ÜMİT SEÇKİN 2000471087
& HANZADE H. KUTSAL 2001471125
SEDA DURMAZ 2000471037 & SEDA EMİR 2001471041
KÜBRA DÖVER 2001471039 & SERTAN KİREMİTÇİ 2001471069
GOVERNMENT, THE ROLE OF GOVERNMENT IN AN ECONOMY
Most resources in market economies are allocated through markets in which individuals
and private firms trade with other individuals or firms.
However governments play a major role. They set the legal rules, they buy goods and
services, they produce goods and services, and they make payments such as pensions.
Through taxation and borrowing, governments exert a major influence on prices, interest
rates and production.
WHAT DO GOVERNMENTS DO?
1) Create laws,rules and regulations
Governments determine the legal frame work that sets the basic rules for ownership of
property and the operation of markets. Even in the most capitalist economies there are
limits to the rights of ownership. Not everyone can own a gun. It is usually illegal to build
a factory in a residental area. In addition, governments at all levels regulate economic
behaviour, setting detailed rules for the operation of businesses.
Regulations include, planing permission, health and safety regulations and attempts to
prevent some types of business, such as the sale of heroin.
2)Buy and sell goods and services
Governments buy and produce many goods and services, such as defence, education,
parks and roads which they provide to firms and households. Most of these goods, such as
defence and education are provided to users free of direct charge. Governments also
produce and sell goods.
3)Make transfer payments
Governments also make transfer payments such as social security, and unemployment
benefits to individuals. Transfer payments are payments for which no current direct
economic service is provided in return.
4)Impose taxes
Governments pay for the goods they buy and for the transfer payments they make by
levying taxes or by borrowing.
5)Try to stabilize the economy
Governments often attempt to modify fluctuations in the business cycle. The government
may reduce taxes in a recession in the hope that people will increase spending and thus
raise the GDP. When inflation is high, the central bank may reduce the rate of money
growth with the aim of reducing inflation.
6)Affect the allocation of resources
Buy spending and taxing, the government plays a major part in allocating resources in the
economy. In terms of what, how and for whom governments chooses much of what gets
produced, from defence expenditures to education to its support for the arts. It affects
howgoods are produced through regulation and through the legal system.
THE MAJOR FUNCTIONS OF GOVERNMERNT
Allocation Function: The provision of public goods, or the process by which total
resource use is divided between private and public goods is provision may be termed the
allocation function of budgetary policy.
Distribution Function: Adjustment of the distibution of income and wealth to assure
conformance with what society considers a fair or just state of distribution, here referred
to as the distribution function.
Stabilization Function: The use of fiscal policy as a means of maintaining high
employment, a reasonable degree of price level stability, and an appropriate rate of
economic growth.
THE MAJOR SOURCES OF GOVERNMENT REVENUES
-Taxes
-User charges(fee, tolls etc.)
-Borrowing (Domestic and external borrowing)
-Money creation (Issuance of paper money, borrowing from the Central
Bank)
-Revenues from public utilities (electricity, water, gas production
units)
-Revenues from public economic enterprises
-Fines
-Social security contributions
-Fiscal monopolies
Characteristics of taxes:
-It is compulsory
-Taxes are paid as a result of government sovereignty
-There is no exact correlation between the amount paid and the value of the
public services from which the tax payer benefits
-Taxes are paid in cash by individuals, corporations and other
organizations to the government
-Taxes finance government expenditures
Types of government spending:
-Investment expenditures
-Transfer expenditures
-Social expenditures
-Current expenditures( personal expenditures)
Functional classification of government spending:
-General services
-Housing and sanitation
-National defense
-Transportation
-Foreign affairs
-Energy
-Justice
-Postal and telecommunacation
-Education
-Pensions and social security
-Health
-Interest on general debt
-Welfare spending
-General administrative expenditures
-Police and fire protection
-Rural development
-Highways
-Culture, tourism etc.
WHAT SHOULD GOVERNMENTS DO?
The general argument for government intervantion is market failure. Sometimes markets
don't allocate resources efficiently, and government intervention may improve economic
performance. Government could improve the allocation of resources. Econonmic theory
identifies the types of market failures:
The business cycle: The businee cycle has many external causes, from wars or oil price
changes to bursts of new inventions. Government policies also affect it. Increases in taxes
and reductions in government spending generally reduce GNP, increases in the Money
stock increase GNP and prices. Government policy can make the business cycle worse,
lenthening recessions and creating inflations or it can reduce economic fluctuations.
Public goods: There are goods we can all consume simultaneously. These are called
public goods. A public good is a good that even if it is consumed by one person, is stil
available for consumption by others. A private good; if consumed by one person can not
be consumed by another. For example clean air, national defence or public safety are
public goods. It is no coincidence that most public goods are not provided in private
markets.
Externalities: An externalities exist when the production or Consumption of a good
directly affects businesses or consumers not involved in buying and selling it and when
those spillover efects are not fully reflected in market prices. Positive externality is a
benefit received by a person as a result of the actions of others. Negative externality is a
cost received by a person as a result of the actions of others. Government intervention
may improve the functioning of the economy, for ezample by requiring firms to treat
their waste products in certain ways before dumping them.
Monopoly and market powers: Competitive markets generally work well, but markets
where either buyers and sellers can manipulate prices generally don't. Some monopolies
are almost unavoidable. Most public utilities (gas for example) are potantial monopolies.
The government can regulate such companies by controlling the prices they are allowed
to charge, or it may elect to supply the products itself. Other monopolies may be artifical,
brought about through manupilation by firms. Here governments intervene with
competition laws, seeking to make competition more vigorous and to prevent monopolies
or other attemps to control supply.
Government spending on transfer payments represents government redistribution of
income towards the elderly (through social securty) the unemployed (through
unemployment benefits), farmers (through price supports) and other beneficiaries. There
is difference between government intervention to effect the distribution of income and
intervention to ensure the right level of production of public goods or to make market
prices reflect externalities.
In the later cases the government is taking actions that at least in principle can make
everyone in society better off. But when the government intervenes to affect the income
distribution it make some people better off by making others worse off.
Mehmet ZANBAK & Melih COŞKUN
2000461205
2001461049
Government : A government is an organization that provides goods and services and redistrubutes
income and wealth.
What do governments do?

Create Laws, Rules and Regulations
Government establishes and enforces the laws that govern private economic activity, including the
commercial codes for private contracts.Governments regulate economic behaviour, setting detailed
rules for the operation businesses.Regulations include, planing permission, health and safety
regulations.

Buy and sell goods and services
Governments buy and produce many goods and services, such as education, parks and roads which
they provide to firms and households.

Make transfer payments
Transfer payments are payments for which no good or service is exchanged. This includes things
like benefits, pensions and lottery payments. A significant proportion of government expenditure is
on transfer payments.

Impose taxes
What is the tax? Tax is a fee charged by a government on a product, income, or activity.
Governments can and do tax income, consumption, labor, investment, and savings.
Taxes can be divided in three broad categories: income taxes on individuals and corporations,
including the social security tax on wage earnings; expenditure taxes, including sales taxes, excise
taxes and import tariffs; and property taxes, including a wide variety of levies on houses and
buildings, agricultural and residential land, and inheritances
Taxes are also classified as direct versus indirect, though these terms are somewhat imprecise. The
classification “direct” generally refers to those taxes that are levied directly on individuals and
business firms, while “indirect” taxes are those levied on commodities and services, income and
propert taxes fall into the first category, while sales taxes and trade tariffs fall into the second.

Try to stabilize the economy
Every market economy suffers from business cycles. The business cycles consist of fluctuations of
total production, or GDP, accompanied by fluctuations in the level of unemployment and the rate of
inflation. In that position, governments often attempt to modify fluctuations in the business cycle.

Distribution of resources
In terms of what, how, and for whom, governments chooses much of what gets produced, from
defence expenditures to education to its support for the arts.
Government Revenues and Expenditures
Government expenditure is spending by central government and local authorities on the provision of
goods and services, transfer payments and debt repayments. Government expenditure can also be
divided into four categories.
1.
2.
3.
4.
Consumption by the government
Government investment
Transfers to the private sector.
Interest on the public dept.
Government revenue includes; personal income taxes, corporate income taxes, indirect taxes, social
insurance contributions.
The Budget
A plan to show how much money a government will earn and how much they will need or be able to spend.
The budget take forms government revenue and expenditures.
Government Revenue: Annexed Budget Revenues, Consolıdated Budget, Specıal Revenues And
Funds, Non-Tax Revenues, Tax Revenues.
Government Expenditure: Interest Payments, Personnel Expendıtures, Transfers To Socıal Securıty
Agencıes, Transfer Expendıtures, Investment Expendıtures, Other Current Expendıtures.
Balanced Budget: A balanced budget rises when the government receives the same amount of
money from taxation as it is spending.
Budget Surplus: If revenue exceeds expenditure, the budget balance is positive and the government
has a budget surplus.
Budget Deficit: If expenditure exceeds revenue, the budget balance is negative and the government
has a budget deficit.
Government dept is the total amount of barrowing that the government has undertaken and the total
amount that is owes to households, firms and foreigners.
If the government has a deficit, its dept is increasing. If the government has a surplus its dept is
decreasing. If the government has a balanced budget, its dept is constant.
TURKISH CASE
Turkish Budget in 2003
Budget Expenditures in 2003 (quadrillion)
Interest Payments : 53.1
Personnel Expenditures : 27.4
Transfer Expenditures: 84.3
Investment Expenditures: 4.5
Other Current Expenditures: 5.4
According to the increasing rate of 2002
Interest Payments : %13.6
Personnel Expenditures : %32.1
Transfer Expenditures : %23.6
Investment Expenditures : -%10.9
Other Current Expenditures : %0.2
Budget Revenues in 2003 (quadrillion)
Annexed Budget Revenues : 1.6
Consolidated Budget : 88.7
Special Revenues And Funds : 3.6
Non-Tax Revenues : 8.8
Tax Revenues : 74.6
According to the increasing rate of 2002
Annexed Budget Revenues : %47.6
Consolidated Budget : %27.2
Special Revenues And Funds : -%20.6
Non-Tax Revenues : -%12.8
Tax Revenues : %38.2




In 2003 Turkey has a deficit. The deficit is : 33.1 quadrillion…
In 2003 our domestic dept is : 178.7 quadrillion
According to the increasing rate of 2002 : %19.2
In 2003 our foreign dept is : 137.9 quadrillion
According to the increasing rate of 2002 : %5.3
As a result we can say that, although we apply for the IMF programmes our dept is not decrease…