The Major Functions Of Government

3. • Government
• Protective government
• Limited government
• Leviathan (big government)
• Proper sphere of government
• The size of government

4. • ALLOCATION FUNCTION. The provision of public goods, or the
process by which total resource use is divided between private
and public goods.
• DISTRIBUTION FUNCTION. Adjustment of the distribution of
income and wealth to assure conformance with what society
considers a “fair” or “just” state of distribution, here referred to
as the distribution function.
• STABILIZATION FUNCTION. The use of fiscal policy as a means
of maintaining high employment, a reasonable degree of price
level stability, and an appropriate rate of economic growth.
There is also the objective of stability in the balance of
payments. We refer to all these objectives as the stabilization
function.

5. • What is government? Why do we need government?
• What are the main functions of the government?
• What is economic stability? How does government stabilize
economy?
• How can government alleviate poverty?
• What is redistribution policy?

7. • The goal of full employment
• The goal of price stability
• The goal of economic growth and development
• The goal of just and equitible income distribution

8. • FISCAL POLICY. The use of taxation and government expenditures to effect
changes in aggregate economic variables and to realize the goals of
economic policy.
• FULL EMPLOYMENT. Full employment is a situation in which the optimal level
of employment is reached with no underemployment and no excessive
unemployment; a situation in which all workers who desire employment at
the current real wage are employed.
• PRICE STABILITY. A situation in which there is no change in the overall price
level- the average price of all goods, services and resources.
• ECONOMIC GROWTH. Economic growth is an increase in real GNP or
real GNP per person through time.
• INCOME DISTRIBUTION. The distribution of GNP among people.
• SUSTAINABLE ECONOMIC DEVELOPMENT. Sustainable development can
be defined as an increase in human well-being that is not later reversed:
development that is lasting

9. • What is economic policy? What are the main economic policy
instruments?
• Whar are automatic stabilizers?
• Explain inflationary gap on a graph.
• Explain keynesian fiscal policy dealing with a recession? And
display a deflationary gap on a graph.
• What is restrictive fiscal policy?
• What is expansionary fiscal policy?

10. THE TYPES OF
UNEMPLOYMENT

11. • Open Unemployment
• Hidden Unemployment
• Frictional Unemployment
• Structural Unemployment
• Technological Unemployment
• Cyclical Unemployment

12. • UNEMPLOYMENT OF RESOURCES. A situation in which
human or nonhuman resources that can be used in production
are not so used.
• UNEMPLOYMENT RATE. The number of unemployed people,
expressed as a percentage of the labor force.
• LABOR FORCE. It is the number of people holding or
seeking jobs.
• CYCLICAL UNEMPLOYMENT. Cycical unemployment rises
during recessions and falls as proeperity is restored.
• FRICTIONAL EMPLOYMENT. Unemployment resulting from the
temporary job loss.
• STRUCTURAL UNEMPLOYMENT. Refers to workers who have
lost their jobs because they have been displaced by
automation, because their skills are no longer in demand, or
for similar reasons.

13. • What are the most harmful effects of unemployment?
• What is full employment?
• How can we measure empleyment and unempleyment?
• What are the causes of unemployment?
• Do you think that full employment is a sound policy objective?

14. TYPES OF ECONOMIC
INSTABILITY

15. • Business cycle
• Inflation
• Deflation
• Depression
• Recession
• Stagnation
• Stagflation
• Taxflation

16. • BUSINESS CYCLES. Recurrent fluctuations in the level of business activity, such as prices,
unemployment and economic growth rate.
• COUNTERCYCLICAL POLICY. Macroeconomic policy to balance the business cycles.
• STAGFLATION. The combination of stagnating growth and high inflation is known as
stagflation.
• DEFLATION. A sustained decrease in the general price level.
• INFLATION. A sustained increase in the general price level.
• DEMAND-PULL INFLATION. Increases ın the price level caused by increases in the demnad
for products and resources.
• COST-PUSH INFLATION. Increases in the price level caused by monopoly and/or union
pressure or by decreases in the supply of products or resources.
• CREEPING INFLATION. Refers to an inflation that proceeds for a long time at a moderate
and fairly steady pace.
• GALLOPING INFLATION. It refers to an inflation that proceeds at an exceptionally high
rate.
• RECESSION. A period during which the total output of the economy declines.
• DEPRESSION. A severe, persistent contraction in business activity that may last for several
years and result in 15 percent or more unemployment.

17. • What is the Keynesian of the business cycle? What solution to
the business cycle is suggested by the Keynesian theory?
• Explain the monetarist view of the business cycle? What do the
monetarists believe to be the major source of economic
instability?

18. THE DISTRIBUTION OF
INCOME

19. • Personal Income Distribution
• Functional Income Distribution
• Sectoral Income Distribution
• Regional Income Distribution
• Ex ante distribution
• Ex post distribution
• Absolute poverty
• Relative poverty
• Lorenz curve
• Negative income tax
• Affirmative action

20. • PRIMARY INCOME DISTRIBUTION. The primary (market)
income distribution is the distrubution of incomes produced by
factor markets and asset ownership before taxes and
transfers. It is also called as ex ante distribution.
• SECONDARY INCOME DISTRIBUTION. It is the income
distribution after taxes and transfers. It may be called as ex
ante distribution as well.
• FUNCTIONAL DISTRIBUTION OF INCOME. The division of
income among factors of production, especially between
capital and labor.
• PERSONAL DISTRIBUTION OF INCOME. The way total
personal income is divided up among households or income
classes.

21. • Inheritance
• Work and leisure choices
• Capability = ability
• Discrimination in jobs
• Economic system
• Schooling and other types of training
• Work experience
• Luck
• Risk taking

22. • What is poverty? Explain the concepts of absolute and relative
poverty?
• What do you think would be the major effects of the negative
income tax?
• What are the causes of income inequalities?
• What is poverty line?
• What measures should be taken in order to mitigate poverty?

23. PUBLIC FINANCE
(MAJOR SOURCES OF
GOVERNMENT REVENUES)

24. • Taxes
• User Charges (fee, tuition, tolls etc.)
• Borrowing (Domestic borrowing and external borrowing)
• Money Creation (1. Issuance of paper money 2. Borrowing from
the Central Bank.)
• Revenues from public utilities (electricity, water, gas production
units.)
• Revenues from public economic enterprises etc.
• Fines
• Social security contributons
• Fiscal monopolies etc.

25. • It is compulsory.
• Taxes are paid as a result of government sovereignty.
• There is no exact correlation between the amount paid and
the value of the public services from which the taxpayer
benefits.
• Taxes are paid in cash by individuals, corporations and
other organizatons to the government.
• Taxes finance government expenditures.

26. • Criterion of fairness and equity.
• Horizontal Equity and Vertical Equity
• Criterion of economic efficiency.
• Criterion of Simplicity.
• Criterion of Flexibility.
• Criterion of International Harmonization.
• Criterion of Changes in Tax Rules (Binding Principle)
• Criterion of Certainity
• Criterion of Enforceability
• Criterion of Convenience

27. • Equality
• Certainity
• Convenience of payment
• Economy in collection.

28. • The distribution of tax burden shoul be equitable. Everyone
should be made to pay his “fair share.”
• Taxes should be chosen so as to minimize interference with
economic decisions in otherwise efficient markets.
Imposition of “excess burdens” should be minimized.
• Tax system should permit efficient and nonarbitrary
administration and it should be understandable to the tax
payer.
• Administration and compliance cost should be as low as is
compatible with the other objectives.

29. 1. Taxes on Goods and Services
(taxes on the production, sale, transfer of goods and services)
A. Value Added Tax
B. Excise Tax
C. Sales Taxes
D. Fiscal Monopolies
E. Customs and Import Duties

30. A. Taxes paid by households in respect of motor vehicles :Motor
Vechicles Tax
B. Taxes paid by others in respect of motor vehicles: Motor
Vehicles Purchase Tax

31. A. Personal Income tax
B. Corporate Income Tax
C. Capital Gains Tax

32. 4. Payroll Taxes. (Taxes on employers based on payroll or
manpower.)
5. Taxes on wealth and immoveable property
A. Property Tax or Real Estate Tax
B. Inheritance and Gift Tax

33. Two major approaches to tax equity involve the benefit and ability-
to-pay principles.
• Benefit Principle
• Ability-to-Pay Principle
• BENEFIT PRINCIPLE. According to the benefit principle, individuals
who receive the most benefits from government-produced goods
should pay the most for their production.
• ABILITY-TO-PAY PRINCIPLE. Accordint to this principle, individuals
who are more able to pay should pay more taxes than those less
able.
• HORIZANTAL EQUITY. It requires that equal tax treatment should be
applied to the people in equal positions.
• VERTICAL EQUITY. It requires that different tax treatment shold be
applied to the people in different positions.

34. • TAX SHIFTING. The shifting of a tax is the recovery by the
taxpayers of any part of their tax payment through pricing
adjustments.
• TAX INCIDENCE. Tax incidence is the ultimate resting of any
part of a tax upon some economic class who cannot shift it
further.

35. • Payment
• Impact
• Shifting
• Incidence

36. • Forward Shifting
• Backward Shifting
• Statutory Shifting
• Absolute Shifting
• Differential Shifting

37. • A tax, the burden of which cannot be easily shifted or passed
on to some other person by the person on whom it is levied.
Personal income, inheritance and poll taxes are examples of
direct taxes.
• INDIRECT TAX. A tax, the burden of which can be fairly readily
shifted or passed on to someone else by the person who is
required by law to pay the tax to the government. Most excise
taxes are indirect taxes.

38. 1.The Micro-Economic Effects Of Taxes
• On work effort and labor supply
• On savings.
• On investment
• On consumption
2.The Macro-Economic Effects Of Taxes
• On economic growth and development
• On resource allocation
• On poverty and income distribution
• On employment
• On price stability
• On government revenues

39. An income tax may reduce or increase work effort, depending on
whether the substitution effect outweighs the income effect, or vice
versa

40. • Household saving as a percentage of income (the average
propensity to save) rises with income, but the marginal
propensity to save rises less. Since differences in the savings
impact of more or less progressive taxes depend on
differences in the marginal propensities, they are less
important than one might expect.
• Income taxes may also affect saving because they reduce
the net rate of return.
• A large part of the corporation tax tends to be reflected in
reduced corporate saving.

41. • Taxes tend to reduce the level of investment by reducing the
net rate of return.
• Investment credit may be used to stimulate investment.

42. PUBLIC FINANCE
(GOVERNMENT
SPENDING)

43. • Exhaustive Expenditures
• Nonexhaustive Expenditures
• Investment Expenditures
• Current Expenditures (Personnel Expenditures)
• Transfer Expenditures
• Social Expenditures

44. • General services
• National defense
• Foreign affairs
• Justice
• Education
• Health
• Welfare spending
• (transfers to poors, etc.)
• Police and fire protection
• Highways
• Housing and sanitation
• Transportation
• Energy
• Postal and telecommunication
• Pensions and social security
• Interest on general debt
• General administrative expenditures
• Rural development
• Culture/Tourism etc

45. GROWTH OF
GOVERNMENT

46. • Government purchases of goods and services as a percentage
of GNP
• Government employment as a percentage of total work force.
• Total government expenditures including transfer payments as a
percentage of GNP
• Total taxes as a percentage of GNP

47. • Increased Demand for Services by People.
• Population Growth
• Growth in real Per capita income.
• Need for Income Redistribution
• A Desire to Supply More Government Services.
• Politician’s Vote Maximizing Behaviour
• Bureaucrat’s Budget Maximizing Behaviour
• Special Interest Group’s “Rent Seeking” Behaviour
• Voters Utility Maximizing Behaviour
• Inefficiency in the Public Sector
• War and Increasing Defense Spending
• Urbanization

48. • German economist Adolph Wagner advanced his “ law ofever-
increasing public expenditures.” He based his law on “the
pressure for social progress and resulting changes in the
relative spheres of private and public economy.

49. According to Peacock and Wiseman, every few decades the
necessity to finance a war leads to a broadening of
governmnet growth.

50. MARKET FAILURE

51. • Lack of competition
• Externalities
• Public goods
• Economies of Scale and Natural Monopoly
• Economic Instability
• Poverty and need for fair income distribution
• Allocative inefficiency
• Lack of economic growth and development
• --------------------------

52. • Market economies suffer from severe business cycles.
• The market does not distrubute income quite equally.
• Where markets are monopolized, they allocate resources
inefficiently.
• The market can not deal properly with the negative
externalities.
• Market can not provide public goods, such as national
defense.
• ----------------------------------

53. • POSITIVE EXTERNALITY. A positive externality is a benefit received by a
person as a result of the actions of others.
• NEGATIVE EXTERNALITY. A negative externality is a cost received by a
person as a result of the actions of others.
• COLLECTIVE CONSUMPTION GOOD. It is a good for which consumption
by a consumer will not reduce the consumption of any other consumer.
• RENT SEEKING. It refers to unproductive activity in the pursuit of
economic profit.
• FREE RIDER. An individual who is able to receive the benefits of a good
and service without paying for it.
• COST-BENEFIT ANALYSIS. A process used to estimate the net benefits of
a good or project, particularly goods and services proviede by
government.

54. • Which economic activities should be undertaken by government?
Why?
• Which economic activities should be undertaken by private
sector? Why?
• Give some examples of public goods.
• Why is an externality considered a market failure?
• Explain the major types of public goods.

55. GOVERNMENTAL FAILURE

56. • The rational voter ignoranance: Voter ignorance and
inability to recognize the costs and benefists fully.
• The rational voter irrelavance
• The power of special interests. rent seeking
• Political myopia (Shortsightedness effect)
• Inefficinecy in the Public Sector /Little entrepreneurial
efficiency )
• Logrollling
• Imprecision in the reflection of consumer preferences
• Common ownership (Tragedy of Commons)

57. • Why does government fail? What are the sources of
governmental failure?
• Is market better than government?
• What are the costs of excessive government?
• What is optimal government?
• Is less government best? Or is big government best?

58. GLOBALIZATION

59. • Economic globalization
• Political globalization
• Cultural globalization
• Regionalization
• Regional trade blocs
• Global village
• Liberalization

60. • Globalization means the increased integration of world markets of
goods, services and capital.
• Global economic integration -the widening and intensifying of links
between the economies of industrial and developing countries- has
accelerated rapidly. Underpining the intensification of these links -which
include trade, finance, investment, technology, and migration- are several
structural factors. The progressive liberalization of trade policies
negotiated during consecutive rounds of trade talks -culminating in the
Uruguay Round- has lowered tariffs and stimulated trade. The
integration of the world economy through trade has been reinforced by
increases in the private capital flows, particularly in the 1990s. And
technological advances in transport and telecommunications have
lowered the cost of operating globally and provided developing
countries with new opportunities to benefit from the growing world
economy.

61. • Openning of trade barriers (tariffs, quotas etc.)
• Trade agreements
• Regional economic integration (EU, NAFTA, APEC etc.)
• Export growth per capita
• International trade as a share of GDP
• Foreign direct investment as a share of GDP
• International capital flow

62. COMPETITIVENESS

63. • Competition
• Economic growth
• Openness
• Financial markets
• Quality

64. • Competitiveness signifies the ability of a national economy
to achieve sustained high rates of economic growth, as
measured by the annual change in gross domestic product
per person.
• Competitiveness depends very much upon the ability of a
nation to create an environment which favors sustained
value added creation. The term “sustained” is very
important. It emphasizes the long term dimension of
competitiveness.

65. • Openness of an economy to international trade and finance (International
trade, foreign investment, openness of financial markets.)
• The Role of Government. (Size of government, taxation, economic intervention,
bureaucracy etc.)
• Development of Financial Markets. (Cost of capital, interest rates, saving and
investment ratios, credibility and risk rating)
• Quality Infrastructure. (Transport, telecommunications, power etc.)
• Quality of Science and Technology. (Knowledge workers, computer use, R&D,
high technology etc.)
• Quality of Business Management. (Entrepreneurship, Total Quality Management
etc.)
• Labor Market Flexibility (availability of basic skills, costs of labor, labor market
regulations etc.)
• Quality of Judicial and Political Institutions (Rule of law, justice, anti-trust
laws,property rights. etc.)

66. ECONOMIC FREEDOM

67. • Liberty
• Freedom
• Economic freedom
• Political freedom

68. • The dictionaries define “freedom” as “the absence of necessity, coercion, or
constraint on choice or action”. The dictionaries defines “economic” as “ of,
realting to, or based, on the production, distribution, and consumption of goods
and services.” Therefore, economic freedom can be defined as the “absence of
government coercion or constraint on the production, distribution, or consumption
of goods and services. “
• The central elements of economic freedom are personal choice, protection of
private property, and freedom of exchange. Individuals have economic freedom
when;
• property they acquire without the use of force, fraud, or theft is protected from
physical invasions by others and
• they are free to use , exchange, or give their property to another as long as
their actions do not violate the identical rights of others.
• In en economiaclly free society, the fundamental function of government is the
protection of private property and the enforcement of contracts. When a
government fails to protect private property, takes property itself without full
compensation, or established restrictions that limit voluntary exchange, it violetes
economic freedom of its citizens.

69. • Freedom of exchange (freedom to operate a business, freedom to
participate in the market economy)
• Freedom of choice
• Freedom of consumption
• Freedom of saving
• Freedom of investment
• Freedom of working
• Freedom of transferring wealth
• Freedom of competition
• Freedom of international trade (freedom to trade internationally)

70. • International Trade Policy: Protectionism Vs. Free Trade.
(Taxes on ınternational trade, Restrictions on the freedom
of citizens to engage in capital transactions with
foreigners.)
• Taxation Policy: Neutral Taxes Vs. Regulatory Taxes.
• Government Intervention. ( Size of government, The role
and presence of PEE’s, regulations and controls, subsides
etc.)
• Monetary Policy. ( Money creation of government, inflation
rate, )
• Capital Flows and Foreign Investment

71. POLITICAL FREEDOM
AND DEMOCRACY

72. • Political freedom
• Civil Liberties
• Democracy
• Civil society
• Rule of law
• Secularity

73. • Freedom House, an independent think tank publishes Freedom in
the World: The Annual Survey of Political Rights and Civil
Liberties. This study aims to monitor the progress and decline of
political rights and civil liberties in about 200 countries and
about 50 related territories.
• It is an annual evaluation of political rights and civil liberties
everywhere in the world.

74. • Freedom to Vote
• Freedom to Establish Political Parties
• Freedom to Establish Organizations
• Freedom of Meeting

75. • Freedom of Speech
• Freedom of Assemby and Demonstration
• Freedom of Press
• Freedom of Movement
• Freedom of Residence

76. HUMAN DEVELOPMENT

77. • Economic growth
• Economic devleopment
• Social development
• Human development
• Human poverty
• Income poverty
• Longevity
• StandarD of living
• Per capita income
• GDP
• GNP

78. • Human development is the process of widening people’s choice’s and the
level of well-being they achieve are at the core of the notion of human
development. Such choices are neither finite nor static. But regardless of
the level of development, the three essential choices for people are to
lead a long and healthy life, to acquire knowledge and to have access
to the resources needed for a decent standard of living.
• Human development is measured by The UNDP. The Human Development
Index developed by UNDP offers an alternative to GNP for measuring
the relative socio-economic progress of nations. It enables people and
their governements to evaluate progress over time.

79. • Longevity is measured by life expectancy.
• Knowledge is measured by a combination of adult literacy
(two-thirds weight) and mean years of schooling (one -third
weight).
• Standard of living is measured by purchasing power, based
on real GDP per capita adjusted for the local cost living
(purchasing power parity)

80. • HDI measures the average achiavements in a country in three
basic dimensions of human development - longevity, knowledge
and a decent standard of living.
• HDI is a more comprehensive socio-economic measure than GNP.

81. COUNTRY RISK AND
CREDIBILITY

82. • Risk management
• Country risk
• Credibility

83. • The purpose of country risk service is to provide complete
internationally comparable and regularly updated country risk
analysis for developing and highly indebted countries, and to
generate credit ratings of the relative risks from a
macroeconomic and financial standpoint.

84. • Political risk
• Economic policy risk
• Liquidity risk
• Currency risk
• Sovereign debt risk
• Banking sector risk

85. • Macroeconomic data. (Debt-service ratios, total debt service to
exports, total external debt to GDP, inflation rate, budget
deficit to GDP, etc.)
• Economic Policy.
• Political stability.

86. • Standard and Poors, New York
• Moody’s Investor Service, New York
• IBCA, London
• Institutional Investor, New York
• Euromoney
• Economist Intelligence Unit (EIU)
• Political Risk Services (PRS),