CHAPTER 45 & 46 Government Macroeconomic policy objectives
The govt. has five major macroeconomic objectives:
Price Stability:
Inflation is the continuous rise in the average price levels. If prices rise too quickly it
can negatively affect the economy because it can:
-Reduce people’s purchasing powers
-Cause hardships for the poor.
-Increase business costs especially as workers will demand for more wages to
-support their livelihood.
-Will make products more expensive than products of other countries with low inflation
and therefore will reduce exports.
Governments aim for price stability because it ensures greater economic
certainty and prevents the country’s products from losing international
competitiveness. If consumers and producers have an idea about future level of
prices, they can plan with greater confidence. In seeking to achieve price stability, most
governments are not aiming for a zero percentage change in price. A common target is
a stable inflation rate of 2%.
They do not aim for unchanged prices, for two main reasons. One is that measures of
inflation tend to overstate rises in prices. A second reason is that a slight rise in prices
can provide some benefits. It can encourage producers to increase their output.
Balance of Payments Stability:
The ideal situation is for the balance of payments to be in equilibrium i.e. the inflows of
money equal the outflows across the whole account. Countries are usually concerned
about their current accounts.
Over the long run, most governments want the value of their exports (sell out) to equal
the value of their imports (buy in). If expenditure on imports exceeds revenue from
exports for a long period of time, （ Imports>Exports = Deficit ） the country will be living
beyond its means and will get into debt. If export revenue is greater than import
expenditure, （ Exports>Imports = Surplus ） the inhabitants of the country will not be
enjoying as many products as possible.
All economies try to balance this inflow and outflow of international trade because:
- It may run out of foreign currency to buy imports.
- The value of it’s currency may fall against other foreign currencies and make imports
more expensive to buy.
Governments also seek to avoid sudden changes in other parts of the balance of
payments. This is because they can prove to be disruptive for the economy.
, Full Employment:
Most governments try to achieve full employment. This means that people who are
willing and able to work can find employment. Of course, not everyone wants to
work or is able to work. These people are not in the labor force. They include children,
retired, those engaged in full time education, home makers.
The unemployment rate is calculated as a percentage of the labor force, i.e.:
Unemployed / Labor force X 100
Most economists think that full employment is not actually 0% unemployed. They
usually put the figure at approximately 3%. This is because they think that even in a
strong economy; there will always be some workers changing jobs and being
unemployed for short periods.
If there is a high level of unemployment in a country, the following may happen.
-The total national output (goods produced) will fall.
-Government may have to give welfare payments (unemployment benefits) to the
unemployed, increasing public expenditure.
Economic Growth:
Economic growth refers to the gross domestic product (GDP) per head, i.e., the
amount of goods and services available for every person in the economy.
When an economy experiences economic growth, there is an increase in its output in
the short run. This is sometimes referred to as actual economic growth. In the long
run, for an economy to sustain its growth, the productive potential of the economy has
to be increased. Such an increase can be achieved as a result of a rise in the quantity
and/or quality of factors of production and is called potential economic growth.
Governments aim to achieve sustainable economic growth. High growth rates may be
very good for developing countries, but if they are achieved by depletion and exhaustion
of scarce natural resources or by too much pollution, leading to climate change, then
the high rates will not be sustainable.
Economic Development:
The need for development is to raise the standard of living of the country as a whole
and of the poorest groups in particular. This includes: higher incomes; more jobs to
reduce unemployment; better, and more, food, housing, etc; greater availability of, and
higher quality, education and health facilities.
Sustainability:
The idea is to develop growth which is lasting and makes a real difference to
individuals. It recognizes that everybody has the right to a healthy, clean and safe
environment. In 2015 the United Nations passed a resolution called Agenda 2030. This
set out 17 Sustainable Development Goals (SDGs), sometimes called Global Goals as
The govt. has five major macroeconomic objectives:
Price Stability:
Inflation is the continuous rise in the average price levels. If prices rise too quickly it
can negatively affect the economy because it can:
-Reduce people’s purchasing powers
-Cause hardships for the poor.
-Increase business costs especially as workers will demand for more wages to
-support their livelihood.
-Will make products more expensive than products of other countries with low inflation
and therefore will reduce exports.
Governments aim for price stability because it ensures greater economic
certainty and prevents the country’s products from losing international
competitiveness. If consumers and producers have an idea about future level of
prices, they can plan with greater confidence. In seeking to achieve price stability, most
governments are not aiming for a zero percentage change in price. A common target is
a stable inflation rate of 2%.
They do not aim for unchanged prices, for two main reasons. One is that measures of
inflation tend to overstate rises in prices. A second reason is that a slight rise in prices
can provide some benefits. It can encourage producers to increase their output.
Balance of Payments Stability:
The ideal situation is for the balance of payments to be in equilibrium i.e. the inflows of
money equal the outflows across the whole account. Countries are usually concerned
about their current accounts.
Over the long run, most governments want the value of their exports (sell out) to equal
the value of their imports (buy in). If expenditure on imports exceeds revenue from
exports for a long period of time, （ Imports>Exports = Deficit ） the country will be living
beyond its means and will get into debt. If export revenue is greater than import
expenditure, （ Exports>Imports = Surplus ） the inhabitants of the country will not be
enjoying as many products as possible.
All economies try to balance this inflow and outflow of international trade because:
- It may run out of foreign currency to buy imports.
- The value of it’s currency may fall against other foreign currencies and make imports
more expensive to buy.
Governments also seek to avoid sudden changes in other parts of the balance of
payments. This is because they can prove to be disruptive for the economy.
, Full Employment:
Most governments try to achieve full employment. This means that people who are
willing and able to work can find employment. Of course, not everyone wants to
work or is able to work. These people are not in the labor force. They include children,
retired, those engaged in full time education, home makers.
The unemployment rate is calculated as a percentage of the labor force, i.e.:
Unemployed / Labor force X 100
Most economists think that full employment is not actually 0% unemployed. They
usually put the figure at approximately 3%. This is because they think that even in a
strong economy; there will always be some workers changing jobs and being
unemployed for short periods.
If there is a high level of unemployment in a country, the following may happen.
-The total national output (goods produced) will fall.
-Government may have to give welfare payments (unemployment benefits) to the
unemployed, increasing public expenditure.
Economic Growth:
Economic growth refers to the gross domestic product (GDP) per head, i.e., the
amount of goods and services available for every person in the economy.
When an economy experiences economic growth, there is an increase in its output in
the short run. This is sometimes referred to as actual economic growth. In the long
run, for an economy to sustain its growth, the productive potential of the economy has
to be increased. Such an increase can be achieved as a result of a rise in the quantity
and/or quality of factors of production and is called potential economic growth.
Governments aim to achieve sustainable economic growth. High growth rates may be
very good for developing countries, but if they are achieved by depletion and exhaustion
of scarce natural resources or by too much pollution, leading to climate change, then
the high rates will not be sustainable.
Economic Development:
The need for development is to raise the standard of living of the country as a whole
and of the poorest groups in particular. This includes: higher incomes; more jobs to
reduce unemployment; better, and more, food, housing, etc; greater availability of, and
higher quality, education and health facilities.
Sustainability:
The idea is to develop growth which is lasting and makes a real difference to
individuals. It recognizes that everybody has the right to a healthy, clean and safe
environment. In 2015 the United Nations passed a resolution called Agenda 2030. This
set out 17 Sustainable Development Goals (SDGs), sometimes called Global Goals as
