Macroeconomic policy objectives

Microeconomics vs Macroeconomics Micro – unit 1 Macro – unit 2 From Greek prefix mikro- meaning "small”, is a branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of limited resources. Typically, it applies to markets where goods or services are bought and sold. The field of economics that studies the behaviour of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.

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Policy objectives The government’s major policy objectives. These are Economic growth Stable prices (inflationary control) Full employment Balance of payments Why these? The primary aim of all governments is to improve economic welfare, this comes with economic growth, but the trade offs that come with this necessitate the pursuit of other objectives to ensure continued growth.

Activity Prepare to present a case why your policy objective should be prioritised above the other three.

Prioritising policy objectives Responsibility Economic growth Stable prices (inflationary control) Full employment (unemployment) Balance of Payments

Economic growth Why pursue economic growth? To bring about improvements in standards of living. To ensure the economy uses its 4 factors to their full potential ensuring productive and allocative efficiency. To be re-elected. To satisfy the human condition of ‘improving’ upon previous performance.

Stable prices (inflationary control) Why pursue price stability? To maintain levels of confidence in the economy and continued economic growth. To maintain international competitiveness and help regulated the balance of payments. To ensure economic growth continues and thus rising levels of employment. Some would argue, the pursuit of price stability (inflationary control) is the prime requisite for achieving the other macroeconomic objectives.

Full employment Why pursue full employment? Unemployment represents a waste of a scarce factor of production. By being employed, goods and services are being produced thus improving economic welfare. Being employed brings about improvements in ones standards of living and reduces ‘human misery’. Government revenues rise and outflows fall thus increasing funds to spend on public and merit goods. To be re-elected.

The Balance of Payments (X-M) Why pursue the balance of payments account? To maintain the relationship between what we earn internationally (exports) and that which we buy (imports). As with any household, it cannot buy more than it earns indefinitely, it will have to borrow (or print) money to fill any shortfall. The balance of payments can conflict with domestic policy objectives where net exports can be expansionary and net imports contractionary.