Economics functions of the Gov.

Taxation Objectives of taxation

Adjust allocation of resources
• To alter the composition of the domestic
output
Assist the private sector
• To ensure economic stabilization (control
inflation & unemployment)
Create a business environment (encourages
competition)
• Increase efficiency in utilizing resources ad
produce better quality products
Redistribute income and wealth among the
population
• Control income disparity (through taxation
and transfer payments)
Provide a legal framework and a social framework
• For effective operation of an economy
Features of a tax:
• A compulsory payment
• Comprises regular and periodical payments
• Involves penalty for non-payment
• Impose in the general interest of the nation
Types of taxes
1. Direct (tax paid by the person on
whom it is imposed which cannot be
passed on to another person)
2. Indirect (burden of tax can be passed
on to another person)
• Income
• Important source of gov income
• Equitable distribution of income
• Reduces inequality of income (eg. income tax
& property tax)
• Regulation of harmful consumption
• Taxation imposed on goods (cigg & alcohol) to
restrain people from consuming
• Regulation of Foreign Trade
• Tax imposed on imported goods to protect
local industries/infant industries
• Conservation of resources
• Tax imposed on scarce resources (coal &
petroleum) to increase price and discourage
exports.

Balanced Budget
Types of budgets Role of Government
Gov expenditure = total revenue
Surplus Budget
Total revenue > gov expenditure
Deficit Budget Types of tax structure
Gov expenditure > total revenue • Proportional tax
• Tax imposed at the same rate for all income levels
Government Revenue •Progressive tax
Sources of GR • Tax rate which increases along with income
Tax revenue • To obtain revenue to help the poor
Tax : compulsory contribution by an indv or a firm to the gov to be used in •Regressive tax
the common interest of the economy. • Tax rate which falls along with an increase in
Direct tax = indv income tax, stamp duties, petroleum income tax income
Indirect tax = import duties, excise duties, sales tax • High income, low % of tax
Non-tax revenue
Revenues which arise from other sources beside tax
Eg. licenses & permits, petroleum royalty, interest & returns on investment,
fees & penalties
Non-revenue receipts
Include refunds of expenditure and receipts from the gov agencies
 Government expenditure
2 types of gov expenditure:-
1. Gov Operating Expenditure
• Gov exp allocated to cover operating and
administering expenses of gov departments
• Eg. emoluments, debts, service charges
2. Gov Development Expenditure
• Gov exp for investment purposes to improve
facilities in the basic physical infrastructure.
• To boost the economic growth
• Defense and security
• Comprise agriculture and rural
development, transport, public
utilities. Includes education, health,
housing
• Social services
• Includes education, health, housing
• General administration
• LHDN, JPA, Ministry of foreign affairs
Public debt
 The debt which a gov owes to its subjects or to the nationals
of other countries
Sources of Public Debt
Internal
• Borrow from citizens (sale of securities, bonds & save
cert)
• Borrow from financial institution
• Loans from Central Bank
• Loans from commercial bank
External
• International Money Market (Paris, London)
• Currency loans from foreign government (USA, UK)
• Loans from international financial institutions (IMF)
Role of Government
Money Attributes / Qualities of money Supply of money
1. Acceptability
Definition : Anything that acts as a medium
2. Portability  Controlled by Bank Negara Malaysia (BNM)
of exchange  Independent of interest rates
3. Durability
Evolution of money 4. Divisibility  Depends on the currency issued by central bank and
1. Commodity money 5. Stability policy on credit creation
2. Metallic money 6. Relative scarcity  The methods use to measure supply of money call:-
3. Paper money o M1: money which can be directly used for
4. Bank money transaction ( currency/ FM, checkable deposits/
5. Plastic money
demand deposits, travellers cheques)
Function Of Money o M2: broader definition of money consists of M1 and
1. Medium of exchange near money ( M1, saving acc in comm banks, fixed
- Any commodity that is generally accepted by people in Money and depo acc in comm banks, NCD, Repo, BNM cert)
exchange for goods and services.
- People accept money as medium of exchange eliminate banking o M3: money supply which is the broadest in
definitions ( M2-M1 plus near monies, saving and
the inconvenience.
fixed depo accs in other FI)
2. Measure of value of account
- Serves as a unit of measurement Types of Money
- It becomes the value of all goods and services exchanged
in the economy are measured and expressed. a) Commodity money Three main banking system
- Monetary unit as yardstick - Any item that has its own value in Malaysia
- Eg. price tag - Used as means of payment
1. Banking institutions
- Eg. tobacco/cowrie shells etc.
3. Store of value - Central banks
b) Fiat money
- Commodity that can be held in order to enable people - Commercial banks
- Any item that government declared as money
to buy and sell at different times and different places. 2. Non-bank financial
- Money can be held in reserves - FM (currency) = coins + paper money
institutions
c) Legal tender
- Islamic bankings
4. Standard of deferred payment - Government approves to be accepted as means
- Serves as a unit or standard of deferred payment or a - Investment banks
of payment/settling debt
unit in terms of which all future payments are expressed. - Discount houses
- Eg. Malaysia = RM, Indonesia = Rupiah
- Possible to make contract to exchange good or settle 3. Non-bank financial
d) Token money
debt in future. intermediaries
- Depends on purchasing power - Money that has lower metallic value that its face
- Development financial
value
institution
e) Demand deposits
- Employee provident fund
- Money that is transferable by way of cheques
- Known as bank deposits/ current accounts.

Methods to measure supply of
money
M1 = Currency + checkable deposits + travellers cheque
M2 = M1 + Savings and fixed depo in comm banks + NCD
+ Repo + BNM Cert
Near money (Quasi Money) = M2 - M1
M3 = M2 + Savings and fixed depo in other FI
Broad near money (Quasi Money) = M3 – M1
Central Bank
- An important financial institution in
every country
- Plays active role in implementing
government’s economic policy
- In Malaysia, it is known as Bank
Negara Malaysia (BNM) and is
controlled by the Malaysian
Government
Commercial banks
Functions of Commercial Banks
- An institution that is owned by the
 Accepting deposits
private sector and is a profit-making
o Depends on such deposits from their
institution.
- customer
Get their income by providing bank
o Eg. demand, saving, fixed deposits
services
-  Provide loans and advances
Most of their profits come from
o Give loans (housing, car, education
loans and investment
and etc)
o Earns profits through direct loans,
overdraft and discounting bills of
exchange)
 Provides other banking services and facilities
Money and o Enable fund transfer,provide ATM,
banking facilitate bill payments, provide safe
deposits boxes.
Functions of Central Bank
 Issue currency and keeping reserves
o Central bank’s fundamental function
o Safeguard the value of currency issued
 Act as banker & financial advisor to the Government
o BNM keeps the gov principal bank accounts, receive taxes and other revenues,
make payment for gov expenditure
o Manage national debts, sells bonds & redeem matured treasury bills
 Act as banker to to other banks
o Keeps cash reserves of commercial banks
o As custodian of the reserves that support its credit and banking system
o Other banks keep deposit with the central bank
o Act as lender as a last resort
 Promote monetary stability and financial structure
o Responsible for achieving high levels of employment, maintaining price stability and
reasonable balance
o Use quantitative and qualitative measures to ensure monetary stability
 Act as holder of country’s stock of gold and foreign currency reserves
o Managing country foreign exchange reserves
o Implements gov exchange rate and balance of payments policy 
 Business Cycle
Definition:
Business cycle refers to wave-like
fluctuations in aggregate economic
activities particularly in national
income, employment and output.
Characteristics of business
cycle
- An economy-wide
phenomenon
- A wave-like movements
in economic activity
- Business fluctuations
that occur periodically
and tend to be recurrent
in nature
- Expansion and
contraction are self-
reinforcing and
cumulative in effect
- Upward and downward
movements
Unemployment
Macroeconomic Problem  Labour Force
o People from the total population aged 15 to
Phases of business cycle 64 years who are either employed or
unemployed but actively seeking for jobs
Peak/ Boom (prosperity period)
 Unemployment
- The period where the economy is at full o Labour force participants being available
employment and willing to work but unable to find jobs
- Maximum output and lowest unemployment rate  Labour force participation rate
o Fraction of the labour force to the total
Recession working age group population (percentage)
Calculation
- The period where real GDP declines
LFPR = (Labour force / working age
- Output decreases and unemployment rate
population) x 100%
increases  Unemployment rate
- A deep and long recession is known as o The percentage of labour force that is
depression. unemployed and actively seeking jobs
Calculation:
Trough
Unemployment rate = (num of
- The period where the output is minimum and unemployed / labour force) x 100%
unemployment rate is maximum  Discouraged worker
o An individual who wants to work but has
Recovery been unsuccessful for a long period in
finding a job and has given up seeking jobs.
- The period where the output level increases and o Excluded from labour force
unemployment rate declines
 Underemployment
o An individual who works part-time or who are in jobs below their capability but who are
seeking full-time employment.
o Not measure under unemployment rate
 Full employment
o The situation in the economy where all available resources are employed to produce goods
and services
o Does not mean 100% of working labour force- some people voluntarily unemployed
o Full unemployment means unemployment rate = to all types of unemployment except cylical
 Types of Unemployment
 Frictional unemployment
o Occurs when people are in between jobs,
entering or reentering labour force
o Job seekers temporarily unemployed for a
short period
o Voluntarily quit their jobs / fresh graduates
 Cyclical unemployment
o Occurs when there is lack of jobs because
of downswing in business cycle or a
recession
o Workers are laid off
o Serious concern because the recovery takes
several years
o Not included in full employment
 Structural unemployment
o Arises due to structural changes in the
o
economy of a country
Composition of labour force does not
respond quickly to meet changing consumer
demands, technological advancements or
competition from imported goods and etc.
o Workers skills , talent & experience – out of
date.
 Seasonal unemployment
o Arises due to seasonal variation in the
activities of particular industries
o Caused by climatic changes, changes in
fashion trends or the inherent nature of the
industries itself.
o
Eg. fisherman
Impact of Unemployment
1. Effects on individual & society
a. Loss of income & self respect – face financial problems, lose self
respect and respect from immediate family & friends
b. Loss of job skills – Due to lack application. Retraining may be
expensive.
c. Social & political problems – turn to alcohol/ drugs or crime life.
Crime life high of unemployment rate
2. Effects on the economy
- GNP gap one way to measure .
- The higher unemployment rate, the greater GNP gap.
- Government loss revenue – taxes.
- Unemployment benefit – increase government expenditure.
- Reduce development activities – slow economic growth and lead to
depression.
Macroeconomic Problem
Inflation
Definitions
- Inflation
o A continuous increase in the general price level of
goods and services in the economy
- Deflation
o A decrease in the general price level of goods and
services in the economy
- Stagflation
o The condition in an economy where it experiences
high unemployment and rapid inflation
simultaneously.
- Disinflation
o A reduction in the rate of inflation
 Measures of Inflation Causes of inflation

Calculation Demand pull inflation

Inflation Rate = [ (CPI this year- CPI previous - Occurs when AD exceeds AS
year)/ CPI previous year ] x 100% - Rise in AD – rise in demand, increase in government expenditure, rise
investment by firms, increase in demand for the country’s export

Cost push inflation

Effects of inflation
- An increase in the general price level associated with an increase in the
- Inflation affects the consumer’s real cost of production.
disposable income and their expenditure
patterns
- Money value has fallen and lesser good can
be purchased Macroeconomic Problem
 
a) Distribution of income
o Some group are better than others,
causes inequality to those who losse
from inflation (fixed income people
and etc)
b) Savings
o People save less and invest in
houses and land
c) Productions
o Producers make profit – increase
level of production and investment
o Create more job
d) Balance of trade
o Deficit balance of trade – import
products are cheaper = import
increases,

o Price of domestic products increases

= reduction in demand