2.6.1 possible macro objectives

How many macroeconomic objectives are there?

7

1. Economic growth

Increase in production of g+s in an economy over a period of time - measured as percentage increase in real GDP

Benefit of economic growth

→ Higher living standards: increased income + improved QOL e.g. rapid growth in China lifting millions out of poverty

Cost of economic growth

→ Inflation: Rapid growth can lead to rising prices e.g. hyperinflation Zimbabwe - 2000 + 2008

2. Low unemployment

Large proportion of labour force is employed, leading to higher income + production levels in economy

Benefit of low unemployment

→ Higher income: more people earning wages e.g. low unemployment rates in Germany contribute to high standards of living

2 Costs of low unemployment

→ Inflation: can drive wages up, leading to inflation e.g. Phillips Curve theory where lower unemployment leads to higher inflation

→ Skill mismatches: Job types change, since there is a tight labour market, employers may start hiring workers who don’t fully match the skill requirements for certain jobs

3. Low + stable rate of inflation

Prices of g+s rise slowly + predictably over time

2 benefits of low + stable rate of inflation

→ Predictability: helps businesses plan for future e.g. European central bank targeting 2% inflation

→ Maintained purchasing power: protects consumer savings

2 costs of low + stable rate of inflation

→ Interest rates: low inflation can lead to low-interest rates, which may not always stimulate investment e.g. Japan’s experience with low inflation + near-zero interest rates (saving becomes more attractive than investing if prices are expected to fall)

→ Deflation risk: if inflation is too low, economy may slip into deflation, which can be harmful

4. Balance of payments equilibrium on current account

The value of exports of g+s is roughly equal to the value of imports, avoiding large deficits/surpluses

2 benefits of balance of payments equilibrium on current account

→ Economic stability: reduces reliance on foreign debt e.g. Germany’s balanced current account contributing to economic stability

→ Exchange rate stability: avoids large fluctuations in currency value

2 costs of balance of payments equilibrium on current account

→ Export dependency: too much focus on exports can make economy vulnerable to global downturns e.g. South Korea’s dependence on exports makes it sensitive to global market changes

→ Consumption sacrifice: may require reduced domestic consumption to balance trade

5. A sustainable level of gov borrowing

When gov revenues equal gov expenditures over a fiscal period

2 benefits of sustainable level of gov borrowing

→ Debt control: prevents accumulation of national debt e.g. Sweden’s fiscal policies aimed at balancing the budget

→ Investor confidence: attracts foreign investment by showing fiscal responsibility

2 costs of sustainable level of gov borrowing

→ Public services: may require cuts in public services/higher taxes e.g. Austerity measures in Greece leading to public unrest

→ Flexibility: reduces gov’s ability to respond to economic crises

6. Protection of environment

Policies aimed at reducing pollution, conserving natural resources, + promoting sustainable practices

2 benefits of protection of environment

→ Sustainable development: ensures resources are available for future generations e.g. Denmark’s investment in renewable energy

→ Health benefits: reduces pollution-related health issues

2 costs of protection of environment

→ Economic trade-offs: environmental regulations can increase production costs e.g. restrictions on fossil fuels affecting energy industries

→ Competitive disadvantage: stricter regulations can make domestic firms less competitive internationally

7. Greater income equality

A more equitable distribution of income across society, reducing gap between rich + poor

2 benefits of greater income equality

→ Social cohesion: reduces social tensions + promotes fairness e.g. Nordic countries with low Gini coefficients (measure of income inequality) + high social trust

→ Economic stability: more equal societies tend to have more stable economies

2 costs of greater income equality

→ Incentives: high redistribution may reduce incentives to work + invest e.g. debate over high taxation in France leading to wealth fight

→ Gov spending: requires significant gov intervention + spending