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Main objectives of government macroeconomic policy are often asserted to be full employment, stable prices, balance of payments equilibrium and a high growth rate. Consider some of the difficulties facing a government in its attempt to attain these objectives. by Mind Map: Main objectives of government macroeconomic policy are
often asserted to be full employment, stable prices, balance of
payments equilibrium and a high growth rate. Consider some
of the difficulties facing a government in its attempt to attain
these objectives.
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Main objectives of government macroeconomic policy are often asserted to be full employment, stable prices, balance of payments equilibrium and a high growth rate. Consider some of the difficulties facing a government in its attempt to attain these objectives.

Full employment

Challenges based on type of Unemployment

Monitoring

Structural, Retraining workers who are incapable or unwilling to be retrained in declining industries

Real wage, Counter trade unions

DD deficient, Increase investment/spending to increase firm demand for labour which is a derived demand

Frictional, Providing timely and accurate information to job seekers and firms so that they can make faster decisions and reduce the time they are unemployed hence increasing productivity, Increase incentives to work by cutting taxes and reducing unemployment benefits

Seasonal, Providing alternate jobs for people who are unable to work during off periods

Challenges to reach full employment

Monitoring, Economic cost of monitoring

Tradeoff: BOP equilibrium

To achieve full employment, expansionary policies are used., Rise in National income, Higher imports, BOP deficit worsens

Evaluation, Not a problem if multiple policies are used

Stable Prices

Tradeoff: Full employment

By reducing DD-pull inflation by lowering AD, DD-deficient unN may result., New node

Hence price stability and full employment could be conflicting goals., E.g., The Central Bank of Northwest Queoldiolia seeks to promote lower rates of unemployment through expansionary monetary policy. The economy expands, unemployment falls, and full employment is achieved, but inflation emerges from the over stimulated economy., New node

Evaluation

Liberals have tended to seek full employment over price stability.

Conservatives, in contrast, have sought price stability, more so than full employment.

Counter argument, Tackle cost push inflation=stable prices; do not sacrifice employment, e.g., Singapore, DD-deficient unN is insignificant, E/R used to control imported inflation, 2 objectives not conflicting

Balance of Payments equilibrium

Challenges/ conflicting goals

Growth sacrificed for BOP eqm, and vice versa, When an economy is growing quickly, consumer spending tends to be high. As we have already noted, British consumers tend to buy goods from abroad in preference to home produced goods. Hence, import growth picks up relative to exports, assuming an average growth rate in the countries that buy British goods, leading to a worsening trade deficit., Evaluation, Not a problem if multiple policies are used., Depends on state of economy., Recession, Growth is more important, Economic boom, BOP eqm is more important

Strong exchange rate may also be sacrificed thereby leading to uncompetitive export prices.

High growth rate

Challenges/ conflicting goals

Equity as tradeoff for growth, Argument of accumulation, lower income inequality would lower national savings rates and hence, hamper future growth, Evalutation, Equity may have positive impact on growth in LDCs, Greater social/political stability, Attract FDIs, Economic growth, Growth fuelled by trade, Benefits unskilled workers, Lack skilled workers, E.g., AsianTigers, DCs, Abundant in capital, skills and technology, Growth fuelled by trade, Benefits highly skilled, Inequity worsened due to growth, Counterarguments, A more equal income distribution leads to an increased demand for industrial goods which triggers off innovation and growth., Alesina and Perotti (1994), increased equality in income and capital, build up stocks of human capital more rapidly, increased investment in education by low income groups, Growth enhanced, (Person and Tabellini 1994)., inequality, voting behaviour which sanctions higher taxes and larger budget deficits, forces the application of redistributive policies which are growth destructive, with consequent negative negative influence on growth rates, higher level of government expenditure (as a result of higher taxes or deficit financing), increase investment in human resources, support the development of markets and improve infrastructure, following the new growth theories, contribute to higher levels of growth., some of the costs of achieving higher equality will be gained back over time, Impact of inequity, in case of countries with high inequality (a Gini ratio of 0.6 like Brazil, see Table 8) a poverty line of 15 per cent of per capita income will result in 23 per cent of the population in poverty, By reducing its inequality to that of a low inequality country (a Gini ratio of 0.28), its percentage of population in poverty would be less than 1 per cent.

Tradeoff: full employment, E.g., Higher growth at expense of structural unN, Seeking to keep pace with economic growth in neighboring Southeast Queoldiolia, the President of Northwest Queoldiolia enacts an intense program of scientific research and development. The program bears ample fruit, creating scores of new technological innovations that lead to high rates of economic growth, but implementation of the innovations disrupts the economy throwing millions of people who lack the necessary skills or training needed by the new technologies out of work.node, Evaluation, Liberals have tended to seek full employment over economic growth, Conservatives, in contrast, have sought economic growth more so than full employment.

Conclusion

Most important objective

inflation., If this goal is missed, it is felt, then the goal of higher growth will not be attainable either.

Choices have to be made between objectives i.e. there exist trade-offs between them

Reduced inflation= improved BOP=Improved equity

Higher growth=lower unN

Whether objectives conflict depends on types of policies used

Depends on state of economy

Economic boom, BOP eqm/equity/stable prices more important

Recession, Growth and full employment more important