Macro-Economic Objectives - Assignment Example

? and Section # of This Paperaims to answer questions regarding the macro-economic issues faced by businesses that are new to the market. Moreover, it would discuss the implications of these issues over the business environment. DISCUSSION Inflation, Unemployment and Economic Growth Inflation is defined as a rise in the general level of prices. By and large, inflation is measured by a number of indices, of which the most widely known and quoted is the retail price index (RPI). The RPI reflects a weighted average of price rises over the previous 12 months and as such it can be seen as the rate of inflation affecting the average household. (Jewell, 2007) Economists attribute inflation to one of the three causes; Excess demand in conditions of full employment, this is also known as demand pull inflation. Monetary inflation, which is the excess rise in the money supply A rise in the cost of production that is, in turn, passed on to the customers by firms enjoying some degree of monopoly power. This is cost push inflation. Inflation leads to a rise in prices, it has the effects of redistributing purchasing power. Businesses might suffer if their customers experience a decline in their real incomes. Moreover, if the inflation is one of costs rather than prices, profit margins will be squeezed. Conversely, inflation caused by access demand may lead to an increase in profits margin. One of the most damaging aspects of inflation from the business point of view is that it makes planning for the future difficult. Budgeting becomes difficult. Making provisions for expenses and purchases becomes difficult as prices tend to increase. (Jewell, 2000) The unemployed are defined in government statistics as those people seeking work who are unable to obtain a job. Unemployment can occur due to deficiency in demand; this could be cyclic, which is temporary during recession. Or it could be persistent which results from long-term deficiency. Technological advancement curb the need for manpower and this can also result in unemployment. Structural unemployment occurs when there is a change in the structure of demand leading to the decline of a major industry. Regional unemployment occurs when a major local industry declines leaving the workers of that area unemployed. Frictional unemployment results from the unemployment while job changing. Another form of unemployment is voluntary, which is the unwillingness to work at current rates of pay McEachern, 2008). In theory, a high level of unemployment should increase the reserves of labour available to business. Firms that are starting up would find labour easily. Furthermore, excess supplies of labour may also weaken the resolve of unions to demand high pay. These were the advantages of unemployment; however, it is possible for unemployment to coexist with shortages of particular types of labour or shortages in certain geographical regions. (Frank & Bernanke, 2001) Economic growth is basically an increase in the productive capacity of the economy or a rise in real national income per head. As it provides the means for achieving higher living standards for all, it opens up the prospects of reducing poverty without the necessity of income redistribution. Economic growth is beneficial to private sector firms. New market opportunities will be created in an expanding economy. This provides scope for emerging businesses as well as the expansion of existing ones. A growing economy is favorable for any business and especially the ones that are new. Economic growth is measured by the increase in the gross domestic product (GDP) of the country. GDP can be measured by the expenditure approach or by the income approach. (Wessels, 2006) International Trade and the Balance of Payments The balance of payments is a set of accounts recording details of a nations transaction with the rest of the world. The current account measures a country's trade in currently produced goods and services along with independent transfers between countries. (Abel & Bernanke, 2008 ) The current account of the balance is calculated by subtracting the total value of imports of goods and services from the total value of exports of goods and services. A deficit means that the total imports are greater than the exports and a surplus means that the total of exports exceeds that of the imports. A current account deficit is considered undesirable in that it has to be financed by a run on the country's foreign currency reserves or by borrowing from abroad. Alternatively, if the currency is allowed to float freely, it will cause the exchange rate to fall. The capital and financial accounts of the balance of payments record the real or financial assets international transactions. Unilateral transfers of assets between countries are recorded in the capital accounts. For example, the assets that migrants take with them when the move into or out of a country could be categorized as a capital account transaction. The capital account is used as a measure of the unilaterally transferred assets that come into the country. Majority of the transactions that involve the movement of assets into or out of a country are recorded in the financial accounts. The selling of an asset by a home country to another country is recorded as a financial inflow transaction for the home country and as a credit item in its financial account. (Abel & Bernanke, 2008) similarly, a financial outflow is when the home country buys an asset from abroad and as the funds are moving out of the country in result of this transaction, it is recorded as a debit item in the home country's financial account. Like the balance of payments, the balance of the financial account is calculated by subtracting the financial inflows from the outflows. When the selling of assets is greater than the purchases, the financial account shows a positive balance leading to a financial account surplus, while a negative balance indicates that there have been more purchases of assets from across the country than there have been sales and this result in a deficit in the financial account. (Blanchard, 2007) The balance of payment affects a number of different economic variables of a country. One of the most significant aspects of a current account deficit is the fall of exchange rates. A depreciation of exchange rate would make UK exports cheaper for foreign buyers and therefore boost sales of UK goods and services abroad. At the same time, depreciation will make foreign goods more expensive in the UK, thus reducing the quantity bought. The twin impact of exports and imports will bring a positive impact over the balance of payments. (Jewell, 2000) A deficit in the balance of payments leads to reductions in the aggregate demand as more money is being consumed in imports that are being earned through exports. It would also lead to an increase in unemployment if the exporting industries require less labour due to lower exports and if the UK businesses lose market share. There would also be a decline in capital investment spending by UK exporting companies with the decrease in sales. On the contrary, a balance of payment surplus would increase the job opportunities, thereby decreasing the level of unemployment. Furthermore, UK businesses would get a boost as the international demand would also be increasing. Lastly, it would increase the aggregate demand and expansion in the economy. Economic Policies Monetary policy is basically the determination of a country's money supply. It is the belief of most economists that important microeconomic variables such as employment rate, interest rate, inflation, exchange rate and economic growth are affected by the changes in money supply. In almost all countries, central bank is the government institution that controls the monetary policy. Monetary policy has a major impact over inflation. It is one of the goals of the policy to curb inflation, or the value of currency with the help of the alterations in monetary policy told. As inflation rises, the central bank controls it through increasing the interest rates. As high inflation increases the cost of good, it is the aim of the central bank to keep inflation low in order to stabilize the cost of the goods in relation to the currency value. When there is low inflation and the economy is stable or it is in its expansionary phase, there are lower levels of unemployment as compared to when the inflation is high and the economy is going through a phase of contraction. Changes in the monetary policy in order to maintain the stability of the economy and control inflation also results in keeping the levels of unemployment low. Fiscal policy is referred to the decisions taken to determine the budget of the government. This is in inclusion of the amount and the composition of the expenditures and the revenues of the government. One imperative aspect of the fiscal policy is to maintain a balance between government spending and taxes. When the government expenditure is more that the collection in taxes, the government runs a deficit, while on the contrary, if the spending is less that the amount collected in taxes, the government incurs a budget surplus. Fiscal policy is used by the government to influence the level of aggregate demand in the economy thereby achieving the economic objective of full employment, economic growth and price stability. (Afonso & Sousa, 2009) The revival of monetarism was accompanied by a switch in emphasis, both in theory and policy from managing the level of demand to stimulating the supply side of the economy. Supply side measures are designed to raise the productive capacity of the economy in order to increase the rate of economic growth, consequently the standards of living, increase the supply of goods and services, thereby reducing inflationary pressure and reduce unemployment in the long run. Supply side economists favour a long term approach rather than short term measures. Supply-siders also favour a non-interventionism or free market approach to policy. Supply side measures usually take the form of freeing the market thus making it more competitive and efficient. The monetarist and supply side schools of thought reject reflation as futile. They favour policies to make work and enterprise more rewarding and markets more competitive. Tax cuts to raise income differentials between those in work and those on benefits are seen as a way of reducing what economists refer to as voluntary unemployment. Removal of market imperfections will reduce the rate of natural unemployment. BIBLIOGRAPHY Abel, A.B. & Bernanke, B.S. (2008) Macroeconomics. Pearson / Addison Wesley Blanchard (2007) Macroeconomics. Pearson Education. Frank, R. & Bernanke, B. (2001) Principles of Economics. McGraw-Hill Jewell, B. R. (2000) An Integrated Approach to Business Studies. Pearson Education Limited. Jones, G.R. & George, J.M. (2007) Contemporary Management. McGraw-Hill Companies. McEachern, W.A (2008) Economics: A Contemporary Introduction. Cengage Learning. Wessels, W.J. (2006) Economics. Barron's Educational Series. Afonso, A. & Sousa, R.M. (2009) The Macroeconomic Effects of Fiscal Policy. European Central Bank. R.A (2010) A Healthy dose of Inflation. The Economist. Available from http://www.economist.com/blogs/freeexchange/2010/02/monetary_policy_1 [13/03/11] Bloomberg News (2010) Bernanke says poor regulation, not monetary policy, lead to housing bubble. Los Angeles Times. Available from http://articles.latimes.com/2010/jan/04/business/la-fi-bernanke4-2010jan04 [13/03/11] Read More