T.

KAJAN
EU/IS/2015/MS/61
 CONTENTS

 Objectives of this assignment

 Macroeconomics
 Macroeconomics objectives
 Importance of macroeconomics objectives
 Objective of this assignment

Macroeconomics is concerned with issues, objectives and policies

that affect the whole economy. All economic analysis that refers
to aggregates is macro.
The four major objectives are:
1. Full employment
2. Price stability
3. A high, but sustainable, rate of economic growth
4. Keeping the balance of payments in equilibrium.
In this Learn-It, we will look at the way in which these objectives
are measured. In the next, we shall look at why these objectives
are important, their relative importance and how successful
recent governments have been in achieving these goals.
 Macro economics

What is macroeconomics?
Macroeconomics is a branch of economics dealing with the
performance, structure, behavior, and decision-making of an
economy as a whole. This includes regional, national, and global
economies.
 Objectives of macro economics

Economists usually distinguish five objectives of macroeconomic

policy, which in its turn can also be used to appraise the
performance of the economy.

 Economic growth is determined to establish a country's

total production of goods and services. (GDP)
 Full employment - The unemployment rate is calculated to
establish the level of unemployment in a country.
 Price stability - Economists are interested in what is
happening to the prices of goods and services. They want to
know what is happening to inflation. How do we calculate
the inflation rate?
 Income equality - Meaning, how is income distributed
amongst individuals or households. Income equality is
measured by the Gini coefficient and the Lorenz curve.
 Balance of payment - This concerns a country's economic
links with other countries. A country keeps record of its
transactions, the amount of exports, imports, investment,
savings and so on.
Every country has macroeconomic goals that it wants to achieve,
these goals or objectives are key to ensuring long-term
stable economic success. These are the five main macroeconomic
goals that most central banks aim to achieve.
 Importance of macroeconomic objectives

1. Economic growth

 what is economic growth and why it is important for

an economic?

Economic growth means a rise in real GDP; effectively

this means a rise in national income, national output
and total expenditure. Economic growth should enable
a rise in living standards and greater consumption of
goods and services. As a result, economic growth is
often seen as the 'holy grail' of macroeconomics
However, this simplistic emphasis on economic growth
is often criticised because living standards depend on
many more factors than just increasing real GDP. Some
economists have suggested that a more useful
measure is to look at a wider range of factors, such as
the Human Development Index (HDI) which measures
GDP but also statistics such as literacy and healthcare
standards. Some also argue we should not be using
GDP but, a happiness index.
 Reduction in poverty. Increased national output means
households can enjoy more goods and services. For
countries with significant levels of poverty, economic growth
can enable vastly improved living standards. For example, in
the nineteenth century, absolute poverty was widespread in
Europe, a century of economic growth has lifted nearly
everyone out of this state of poverty. Economic growth is
particularly important in developing economies.
 Reduced Unemployment. A stagnant economy leads to
higher rates of unemployment and the consequent social
misery. Economic growth leads to higher demand and firms
are likely to increase employment.
 Improved public services. Higher economic growth leads to
higher tax revenues (even with tax rates staying the same).
With higher growth, incomes and profit, the government will
receive more income tax, corporation tax and expenditure
taxes. The government can then spend more on public
services.
 Reduced debt to GDP ratios. Economic growth helps reduce
debt to GDP ratios. In the 1950s, the UK had a national debt
of over 200% of GDP. Despite very few years of budget
surplus, economic growth enabled a reduction in the level of
debt to GDP.
2. Full employment

 Why is full emplyment is impotant to an economic?

Full employment is an economic situation in which all

available labor resources are being used in the most
efficient way possible. Full employment embodies the
highest amount of skilled and unskilled labor that can
be employed within an economy at any given time.

Full employment involves zero or very low

unemployment. In practice, there will always be some
frictional unemployment as people are looking for new
jobs or leaving school. Economists suggest an
unemployment rate of 3% is close to full employment.
However, it is difficult to determine precisely. Full
employment implies the macroeconomy is operating
at its full capacity and there is no output gap or
demand deficient unemployment.

The main reason for targeting full employment is

because high unemployment has various social and
economic costs. Firstly, the unemployed will have low
income enabling low levels consumption. This low
income will lead to relative poverty. Also, the
unemployed may become de-motivated and de-skilled.
On the job training, is considered important to
employers. Being unemployed with no money to spend
on training and unable to work can create a negative
cycle for the unemployed which makes it difficult for
them to find work in the future. People experiencing
long-term unemployment find it the most difficult to
gain employment. (Hysteresis effect)

Also, during periods of high unemployment, the

government will have to spend more on
unemployment benefits and also the government will
receive lower tax revenues (less VAT, lower income
tax). Therefore, high unemployment will increase
government borrowing. Finally, unemployment may
exacerbate social problems such as crime, vandalism
and social alienation, especially if unemployment is
concentrated amongst young people who feel
alienated by having no jobs.

Therefore, given the costs of unemployment, there are

many social benefits to achieving full employment.
Also, by achieving full employment, it will have the
side-effect of improving other objectives of the
government. Lower unemployment will reduce
government borrowing and help economic growth. If
the unemployed gain work, they will increase
spending, and this will cause a positive multiplier effect
which helps to increase economic growth.
To achieve full employment, if there is a negative
output gap, Keynesians will argue that it is necessary to
increase AD.

This can be achieved by loose fiscal or monetary policy

e.g. lower interest rates. Increasing AD may cause
inflation to increase, but if there is spare capacity there
should only be a limited increase in inflation.
Therefore, there is a strong case for aiming for full
employment through demand management (either
fiscal or monetary policy).
3. Price stability

 Why is price stability important to an economic?

Price stability implies avoiding both prolonged inflation

and deflation.

Inflation is a rise in the in the general price level of

goods and services in an economy over a longer period
of time resulting in a decline in the value of money and
purchasing power. Deflation is a decrease in the
general price level of goods and services over a longer
period of time. Too rapid inflation is negative for many
reasons: it complicates the economic decision-making
process and slows economic growth. In addition,
inflation diminishes the value of savings. Deflation is
accompanied by the threat of a slowdown in economic
growth, because the general level of prices declines,
and thus, people postpone consumption and
companies postpone investment. There may emerge
an inflationary gap which is very difficult to overcome.
The real value of loans that are not repaid increases,
which means that borrowers run into difficulty, and
loan losses pose a threat to financial institutions as
well. Often, enterprises find it hard to lower wages,
even if the price of their output declines. This causes
an increase in unemployment and in the number of
bankruptcies.
 Price stability contributes to achieving high levels of
economic activity and employment by
 improving the transparency of the price mechanism. Under
price stability people can recognise changes in relative prices
(i.e. prices between different goods), without being
confused by changes in the overall price level. This allows
them to make well-informed consumption and investment
decisions and to allocate resources more efficiently;
 reducing inflation risk premia in interest rates (i.e.
compensation creditors ask for the risks associated with
holding nominal assets). This reduces real interest rates and
increases incentives to invest;
 avoiding unproductive activities to hedge against the
negative impact of inflation or deflation;
 reducing distortions of inflation or deflation, which can
exacerbate the distortionary impact on economic behaviour
of tax and social security systems;
 preventing an arbitrary redistribution of wealth and income
as a result of unexpected inflation or deflation.
4. Income equality

 Why is income equality is important to an economy?

Equitable distribution of income ensures distributing

welfare to ensure fairness and allowing members of
the economy to have the same opportunity to
accumulate wealth.
The Government redistributes tax revenue to ensure
equitable distribution of wealth. Low income earners
should receive an adequate amount of support that
assists in cost of living pressures but does not
compromise on reducing the incentive to work and
accumulate wealth.

A more equitable distribution of income may help

accelerate growth and promote economic
development. Equitable doesn’t mean equal
distribution of income. It refers to the distribution of
income that is ‘fair,’ but the concept of ‘fair’ is
subjective.
Distribution of wealth and income is the way in which
the wealth and income of a nation are divided among
its population. Or the way in which the wealth and
income of the world are divided among nations.
Equitable distribution of income allows for social
harmony and cohesion. If wealth is too unevenly
distributed, then majority members of an economy will
be disadvantaged at the expense of very few who are
well off. Equitable distribution of income also allows
low income earners ability to access opportunities to
grow wealth.
5. Balance of payments

 Why is keeping balance of payments is important to

economic?

For developed economies with mature and free capital

markets, balance of payments disequilibria are not so
important nowadays. If a developed country has, for
example, a current account deficit, it can usually
attract enough foreign investment on the capital
account to balance their books. In other words, they
can finance the deficit.
Some economists argue that it is a bad thing, but more
in the sense that it is a sign of the uncompetitive-ness
of the economy's industries. Economies with continual
current account deficits are not 'paying their way' in
the world.
The problem lies with developing countries that
experience large current account deficits over a long
period of time. They may simply not be able to finance
this deficit. They need to pay for the imports in the
currency of the country from whom the goods are
bought. The US dollar is usually accepted worldwide. If
they can't earn enough US dollars to pay for their
imports, can't attract the foreign investment and can't
convince other countries to lend them money, then
they will be in trouble. Countries in this much trouble
can knock on the door of the International Monetary
Fund (IMF) looking for funds. These will only be lent
under quite severe economic conditions, like
keeping government spending down to a prohibitively
low level.
Current account surpluses might not seem so bad (I'd
prefer my bank account to be in surplus rather than
deficit!), but they do mean that the economy is
sacrificing consumption at home for exports abroad.
Also, they can be bad for the simple reason that one
country's surplus is another country's deficit. It is
probably best not to ruin a country to which you
export. Also, one doesn't want to sour trade relations,
otherwise you might provoke a trade war (The USA
and Japan have a lot of history here - see the previous
Learn It). The USA and the EU are currently arguing
over the labelling of products that contain genetically
modified (GM) materials.
Thank you