriculture was the only sector of society producing a surplus and the other sectors consumed what they produced. François Quesnay (1694–1774)

24. © Edco 2012. Positive Economics Law of diminishing returns in agriculture An advocate of non-governmental intervention in economic affairs Turgot suggests that the value of an item depends on its utility to the buyer Jacques Turgot (1727–81)