4. Government and The Macroeconomy O – Level
MACROECONOMIC AIMS OF GOVERNMENT
The key aims (objectives) of a government are:
1. Economic Growth
2. Full Employment/ Low Unemployment
3. Price Stability/ Low Inflation
4. Balance of Payments of Stability
5. A Fair Redistribution of Income
1. Economic Growth
Economic growth refers to the increase in the value of goods and services produced in an economy over a
given period of time.
Reasons why governments aim for Economic Growth
Governments want to achieve economic growth because producing more goods and services can raise
people’s standard of living. People’s lives can be transformed and they may live longer because of
better nutrition, housing and healthcare.
Economic growth can help the government to achieve its other economic aims.
Jobs are created when firms increase their production leading to lower unemployment.
If output is increased to match higher demand, upward pressure on the price level can be avoided.
A country’s trade position may be improved if some of the extra output is exported.
Poor people might get jobs and the governments might allocate more funds to help them by using
the extra tax revenue generated from economic growth.
Criteria that governments set for economic growth
Governments aim for positive and sustainable economic growth.
Positive: because governments want the economy to be producing more goods and services each year.
Sustainable: because governments want the growth to be maintained over a long period of time.
2. Full Employment/ Low Unemployment
Full employment means that almost all individuals in the economy who are willing and able to work have
jobs.
At any point in time there is likely to be a small amount of unemployment as there will always be some
individuals who are in the process of finding work or moving between jobs.
Mr. P. Subban 1
, 4. Government and The Macroeconomy O – Level
Reasons why governments aim for full employment/low employment
Unemployment is a waste of resource. Government will have to spend funds from tax revenue to
provide unemployment benefits those people.
Full employment is likely to result in higher incomes, leading to an increase in consumer spending and
increasing the living standard of the population.
Higher spending by the population may also benefit the producers who are likely to benefit from a rise
in sales and higher profits.
Criteria that Governments set for Full Employment
Most governments and economists think that it is not possible to achieve 0 % unemployment as there will
always be some workers changing jobs and being unemployed for short periods.
Therefore, governments aim to keep unemployment as low as possible. An unemployment rate of about
4% of the total labour force is acceptable for most governments.
3. Price Stability/Low Inflation
Price stability means that the price level in the economy is not changing significantly over a period of
time. The price of some products may be falling while the price of others may be rising, but generally the
amount households are paying for the products they are buying are relatively stable.
Inflation refers to the sustained rise in the general level of prices of goods and services over of a given
period of time.
Why does a government want to achieve price stability/low inflation?
Low and stable inflation ensures greater economic certainty.
Consumers are confident enough that the money they earn today will buy about the same amount of
goods and services in the future. This encourages consumers to spend more.
Businesses are encouraged to invest in capital equipment to expand production, leading to higher
economic growth.
Price stability prevents the country from losing international competitiveness.
How does a government know when price stability is achieved?
Governments aim to keep inflation low and stable. An average increase in the general level of prices in an
economy of between 1% and 3% is acceptable for most governments.
Mr. P. Subban 2
MACROECONOMIC AIMS OF GOVERNMENT
The key aims (objectives) of a government are:
1. Economic Growth
2. Full Employment/ Low Unemployment
3. Price Stability/ Low Inflation
4. Balance of Payments of Stability
5. A Fair Redistribution of Income
1. Economic Growth
Economic growth refers to the increase in the value of goods and services produced in an economy over a
given period of time.
Reasons why governments aim for Economic Growth
Governments want to achieve economic growth because producing more goods and services can raise
people’s standard of living. People’s lives can be transformed and they may live longer because of
better nutrition, housing and healthcare.
Economic growth can help the government to achieve its other economic aims.
Jobs are created when firms increase their production leading to lower unemployment.
If output is increased to match higher demand, upward pressure on the price level can be avoided.
A country’s trade position may be improved if some of the extra output is exported.
Poor people might get jobs and the governments might allocate more funds to help them by using
the extra tax revenue generated from economic growth.
Criteria that governments set for economic growth
Governments aim for positive and sustainable economic growth.
Positive: because governments want the economy to be producing more goods and services each year.
Sustainable: because governments want the growth to be maintained over a long period of time.
2. Full Employment/ Low Unemployment
Full employment means that almost all individuals in the economy who are willing and able to work have
jobs.
At any point in time there is likely to be a small amount of unemployment as there will always be some
individuals who are in the process of finding work or moving between jobs.
Mr. P. Subban 1
, 4. Government and The Macroeconomy O – Level
Reasons why governments aim for full employment/low employment
Unemployment is a waste of resource. Government will have to spend funds from tax revenue to
provide unemployment benefits those people.
Full employment is likely to result in higher incomes, leading to an increase in consumer spending and
increasing the living standard of the population.
Higher spending by the population may also benefit the producers who are likely to benefit from a rise
in sales and higher profits.
Criteria that Governments set for Full Employment
Most governments and economists think that it is not possible to achieve 0 % unemployment as there will
always be some workers changing jobs and being unemployed for short periods.
Therefore, governments aim to keep unemployment as low as possible. An unemployment rate of about
4% of the total labour force is acceptable for most governments.
3. Price Stability/Low Inflation
Price stability means that the price level in the economy is not changing significantly over a period of
time. The price of some products may be falling while the price of others may be rising, but generally the
amount households are paying for the products they are buying are relatively stable.
Inflation refers to the sustained rise in the general level of prices of goods and services over of a given
period of time.
Why does a government want to achieve price stability/low inflation?
Low and stable inflation ensures greater economic certainty.
Consumers are confident enough that the money they earn today will buy about the same amount of
goods and services in the future. This encourages consumers to spend more.
Businesses are encouraged to invest in capital equipment to expand production, leading to higher
economic growth.
Price stability prevents the country from losing international competitiveness.
How does a government know when price stability is achieved?
Governments aim to keep inflation low and stable. An average increase in the general level of prices in an
economy of between 1% and 3% is acceptable for most governments.
Mr. P. Subban 2
