How Governments Affect Economic Opportunity

Instructor: Beth Loy

Dr. Loy has a Ph.D. in Resource Economics; master's degrees in economics, human resources, and safety; and has taught masters and doctorate level courses in statistics, research methods, economics, and management.

This lesson discusses and provides examples of how economic opportunity depends on government functions, including reducing trade barriers, controlling corruption, limiting regulations, and supporting personal income growth. Read on to learn more about these, then take a brief quiz.

What Is Economic Opportunity?

We all want to increase our income. It is why we go to school and why we choose certain jobs. What if we decide to sell birdhouses? How will we determine if that business will support us?

Probably your household is like many others. You subtract expenses from income, and if you still have money at the end of the month, you're doing okay. If you've ever run a business, however, you know that the situation is a little more complicated. And it gets more complicated when you look at an even bigger picture: the economics of a country.

Economic opportunity is a method of measuring economic growth, and there are several ways we can measure this. The most common form of measurement is the gross domestic product (GDP). GDP is the overall finished value of all of the goods and services within a country. It includes the values of:

  1. all consumer spending,
  2. government expenditures,
  3. a country's total investment, and
  4. total net exports.

We have economic growth when the percentage of GDP increases. If we decide to sell birdhouses and a lot of consumers purchase them, the government buys several for national parks, and we export batches to other countries, we are contributing directly to GDP. When the economy is growing, GDP is increasing, and the door to economic opportunity is open. Just like in our small business, the more birdhouses we sell for a profit, the more economic opportunity we have.

The government actually plays a significant role in how much profit we can make from our birdhouses. Those that affect economic opportunity are:

  1. reducing trade barriers,
  2. controlling corruption,
  3. limiting regulations, and
  4. supporting personal income growth.

Beginning with reducing trade barriers, let's look at the effects of these functions on economic opportunity.

The Effects Of Reducing Trade Barriers

A trade barrier is a way for countries to limit the number of imported goods and services. For example, a tariff is a tax that is added to the cost of an import, and an embargo is a politically forced agreement to ban imports. Both are common trade barriers.

Most trade barriers are put into place to punish a country or protect a domestic industry. However, they do tend to limit economic opportunities. For example, say you sell a lot of birdhouses to Japan because your product is cheaper than the birdhouses made locally. If Japan suddenly places a tariff on imported birdhouses, you will have to lower your price to compensate so that the additional tax won't make your product too expensive for Japanese buyers. If you don't, you risk losing consumers who will look elsewhere for cheaper birdhouses.

Without trade barriers, businesses are free to expand globally. Birdhouses can be sold without the extra burden of figuring out the tariff cost. Reducing these trade barriers leads to economic opportunities from:

  • increased competition,
  • improved innovation,
  • increased choices of goods and services, and
  • international demand for goods and services.

The Effects Of Controlling Corruption

Okay, lowering trade barriers is great for our business, but success also depends on some government intervention. Controlling corruption in an economy is essential to economic growth. For example, bribery, extortion, and a black market cause political instability. Consumers will limit their purchases, and producers will restrict their investments, making it very difficult to sell birdhouses.

To improve economic opportunity, controlling corruption must be a priority. Without any confidence in the stability of a market, growth will be limited. Why would we invest in starting a business to make birdhouses if we didn't have any confidence in where we get supplies, how much we pay for inputs like materials and employees, and how we are able to ship goods? Reducing these problems will lead to economic opportunities by:

  • eliminating bribery from the political process,
  • increasing confidence in the judicial system,
  • collecting and distributing tax funds fairly, and
  • removing bias from the regulatory system.

The Effects Of Limiting Regulations

Even when controlling corruption, governments need to be sure that laws are encouraging economic growth, not stifling it. This can be tricky. We all know that some regulations are necessary and encouraged. Tax, finance, stock trading, and those laws that exist to protect our safety and health are just a few.

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