The government plays several key roles in economic development including addressing market failures, externalities, and providing public goods. It also works to promote integrity in markets and overall economic growth. Specifically, the government aims to correct inefficient resource allocation, redistribute income, regulate activities, and promote important public services that benefit all of society. It also establishes rules to manage external costs and benefits from production and consumption.

1. ECONOMIC
DEVELOPMENT

2. What is economic
development?
The objective to raise standards of
living.

3. New Words
 Bad cycle of poverty – a chain of conditions
that leads to poverty.
 Business cycle – a period of prosperity or
depression in the economy.
 Economic development – the objective to
raise standards of living.
 Economic growth – the measurement of
economic development.
 Good cycle of prosperity – chain of
conditions that leads to rising standards of
living.
 Life expectancy – the length of life for the
average citizen.

4.  Literacy rate – the number of people who
can read and write.
 Per capita income – the gross national
product divided by the population.
 Prosperity – a business cycle when
business is booming.
 Recession – a business cycle when
business declines.
 Recovery – a business cycle when
conditions improve after recession or
depression.
•

5. How to Measure Economic
Development
 Economic growth of the GNP – is the
annual measure of the total production of
goods and services in the country.
 Growth of the average income in the
nation or PCI (Per Capita Income) –
economists just divide the GNP by
population, and the answer will be the
average income of the people, or PCI
 Other indicators – e.g. literacy rates, life
expectancies, number of telephones; etc.

6. BAD CYCLE OF POVERTY
Low
Education
Underdeveloped
natural resources
Low
Productivity
Low
Income
Low
Profits
Low
savings
Low
Investments
Low Capital
Base
Low Tax
Base
Poor Public
Services

7. GOOD CYCLE OF PROSPERITY
Better
Education
More Developed
Natural
Resources
Higher
Production
More
Income
More
Profits
More
savings
Higher
Investments
More Capital
More
Taxes
Better Public
Services

8. • Economic Cycle
It is important also to understand that
within the span of life of an economy
there will come “business cycles.” A
business cycle is a change in business
activity which extends over a period of
years.

9. Four Types of Business Cycles
 Prosperity – during a period of prosperity,
GNP is the highest and business is
booming. Optimism is the business
climate and workers are happy.
 Recession – this may be followed by a
recession or a period when the economy
slows down. Businessmen become afraid
and prices begin to fall. People hold on
their money and use it only for basic
needs.

10.  Depression – if the recession lasts for a long
time, then it may turn into depression, a
worse cycle than a recession. During a
depression, many workers are laid off,
factories close down, the stock market
collapses, and banks may go out of business
 Recovery – after a depression, the economy
will improve again and begin a period of
recovery. Little by little, production increases
and so do standards of living. As
businessmen expand their business, life
returns to normal and the economy returns to
a period of prosperity.

11. Planning for Development
Governments and private leaders make
plans for the future. The development plan
is the vision or goals set by the government
or private sector for improving the
economy. Development plans may cover
the whole economy or just parts of it, like
agriculture, labor, industry, or foreign
trade.

12. THE INFORMAL SECTORS

13. According to International Labor
Organization (ILO):
“Very small scale units producing and
distributing goods and services, consisting
largely of independent, self-employed
producers, some of whom also employ family
labor and / or few hired workers or
apprentices, which utilize a low level of
technology and skill, which therefore operate
at low level of productivity, and which
generally provide very low and irregular
income, and highly unstable employment to
those who work in it.”

14. • The informal sector is the part of the
economy that is intentionally hidden
from the view of the government in
order to avoid taxes and regulations
or because the goods and services
being produced are illegal.

15. Different names of Informal Sector
• Underground
• Unofficial
• Hidden
• Illegal
• Black
• Covert
• Grey
• Dual
• Irregular
• Invisible
• Parallel
• Marginal
• Moonlight
• Shadow

16. The existence and continued growth of the
informal sector gives rise to three major sets
of concern:
 First, economically disadvantaged persons are
forced to create income-generating activities.
 Second, loss or decrease in tax revenue affects
the tax system of the country.
 Third, tax payers are seen as dissatisfied with
how the government delivers services to the
people, and the way the government spends
their hard-earned money.

17. Characteristics of the Informal Economy
• Low levels of productivity and employment
• People engaged in the activities look at
their jobs as temporary until an
appropriate job is available.
• Health and safety are always at risk.
• More labor-intensive
• Non-payment of taxes
• Workers are usually paid below the
minimum wage.
• Absence of social protection and benefits.

18. Approaches in Measuring the
Informal Sector
• Direct Approach
 surveys
 not ready to reveal their involvement
 auditing tax returns
personal relations rather than formal
or contractual arrangements

19. • Indirect or Discrepancy Approach
 Disagreement in various markets
 Employment and income oftentimes
are not reflected in national
government accounts.

20. What are the effects of the
underground economy?
• Some consider it as an effective limit of
government restrictions on the economy
and society.
• Some argue that many transition
economies would perform at much lower
level of production.
• The relationship between the country and
the people is weak and needs
improvement.

21. • The underground economy benefits a
great number of people by responding to
the demand for urban services and small-
scale manufacturing.

22. SYNTHESIS
• The informal sector is the part of the
economy that is intentionally hidden from
the view of the government in order to
avoid taxes and regulations or because
the goods being produced are illegal.
• The informal sector is known under
different names and adjectives such as
underground, hidden, illegal, grey,
irregular, invisible, parallel, and twilight.

23. • There are two approaches to consider in
measuring the underground economy: the
direct approach and the indirect approach.
• There are several effects of the underground
economy on the official economy. First, it is
an effective limit on government restrictions
in the economy and the society. The
relationship between the country and the
people is weak and needs improvement.
Third. It benefits a great number of people by
responding to the demand for urban services
and small scale manufacturing.

24. GOVERNMENT
AND
ECONOMY

25. Role of Government in Economic
Development
• Market Failure
 Market implies sufficient sellers and
buyers in the market
 Presence of financial institutions or capital
markets to support business
 Government intervention in the form of
credit programs will enable wider access
to seed funds and will promote faster
growth of the country

26. • Externalities
 The effects of these actions of outside agents
to one’s production or consumption activities
are termed externalities
 Two types of externalities:
 consumption – ex. The pollution emitted by an old
bus while one is walking along a highway. A
neighbor playing loud rock music during wee hours
or morning.
Positive such as the pleasure one derives
from observing a neighbor's flower garden.

27.  production – ex. Garbage and pollutants
dumped in a fishing area that affect
fisherman’s catch.
 Through policy, laws regulations, and police
powers, the government serves to minimize
negative externalities and promote positive
externalities.
 Examples of these policies include:
 Nonsmoking law
 Pollution act
 Garbage dumping regulations

28. • Public Goods
 Public goods are those that benefit many
people and must be provided in the same
amount to all affected consumers. Examples:
Sidewalks
Street lightings
Airports
Police and military protection
These firms that consumes public goods or services
without sharing their costs are called FREE RIDERS.

29. • Integrity of Market
 The government can strengthen the integrity
of the economy by installing laws and
punishing those who commit moral hazards.
The government can minimize the problem of
adverse selection by providing quality
inspections and licenses.
Example: Medical products have to go
through the review of the Bureau of Food
and Drugs (BFD) before they get into
production and are sold in the market.

30. • Promotion of Economic Growth
 The most important role of the
government is promotion of economic
growth.
 Agriculture to industry (Arthur Lewis
model) – farm workers migrate and
take employment in factories.

31. Synthesis
• The promotion of the general welfare and
economic stability is the primary concern
of the government.
• The government’s role in the economy
includes correcting inefficient allocation of
resources, redistributing income and
regulating economic activities.
• In performing its role as moral guardian,
government may prohibit the sale and
purchase of specific goods and services.

32. • Public goods and services are provided by
the government. Their benefits spill-over to
society as a whole.
• Private goods and services are produced
by the market. Their use and benefits are
restricted to the buyers onl.

33. Questions:
1. What are the economic functions of
the government?
Answer: The government exercises the
allocative, redistributive, and regulatory functions
within the economy.

34. 2. What are the two kinds of externalities?
Give an example of each.
Answer: 1. consumption
2. production

35. 3. Differentiate public goods from private
goods.
Answer: Public goods – those that provided
by the government and whose benefits spill-
over to society as a whole.
Private goods – those that the market
produces. Their use and benefits are
restricted to the buyers only.