Macroeconomic Policy Objectives - Essay Example

Macroeconomic Policy Objectives All governments have aims and targets for their respective economies. These are referent to the aims and goals of the policy pursued by the government, which differ from macroeconomic instruments. They are the means for governments to achieve these macroeconomic aims. On the other hand, targets are defined as the intermediate aims closely linked to the objectives theoretically. Thus, for example, a government could set out to achieve low rates of inflation and, to achieve this; they could use interest rates as an instrument while the government could also set consumer credit growth as a target or exchange rates increment. The policies that can be used, by a government, to achieve macroeconomic policies are limited. Macroeconomics is the branch of economics that has to do with investment, national income, consumption, and other aggregates. Another definition is the study of entire systems of economics that aggregate over an economy’s working systems. It is concerned, basically, with systematic and predictable variables that are analyzable independently in relation to decisions of agents that are determinant of their levels. More specifically, macroeconomics can also be defined as the study of national economies with determination of national income. Macroeconomic Policy Low unemployment – Full employment A realistic nature of this objective is the one used by the ILO where they use young and unemployed people who are not always eligible to receive benefits, women who are in a marriage and cannot claim if spouses are not earning enough, and those claiming invalidity and sickness benefits (Marin 16). Most workers who feel inconvenienced often go for these benefits rather than swelling unemployment numbers. It is essential to take note of issues concerning inactive and active members of the country’s populace who have attained working age. Only those active individuals are included in the either working population that can be exemplified as all people who are registered as employed or unemployed. However, some individuals are in the unemployed category as a matter of decision, for instance, individuals opting for early retirement and students in school (Marin 16). Price Stability One can define inflation as the rise in prices at a general sustained level over a period. Inflation is technically a measure through annual Retail price Index, or RPI, which can also be referred to as the headline rate of inflation. To stabilize prices, governments need to keep inflation rates to a minimum (Marin 17). Governments normally prefer to keep the inflation rates to low percentages and mostly target rates of inflation that underlie the yearly percentage of RPIX. RPIX is the initial RPI before the removal of housing costs in the form of mortgage interest payments. Governments normally see sense in utilizing the measure because interest rates that are normally used as a control of inflation directly affect RPI. RPIY also acts as another popular inflation measure that does not include effects of indirect taxation like VAT and consumer price index used for international comparisons (Marin 17). Economic Growth This is measured using GDP change rate, also Gross Domestic product. The term real, as accompanies majority of the statistics, normally refer to the fact that they have factored out inflation. Gross Domestic Product measures income, expenditure, or output of the economy of a country (Marin 19). A country, sometimes may also utilize GNP, or Gross National Product that is just like the GDP. Most governments publish figures of Gross Domestic Product on a quarterly basis that is based on the quarter on quarter change and annual percentages. Balance of Payment This briefly makes a record of all the money that streams into and out of the country. This can be further divided into financial and capital accounts, as well as the current account and capital accounts are referred to as the capital account (Marin 19). Normally, the current account is the most fundamental because it acts to record how well a government’s exports are doing. If countries need to pay for their way internationally in the long term, then it will have to get adequate foreign currency via exports to pay for their imports. If this is not the case, then the country’s account is referred to as being in deficit. While it may seem that a surplus is a good thing as compared to a deficit, this could also be a negative thing. While Japan has had the biggest surpluses for a long time in the world, the United States has the largest international deficit. The United Kingdom, on the other hand, has a deficit (Marin 19). Regional Policy The regional policy in the United States began in the 30s when there was an economic depression and a heavy devastation of the factories in some of the states in the country. For this reason, a country may establish areas to lend assistance where industries and companies acquire grants to protect jobs (Marin 20). In the UK, there was little change over the next 40 years as they pursued a similar policy despite criticisms to the policy in the 70s, it was only when PM Thatcher came in that the policy was rolled back at the time that Ronald Regan was doing the same. The regional policy in the European Union strongly advocates for an injunction and state aid to counter unfair competition. The main aim of their regional macroeconomic policy is social and economic with more than 35% of the budget moved to less favored regions. Those regions that lag behind socio-economically undergo restructuring in order for them to cope with the difficulties that afflict them, as well as to benefit from opportunities arising from single markets (Marin 20). Redistribution of Income and Wealth This macroeconomic objective can be defined as the transfer of property, income, or wealth from some individuals to others due to various social mechanisms such as divorce, monetary policies, charity, and taxation (Marin 21). The desirability and effects of redistribution of income and wealth is an issue that is debated actively on grounds of ethics and economics, including analysis of its means, effectiveness, and objectives. Personal wealth distribution, as well as relative wealth value, in the western world has increased significantly in the past two decades. Distinct changes in policy in the west have also been seen in; finance, education, housing, personal care, and entitlement that make the position of personal assets more essential, as well asset welfare based policies. Conflicts Economic growth and Inflation If an economy has a growth rate that is too fast, especially fuelled by excessive consumer spending, then it is possible for demand to outstrip the supply by some distance, which causes a rise in product and service prices (Fratianni et al 52). The steps taken, by the government, to keep inflation rates at a minimum like increased rates of interest will equally restrict growth via a reduction in investment and spending. To achieve both aims is almost impossible. This can be remedied, to some extent, by managing the growth rate trend that is viewed as the growth rate achievable by a country without the inflation rate getting out of control. Most countries in the west, in the late 20th century and early 21st century, were able to walk a tight rope without going into a recession or attain high rates of inflation (Fratianni et al 52). Attaining an Equilibrium between Healthy Growth and Balance of Payments Economies that have high growth rates are also likely to see high consumer spending. American consumers, like the UK counterparts, are likely to purchase products from outside the country compared to their own. The growth of imports, therefore, will increase compared to that of exports that lead to a trade deficit increase (Fratianni et al 53). Where the balance of payments in the previous years was one of the most important macroeconomic objectives, WTO rules have decreased its importance because governments would have had to use import controls or change exchange rates. Additionally, governments would have been required to deflate their economies that would lead to decreased growth rates. Employment and Low Inflation The two variables possess an inverse relationship in the classic economic theory. When a government attempts to decrease unemployment rates using increased public spending and lower interest rates for reflationary measures, the reduction in unemployment also leads to increased wage bills and higher prices (Fratianni et al 53). On the other hand, when a government attempts to control rates of interest and reduce government spending, there is a reduction in consumer spending and a loss of jobs. In short, the cost of low levels of inflation is unemployment. Economic Growth and Income & Wealth Equality Wealth and income equality was the fundamental macroeconomic objective for socialist governments, although it is now rare in the new labor world. However, government leftists believe that it is an admirable and essential aim (Fratianni et al 54). With the growth of the economy, the poor in the country may get some of the benefits from the growth through the trickle down effect. This, however, overlooks the fact that the wealthy become wealthier. The creation of the welfare system has not reduced this as the wealthy keep getting wealthier with stagnation or worsening of the poor’s living standards. The model of communism used by the USSR was conscious up to the 80s, although the system possessed inherent deficiencies that slowed down the rate of growth (Fratianni et al 54). Measures of National Income Statistics There are three primary methods of measuring statistics of national income with the method to be used dependent on the purpose and availability of data. The first is the product method and, according to it, the total value of services and goods that a country produces is calculated using market prices (Kurihara 45). When using this method, only the final services and goods are included with intermediary services and goods not being accounted for. The second measure is the income method that adds up the net income payments that all its citizens receive. The earned net incomes by production factors are in the form of aggregated profits, interest, wages, and rent (Kurihara 45). However, national income does not include transfer payments. The third method is the expenditure method, and this adds up the total expenditure that the country incurs in a specific year. Expenditures used include net foreign investments, expenditure on services and goods by the government, net domestic investment, and personal consumption expenditure. Using these methods, the total expenditure is equal to the national income. The application of these methods gives identical results, and the use of any one of them depends on the level of calculation for national income. The expenditure method is utilized at expenditure level, product method at the product level, and income method at the income level (Kurihara 46). The choice on which one to use is dependent on the level at which calculation of national income is being made, with the product method use for underdeveloped countries and the income method used to estimate national income in developed countries. Works Cited Fratianni, Michele. Salvatore, Dominick. & Von Hagen, Ju?rgen. Macroeconomic policy in open economies. Westport: Greenwood Press, 2011. Print. Kurihara, Kenneth. National Income and Economic Growth. London: Routledge, 2010. Print. Marin, Alan. Macroeconomic Policy. London: Routledge, 2012. Print. Read More