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Government Policy - Activity

In the Presentation, you have seen how money or income flows around the economy and how income can be injected into the flow or withdrawn from it. More on this topic can be found at the following Biz/ed notes on the Circular Flow of Income(http://www.bized.co.uk/learn/economics/macro/notes/income.htm).

There are controls that the government can use to affect the level of activity in the economy. Traditionally, these have been known as two types of policy decisions: fiscal and monetary policy. Find definitions for these two types of policy from the Biz/ed Glossary(http://www.bized.co.uk/glossary/glossary.htm).

Case 1: Agriculture

A market stall of organic vegetables

In the food industry, if the Government decides that promoting organic produce will have beneficial health and environmental impacts, it may decide to provide an incentive to growing and consuming organic fruit and vegetables. How might the government use fiscal policy to encourage more growers and consumers to 'go organic'? Hint: Think of the taxation that businesses and consumers have to pay when they supply or demand goods.

But in agriculture, this kind of policy would be affected by the system of subsidies that exists to protect supplies of food and the livelihoods of farmers in the European Union. This system is known as the Common Agricultural Policy (CAP). See the National Farmers' Union Web site(http://www.nfu.org.uk/stellentdev/groups/public/documents/faqs/cap-whatisthecomm_ia412f4559-1.hcsp) and the BBC article The return of the countryside(http://news.bbc.co.uk/1/hi/sci/tech/3556658.stm) for more details of the EU's Common Agricultural Policy.

Image: How might the government use fiscal policy to encourage more growers and consumers to 'go organic'? Copyright: Allison Cassels, stock.xchng


Case 2: Interest rates and exchange rates

A selection of different currencies

Image: How do changes in interest rates affect exchange rates? Copyright: José Warletta, stock.xchng

Interest rates are used to control the demand for credit in the economy. If they are low, then individuals and businesses are encouraged to borrow in order to finance their spending or investment; if rates go up, then the opposite usually results, with less borrowing and lower levels of spending occurring.

In 1997, the incoming Labour Government handed control of one of the key tools of monetary policy to the Bank of England. Ever since, the Bank's Monetary Policy Committee (MPC) has set the level of interest rates in the UK. Read the Guardian article Bank keeps interest rates unchanged to find out more about the most recent decision of the MPC, from April 2005(http://www.guardian.co.uk/business/story/0,,1454238,00.html).

After reading the Guardian article, answer the following questions:

  1. What level are UK interest rates at present (April 2005)?
  2. In which direction have rates been moving in recent months?
  3. Which way are rates expected to move in the near future?
  4. What would you expect the impact to be of future changes in rates?

Interest rates affect the exchange rate (the value of one currency, expressed in terms of another currency). Go to the Biz/ed Glossary again to find a fuller definition. The Currency and Tourism Worksheet from our data-handling section, TimeWeb, asks you to analyse the impact of changes in the value of sterling (also known as the £) on levels of tourism in the UK by visitors from abroad and tourist visits by UK holidaymakers abroad(http://www.bized.co.uk/timeweb/digging/dig_mean_work15.htm).


Case 3: Public-private partnerships

A young person being treated in hospital

For the final part of this session, we will take a brief look at the use of Public-Private Partnerships in public works. Increasingly, governments have been keen to involve the private sector in areas of public spending that have usually been funded through taxation. In this way, politicians hope to be able to claim that improvements are being made to public services such as transport and hospitals, without government having to raise levels of taxation.

Details of how Public-Private Partnerships (PPP) or Private Finance Initiatives (PFI) actually work are given in a BBC question and answer session(http://news.bbc.co.uk/1/hi/uk/1518523.stm).

Image: Public-Private Partnerships enable governments to improve public services such as hospitals. Copyright: Tomasz Kobosz, stock.xchng