How Governments Can Support Economic Growth

Over the past few tutorials we have been discussing free market economies,

command economies, and mixed economies. This leads to the obvious question of what degree

a government should be involved in an economy. Now let’s dig in a little bit and see precisely

how governments get involved with economies. But before we do that, let’s first remember

the primary goal, which is economic growth. So how does a government grow an economy? This is done by

increasing productivity. Let’s look at six specific ways governments attempt to do this.

#1: Achieving full employment. Governments support economic growth by getting as

many people working as possible. In other words, the goal is full employment, where nearly everyone

who wants a job has one. As stated in a previous tutorial, this means that the unemployment rate

would be between roughly 4 and 5 percent, though this range is disputed by some economists.

There are many ways governments can help increase employment. First, it can literally create jobs.

For example, if the government decides it needs to provide public housing for those in poverty,

workers will be needed to both build and maintain all that housing.

Second, governments can loan money to businesses so that they can hire workers. Third, governments

can either reduce or increase regulations so that it is easier for businesses to hire workers.

Fourth, governments can build or fund schools, as well as loan money to students to attend schools,

to increase the skills of its citizens, such that they qualify for available jobs.

Fifth, governments can provide tax incentives so that businesses are more likely to hire more

workers. This means that businesses would have less of a tax burden than they normally would.

Those are just five of the ways that governments attempt to achieve full employment.

#2: Securing financial markets. A strong financial market also helps

lower the unemployment rate. A financial market is one where investors buy or sell

assets. Financial markets are important to an economy for a variety of reasons. These markets

function to make assets more productive while simultaneously lowering the cost of transactions.

Common examples of financial markets are stock markets,

bond markets, commodity markets, and derivatives markets. A stock market is one in which investors

make money by buying and selling shares, also known as stocks, of ownership in public companies.

When investors buy stocks at a cheaper price and later sell them at a higher price,

they earn a profit from the sale. Additionally, in some cases stock holders can receive dividends

from that company. In a bond market, investors buy bonds, which are essentially things that represent

a promise by a borrower to pay a lender the money they borrowed back, plus interest. Investors make

money from the interest they earn after buying bonds from companies or even the government

itself. Within an agreed period, a company or the government has to pay back that money,

plus interest. A commodity market is where both investors and traders buy and sell commodities,

or basic goods that can be easily interchanged with different types of goods.

Often these are natural resources. And finally, a derivatives market is perhaps the most difficult

to understand. A derivative is an asset that is based on the value of another asset,

and is linked to that asset by a contract. So if the linked asset goes one way, the derivative

also goes that way, whether up or down. Because derivatives markets can get complex, governments