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1. Public sector comprises of 4 parts.
a) The Central Government- Run by the Prime Minister & all the cabinet ministers.
b) Local Government- Run by elected councillors.
c) Nationalist Industries- Run by the government.
d) Other organisation. E.g.: BBC part of public sector.
2. 2 types of Government Spending
a) Current expenditure- Everyday expenses. E.g.: Salaries of ministers and expenses on items.
b) Capital expenditure- Government investment for long-term benefits. E.g.: Building infrastructure.
3. Reasons for Government Spending
a) To provide public goods.
b) To redistribute income & wealth.
c) To provide merit goods.
d) To control economic activities.
4. Merit goods- A good that are deemed to have a greater value to society.
5. Sources of Government Revenue
a) Direct taxes & indirect taxes.
b) Public sector borrowing.
c) Foreign aids.
d) Sales of assets.
e) Profits from public-owned industries.
f) Fines.
g) Compensations.
h) Revenue from sales of goods & services.
6. Tax- Money paid to the government for financing public expenses.
7. Reasons for taxation
a) It is a form of revenue for the government.
b) The revenue collected will be distributed to the poor.
c) It is a tools to stabilise the economy.
d) Discouragement of consumption of demerit goods. Demerits goods are highly taxes.
e) Discouragement of consumption of imported goods. Consumers might switch to local goods.
8. Good tax system must have
a) The cost of tax collection should not be high.
b) It must be fair to all taxpayers.
c) Taxpayers should be able to file in their tax returns to the government.
d) Cannot be effort-hindering.
9. 3 types of tax structures
a) Progressive tax system
b) Proportional tax system
c) Regressive tax system
10. Progressive tax system- The tax rates increases as the income increase.
11. Proportional tax system- The tax rates constant as the income increase.
12. Regressive tax system- The tax rates decreases as the income increases.
13. Types of direct taxes
a) Income tax
b) Corporate tax
c) Petroleum revenue tax
d) Capital gain tax- Sales of properties & shares.
e) Inheritance tax- Transfer of wealth upon a person’s death.
f) Road tax
g) Property tax
h) Payroll tax- Total wages in a company.
14. Types of indirect taxes
a) Value-Added Tax (VAT)- Tax on spending.
b) Custom duties.
c) Excise duties.
d) Entertainment tax.
15. Advantages of direct tax
a) High revenue.
b) Progressive direct taxes can redistribute income to the poor.
c) It is designed for people who can afford to pay this type of taxes.
16. Disadvantages of direct tax
a) Corporate tax will erode the profit margin of the company.
b) People will not work hard to get higher wages job because they have to pay more tax if they earn more.
c) Some people will evade tax if they have to pay a high tax.
17. Advantages of Indirect Tax
a) Affordable & low tax collection cost.
b) Indirect taxes have wide tax base.
c) It can reduce consumption of some products. E.g.: Tobacco.
d) It can be manipulated easily.
18. Disadvantages of Indirect Tax
a) The poor will feel more burden.
b) It can push up the prices of goods.
c) Ease with which indirect taxes can be altered.
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19. Differences between direct taxes & indirect taxes
a) For direct taxes, the burden cannot be shifted to the third party. For indirect taxes, the tax burden can be shifted to the party.
b) Direct taxes are based on income & wealth. The more one earns, the more taxes one pay. E.g.: Income tax & Corporate tax. Indirect taxes are based on expenditure &; consumption. The more one spends, the more taxes one pays. E.g.: The Goods & Services Tax (GST).
c) Direct taxes are progressive in nature. E.g.: Income tax, property tax & estate duties. Indirect taxes are regressive in nature. The poor will feel more burden than the rich.
20. The Budget- An estimate of the government’s spending & revenue for the coming year.
21. 2 objectives of the Budget
a) To announce plan for government spending & revenue.
b) Influence the state of the economy.
22. Budget surplus- When government’s revenue from the taxation is more than its expenditure.
23. Budget deficit- When government’s revenue from the taxation is less than its expenditure.
24. Budget balance- When government’s revenue from the taxation is equal to its expenditure.
25. When here is a budget deficit, the government needs to borrow to close the deficit. Such borrowing is known as Public Sector Borrowing Requirement or PSBR.
26. Few ways a government can borrow
a) Selling short-terms loans to the general public, banks or foreign countries.
b) Selling bonds such as long-term loans.
c) Borrowing savings of the people through the national savings bank.
27. National debt- An amount of money borrowed that is not repaid quickly by the government.
28. Fiscal policy- A policy that whereby governments alter their purchases of goods and services & taxes. When government revenue is more than government expenditure.
29. The functions of Fiscal Policy
a) Increase taxes & this will reduce consumption & eventually the demand in the economy.
b) The government will reduce expenditure.
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30. Monetary policy- A policy often implemented by a central bank to control credit and the money supply in the economy.
31. The functions of Monetary Policy
a) Increasing cash ratio so that there will be less money supply in the economy.
b) Selling bonds to the public in the open market. After that, there will be less money circulating in the economy & hence the rate of inflation will be reduced.
c) Fixing new regulations for hire purchases to raise the down payment & shorten the repayment period. This will make credit more expensive.
32. Direct policy- A policy involves government intervention in the price mechanism of the country. The government interfering with the market forces so as to reduce the rate of inflation.
33. The functions of Direct Policy
a) Fix the price ceiling to prevents the price from rising above a certain level.
b) Increases national insurance contributions or compulsory savings.
c) The government restricts the amount of a good that are people are allowed to buy.
d) Retraining the workers so that they would be able to find work in other industries.
34. Reasons for adopting different policies
- The use of fiscal policy or the monetary policy will depend on the aim of the government & the effectiveness of the policy. In a period of inflation, the government can adopt the fiscal policy & raise taxes. This will decreases the amount of income & spending of the people. This will slow down inflation but economic growth will also be affected.
- Adopting monetary policy such as the changes in interest rates can be easily implemented but it usually take months to be felt.
35. 2 types of externalities
a) Positive Externalities- When social benefit is greater than private benefit.
b) Negative Externalities- When social cost is greater than private cost.
36. Positive Externalities
a) Private Benefits are benefits enjoyed by an individual. It is known as total utility to the customer & total revenue for the producer.
b) External Benefits are benefits enjoyed by the third party although they are not directly involved in the consumption or production of the goods.
c) Social benefits are a combination of both private & external benefits.
37. Solutions to increases positive externalities
a) Subsidies
b) Legislation
c) Education
d) Joint ventures with private firms
38. Negative Externalities
a) Private Costs are costs incurred by an individual. Consumer known it as total expenditure. Producer known it as the costs of production.
b) External Costs are costs incurred by a third party even though they are not directly involved in the production of goods.
c) Social Costs are a combination of both private & external costs.
39. Ways to reduce negative externalities
a) Taxes
b) Education
c) Legislation
d) Campaigns
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