Possible Macroeconomic Objectives

  • Created by: BKaur
  • Created on: 21-11-18 19:26

Possible Macroeconomic Objectives

  • Governments will try to manipulate and control the economy - to improve economic performance
  • Most governments will have targets relating to:
    • Economic Growth
    • Inflation
    • Unemployment
    • Current Account Balance
    • Government Budgets/Budget Position
    • The Environment
    • Income Inequality/Income Distribution
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Economic Growth

  • Governments want to maximise the economic growth rate of their economy
  • As an economy grows, the standard of living should improve - making a stronger economy
  • In low to middle income countries, high growth rates are possible - and 10% may be a target
  • These countries are moving from low productivity agricultural jobs to higher productivity manufacturing jobs - meaning the workforce can produce more, achieving high growth rates
  • In the high income countries, lower rates of growth are realistic - around 2.5% being a common target
  • These countries have been through the process of industrialisation, with high productivity, meaning limited economic growth
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Inflation

  • Targets for inflation are set by governments and central banks around the world
  • These will aim for low, stable and predictable positive inflation
  • Governments fear high inflation - due to having more costs associated with it
  • Governments also fear deflation due to the negative effect on economic growth
  • UK has a inflation target of 2%
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Unemployment

  • Governments want to keep unemployment as low as possible
  • Impossible to achieve 0% unemployment - due to frictional and seasonal unemployment
  • Most governments will aim for a low unemployment without causing inflation
  • Around 5% is a reasonable target for developed economies
  • Governments have focused on increasing the number of people in employment, as well as reducing unemployment
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Current Account Balance

  • Most governments want the current account balance to be in balance over time
  • Surpluses are often seen as a sign of a strong economy
  • Deficits are often seen as a sign of a weak economy
  • However, reality is more complex - some countries can run large prolonged deficits with no consequences
  • Large deficits are avoided, as they can cause signficant problems
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Government Budgets/Budget Position

  • Governments want to manage their budget position
  • The government accepts that they may need to have a deficit at times (when tax revenues are low and government spending increases - in a recession), but should be able to pay for these when tax revenues and spending falls (in a boom)
  • However, since the financial crisis of 2008, the size of budget deficits has become more of a focus for governments
  • After the financial crisis of 2008, people became unemployed so budget deficits grew in many countries - reducing tax revenue and increasing government spending
  • As budget deficits increased, national debt also increased
  • The increases in budget deficits and the national debt became unsustainable, and reducing budget deficits became a more more important policy objective
  • There is an argument about the best way to reduce deficits - some believe it should be done quickly, even if it reduces growth
  • Others believe slow reduction of the deficit can allow the economy to grow, which will cut the deficit further
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The Environment

  • The impact on the environment of economic activity is difficult to measure
  • The government will have a wide range of targets (e.g. from air quality to litter to global warming)
  • However, most governments are trying to limit their impact by agreeing to CO2 emission targets
  • The effect of growth on the environment is debatable - some say growth uses resources and damages the planet; others argue that growth allows new technologies that can reduce pollution
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Income Inequality/Income Distribution

  • Different governments will have different views on income inequality
  • RIGHT-WING ECONOMISTS: argue that income inequality creates an incentive to work and improve yourself; they don't use policies to improve inequality
  • LEFT-WING ECONOMISTS: feel that it is more important to be fair and everyone should have access to a certain standard of living; they would intervene in the market to help improve equality - through minimum wages, maximum prices, providing healthcare and education, or redistributing income through taxation and government spending
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