The Four Main Objectives of a Government in a Mixed Economy and How It Uses Different Types of Taxes to Achieve These Objectives

A pure market economy is one with only consumers and suppliers. However, the modified market economy is one where the government is involved. In the modified market economy, the government has four economic objectives: sustainable economic growth, price stability, full employment and external balance.

Economic growth is the increasing capacity of an economy to satisfy the wants of its people. This is done by increasing the gross domestic product (GDP), which is what economic growth is measured by. However, economic growth is only good if it can be sustained. If growth is too quick, it is bad as it increases inflationary pressure. However, if the economy is growing too slowly or even contracting, then it is also bad as the unemployment rate will go up. This is why the government prefers to keep economic growth steady at around 4% p.a.

Price stability is the avoidance of inflation and deflation. Inflation is the persistent and appreciable rise in the general level of prices and is measured by the consumer price index (CPI). Deflation is a general decline in prices. The RBA’s target range for inflation is 2-3% p.a. The objective of the government is to maintain low inflation. This is because high inflation can impact negatively on economic efficiency and the economic well-being of some people in the society.

Full employment is when everyone who wants to work as a job. This is virtually impossible so the goal of government is to maintain a low level of unemployment. The unemployment rate is measured as a percentage of the workforce. A low unemployment rate is favourable as it means the economy is working efficiently and maximising its ability to produce while reducing the level of income inequality.

The aim of external balance is to balance the external transactions between Australia and the rest of the world who are our trading partners. The goals are to achieve a sustainable trade balance which is usually in deficit (current account deficit – CAD), to avoid excessive exchange rate fluctuations and to have a sustainable foreign debt ratio as a proportion of GDP. This is because if the CAD is getting big, it means that there will be inflationary pressure, affecting price stability. This also applies with the exchange rate as if the dollar is too strong, then it will increase inflationary pressure too. The opposite of these two also has a negative effect on the economy. Also, if foreign debt is too low, it means that people aren’t spending enough money, which could indicate a high level of unemployment, while if it too high, then it indicates increased inflationary pressures.