There are four major macroeconomic targets. They are Full Employment, Inflation Control, Balance of Payments Equilibrium and Economic Growth. This topic is very interesting as it can form the introduction to the macroeconomic part of the course and also a central part of the end of the course when it considers the objectives of Government.
2. Full Employment
The dominant economic and social objective of government is to achieve full employment. It has been defined as a situation where work is available for all those willing and able to work at the going wage rate. To achieve this objective then the problem of unemployment must be tackled.
There are five main causes of unemployment
(1) Structural Unemployment
Structural unemployment is where the structure of the economy changes. Employment in some industries may expand while in others is contracts. This can be caused by a change in the pattern of demand such as the demand for coal. A second reason could be a change in the methods of production. This is known as technological unemployment where new technology leads to redundancies.
(2) Cyclical Unemployment
Cyclical unemployment is also known as Demand Deficient Unemployment and is associated with economic recessions. As the economy moves into recession consumer demand falls and in due course production will be reduced leading to laying off of workers. As the economy picks up on its path through the Trade Cycle so production increases and demand for labour increases. Hence the reference to Cyclical Unemployment.
Underemployment occurs when an individual is working below full capacity. It is also known as Disguised Unemployment. It can arise in a situation where for example, a worker is employed for only part of a week but his addition to total production (MPP) is very low. Likewise a university graduate with a first class honours degree is delivering goods for the local supermarket to earn a living.
Frictional unemployment is also regarded as Search Unemployment and occurs when there may be, say, 100 carpenters unemployed in New York while at the same time Universal Studios in Hollywood need 100 carpenters. At this point the carpenters are searching for work and Universal Studios are searching for workers.
This occurs where obstacles to the mobility of labour or the removal of the incentive to work such as in the following situations
3. Inflation Control
Keeping prices under control is a major concern in any economy. Some governments, such as the Thatcher governments of the 1980s, could be regarded as considering achievement of low levels of inflation as the prime macroeconomic target.
There are two main forms of Inflation. They are Demand Pull and Cost Push. Demand Pull arises where aggregate demand is greater than aggregate supply while Cost Push is a consequence of increasing costs such as wages and taxes pushing prices up. There are a number of Deflationary Measures which can be adopted in order to counter inflation.
1.Cutting government expenditure
reduces aggregate demand controls demand pull inflation
2. Increase direct taxation (income tax) to reduce aggregate demand
3. Reduce the money supply to control demand pull inflation through diminished aggregate demand
4. The government, together with the social partners, can establish control over excessive wage increases which lead to higher prices. The can encourage moderation by both workers in their wage demands and producers in their pricing policies. This can act as defence against cost push inflation
4. The Balance of Payments
In an open economy where there is a high level of dependency on foreign trade the authorities must maintain vigilance over their foreign trade because of the consequences in other areas.
One important point for observation is the annual Balance of Payments statistics. The balance of payments is a record of a country’s financial transactions with the rest of the world. In the current account it records the movements of exports and imports of both visible and invisible while the capital account movements of capital in and out of the country are recorded.
If a deficit on current account is recorded it is evidence that there has been an excess of imports of goods and services over exports of goods and services. The prime consequence of this is that there will be fall in demand for the national currency. (This should now be read in the EMU context). If there is a decline in demand for the currency the value could fall if the ECB does not take action to maintain its value. This could lead to other consequences such as increases in interest rates to protect the outflow of capital which will follow.
In summary, it is imperative that great vigilance should be maintained over our international trading position and every effort should be brought to bear to strengthen the system because of the consequences in other spheres.
5. Economic Growth
Economic growth involves a change in Gross National Product with no change in the structure of society. The achievement of substantial levels of growth is an aspiration of most policy options. It would be useful to consider the positive and negative features of economic growth.
Below are some of the most
(1) Increase in employment
(2) The standard of living of the people will be improved
(3) There will be an expansion and improvement in the infrastructure
(4) Increased investment will be encouraged
(5) Improved technology from the increased investment will stimulate production
While there are some noteworthy
benefits there are also some costs to be incurred in pursuing economic
growth as listed below
(1) The environment is threatened by factors such as building, chemicals and motorways.
(2) There may be waste of resources which are very finite
(3) There is a probability that the increased wealth will not be equitably distributed
(4) With urban expansion not enough care may be taken to safeguard the community against urban problems such as intensive housing without green space and other facilties leading to crime and vandalism.
The macroeconomic economy covers a broad canvas dealing with national and internationl issues. The four targets of full employement, inflation control, the balance of payments and economic growth need to be pursued and a degree of coordination maintained for the efficient management of the economy.