Macroeconomic Objectives and Macroeconomic Indicators

Please find the written notes below. Part 1/2:

Part 2/2:

What are the current macroeconomic objectives?

Macroeconomic objectives are goals which the government aims to fulfill. These objectives ensure that the economy is in a healthy position.

The government has four major ones; full employment, low and steady inflation, Balance of Payments equilibrium and steady economic growth.

Full employment

The governments aims to have a full employment status within the economy. This is because labour is one of the four factors of production and when any one of these four factors is not being utilized to its full capacity, the economy cannot reach its full potential growth level.

If we refer back to PPFs (Production Possibility frontiers ) from unit 1, you will remember that if researches such as labour are not being used to their full potential then the economy is situated inside the curve rather than on it. This limits the productivity in an economy. Growth is also another one of the governments macroeconomic objective, we will see later why that is so important.

There are also secondary issues raised by unemployment. For example, if people have less purchasing power then aggregate demand is likely to fall and if people have no job then they are likely to commit a crime. This is because they will be thriving for money or they may do it simply out of sheer boredom.

Supply-side policies are used in the UK to encourage employment.

Low and steady inflation

Inflation is the persistent rise in average prices. When this happens the value of money falls. The government and the Bank of England aim to keep inflation at a stable 2.0%. This is because high inflation can cause economical and political instability.
When the value of money falls this also has an effect at a global level. Exchange rates are affected and less people are likely to buy into your currency. The instability causes businesses and consumers to loose confidence resulting in large firms to be reluctant to settle in the UK and consumer spending to fall. Consumer spending is a major part of aggregate demand so if that falls then we will see the economy regress i.e. more unemployment, decreased growth etc.

Interest rates are one of the biggest ways inflation is kept under control in the UK.

Balance of Payments equilibrium  

Balance of Payments is the difference between exports and imports. If your economy like China are a net exporter you are to have a net surplus. If your economy like the UK is a net importer than you are said to have a net deficit.

Economies like the UK consist of mainly service sectors and there it isn’t a problem to have a deficit but the magnitude of the deficit is. We don’t want to become too reliant on imports because there is a risk of, for example starvation if we had war. Exports also depend on global relationships. Governments can put/alter tariffs to change the number of exports and imports in a country.

To encourage exports governments in the UK are subsidizing car factories and farms etc.

Economic growth

The government aims to have a steady economic growth because it keeps the economy competitive. Economic growth is measured through GDP, Gross Domestic Product. 
It is important to have economic growth because it enhances out quality of life, that is to say we have access to merit goods as well as luxuries.  Also, without economic growth all the other objectives fail. All four objectives are intricately linked to one another. You cannot adjust one without the other one being affected.

To encourage economic growth the government utilizes the fiscal policy more than any other policy e.g. they increase government spending. However, they also invest in supply-side policy because fiscal policy is limited in this sense. For example, on a diagram we can see that there will only be benefit from aggregate demand continually increasing is aggregate supply has increased allowing potential for growth.

There are two other major objectives which aren’t as important to the economy;
Concern for the environment

As explored in unit 1 external costs such as pollution are not usually taken into account e.g. pollution from the UK may cause acid rain in France yet we do not pay for this. Furthermore, there are growing concerns about resource usage as they are diminishing and global warming.

No countries can individually undertake actions which will result in drastic changes – it is something which has to be done multilaterally. Yet, organizing so many countries to work together is not easy and has failed many times in the past e.g. Cop15.

To be economically sound and support the environment governments need to find global policies and put them into practice as soon as possible!

Income Redistribution

It is important that we protect the poor and vulnerable. One way the government does this is through transfer payments where money from taxes is spent on benefits like Job Seekers Allowance. However, this can also be a disincentive to work if the gap becomes to small between people who claim benefits and people who pay taxes.People will question what is the point of working.

The fundamental question this comes down to is; is it better for the economy to have some extremely wealthy people and some extremely poor or people at the same income level?

Another method installed by the government is law and legislation. For example, the equal opportunities legislation means that two people will chosen equally on their potential not race, sex or background. This ensures everybody has an opportunity and there is fairness. However, in reality people who do not agree with these regulations find their way around it.

Having income unequally distributed could also limit economic growth. For example, if poor people are not educated or if people who want to be entrepreneurs are restricted by funds and this is limiting would could have increased productivity hence growth.

About these ads

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s