Macroeconomics Objectives of Governments - Essay Example

Macroeconomic objectives of governments Number Department Word Count 517 Introduction Governments, the world over, have about half-dozen main macroeconomic objectives, which they generally desire to track. These include; more economic growth or actual increases in Gross Domestic Product; control of inflation; reduction in joblessness; control of balance between costs on current account; better distribution of income; and environmental conservation. Government priorities however, differ according to the political ideology, and organizational factors such as the role of Central Bank, whose main role is the formulation of monetary policy. Some governments prioritize the management of inflation, in its handling of macroeconomic goals. Others, especially those that advance socialist ideologies, often concentrate on the reduction of joblessness, and proper redistribution of citizen earnings (Fig 1). The various theories often interrelate and are applied by government to achieve sustainable economic growth. Macroeconomic objectives of governments Whereas, each of these macroeconomic goals can have grave repercussions on various economic factors if they spiral out of control, a number essentially have a more significant impact on citizens’ everyday business (Castellani & Xavier, 2005). High rate of joblessness, for instance, not only translates into lost revenue for the government, but can signify a permanent reduction in an individual’s chances of securing employment through loss of expertise. Nonetheless, most government organizations often might not easily solve joblessness, quickly enough. Many economic analysts are of the opinion that too much protection of the jobless impacts to a weak labour market. Additionally, competitiveness of the labour market and more incentives for the unemployed is a significant approach to handling the soaring rate of unemployment. Fig 1. An Autonomous Spending Shock On the same note, low inflation rates is not believed to be a big issue, and as long as the citizens are in employment positions with adequate earnings; low rates of inflation will not result in any serious economic problem (Dolton, O'Neill, & Sweetman 1996; Morgan 2011). Most people’s earnings, and student endowment funds as well as pensions, are modified in line with commodity prices, and therefore, controlling inflation below the 2% level is not a major government concern (Kiefer 2000). Nonetheless, increases in inflation may reach a point where its side effects reduces international competitiveness, dampens the hope of foreign inward investors, and shifts redistribution of income from savers to borrowers to a point that it is harsh economic impacts turns out to be a key government concern (Nayyar 2011). Fig 2. Aggregate Expenditure According to Jin (2007), a current account shortfall on the balance of payments may be of less significance to government organizations, especially if the capital markets and the national currency are stable. Conversely, this may imply that an economy’s expenditures have stretched past its revenue collection, and at a given point the expenditure will have to be countered by substantial inflows. The United Kingdom, for instance, has massive foreign investments with substantial revenue potential, which may imply the shortfall will be checked if the economic condition is left to take its own course (Fig 2). According to Kiefer (2008), whereas, governments should not attempt to correct current account shortfalls with demand management practices: policies leaning toward supply have shown better results in regard to the restoration of permanent competitiveness of the economy. According to Froud, Moran, Nilsson and Williams (2010), the most controversial of government objectives is the policy of imposing more taxes on the higher-end population and handing it to the lower-end, in order to bridge the gap between the two economic segments. Kiefer (2000), point out that redistributing revenue from the moneyed to the poor via taxation policies and benefits is inherently unreasonable; waters down incentives and the ethics of work. Social expenditure is disadvantageous because it barely contributes to poverty reduction, and may result in the development of a dependency culture (Buyuksalvarc? 2010). Nonetheless, extreme shortage of resources is incapacitating and results in a situation in which potential workers are trapped in an unending condition of weakness. The workers may be incapable of retaining permanent job commitment at the standard rates of remuneration, due to individual circumstance, relations, a lack of proficiency or the soaring cost of shelter. Conflicts between the objectives Government attempt to achieve the macroeconomic goals normally contradict: an effort to control inflation and crackdown on unemployment might conflict. For instance, a shortage of qualified persons in a particular field can result in a build-up of remuneration pressures, in which case the net impact may affect the broader economic scope. The situation will impact increases in remuneration, spending, and the rise in production costs as labour is an integral part of production (Ditimi, Nwosa, & Olaiya 2011). A rise in inflation will also be recorded. In a nutshell, negligible rates of unemployment or a small percentage of spare capacity, impacts to a rise in inflation (Fig 3). Practically, in case a government attempts to cash in on this trade-off, it may face undesirable outcomes such as inflation due to overspending on the additional employee wages. An increase in inflation would negatively affect the newly recruited employees and the companies as their expenditures will surpass their incomes. Fig. 3. A graph showing that the conflict between excessive government spending to reduce unemployment, and the increasing rate of inflation GDP growth and the balance of payments on the current account As an economy grows, incomes rise. As a result, consumers will be more likely to demand more imports. Firms’ incentives to export will decline, as it is easier to get willing customers in the local market (Drakopoulos 2004). Therefore, economic growth might worsen the current account. The main exception to this is export-led growth, where the driver of growth is an increase in the net export component of the balance of payments. Export led growth means that the balance of payments will improve as more goods and services are sold abroad. A second reason why growth might not necessarily worsen the balance of payments is if the growth is caused by an increase in aggregate supply. For example, owing to decreases in costs or increases in investment, an economy will become more internationally competitive, meaning the economy can export more an import less while growing (Hart 1990). Low unemployment rate and sustainable environment If there is low unemployment rates, transport lines will be more likely to suffer congestion and more pollution of the environment through carbon emissions from more factories and traffic. Increased production will also impact greater consumption of energy. In addition, an increase in citizens’ incomes will increase the chances of foreign holiday trips (Webb 1991). This means more carbon emissions. Nonetheless, higher employment increases the revenue collection for the government due to more salaries to tax, and the increase of revenues derived from environmental conservation initiatives. Taxation policies targeted at specific air pollutants such as gas-guzzling automobiles, would contribute more effectively toward balancing increased employment, and conservations of the environment. Higher GDP and income redistribution When the GDP increases, members of the top end of income range will receive higher earnings (Webb 1991). This causes an increase in the gap between the rich and the poor. Nonetheless, over time, the high-end community might narrow the income gap by employing people from low-end spectrum, as their aides or domestic workers. More demand for casual labour should ultimately lead to higher pay. On the contrary, while the trickle-down effect may transfer some benefits of economic riches to the low-income earners, the discrepancies persist due to a two-pronged labour market (Fig. 4). The casual workers rarely register any gains because; any skill shortages will be filled by immigrants, as the incomes of poorly-skilled employees remain the same. Additionally, a proportional increase in the incomes would not solve the problem of income inequality (Tucker 2007). Fig. 4. A graph showing higher GDP growth and income redistribution. It is evident that an increase in GDP would not correct income discrepancies between high-income earners and low-income earners who are emplloyed by the former. Inflation and equilibrium on the balance of payments Petrongolo, and Pissarides (2008) indicate that a decrease in inflation, may shore-up for the betterment of a shortfall in the balance of payments on current account. Notably, low commodity prices as compared to trading partners imply that exports, unlike imports, will turn out to be more attractive on global markets. Nonetheless, in case there is a surplus in the balance of payments, efforts to reduce inflation will not rid the economy of surplus (Shah 2006). Additionally, when a government prioritizes the control of inflation, the efforts might result in extremely higher interest rates, than would be the case under laisser-faire situations. Tucker (2007) argues that tight interest rates usually imply an increase in exchange rates. A stable currency makes the export products of a country less attractive and its import commodities relatively low-priced, hence deteriorating its stake in international trade. Conclusion Generally, fiscal policy and monetary policy are used by the government to achieve the macroeconomic objectives. Whereas, fiscal policy is implemented by government through spending and taxation, monetary policy is essentially the responsibility of the central bank, through the controls of interest rates and the supply of currency. Both policies are implemented to reduce inflation rates and joblessness. The policy mix, often applied by government in its expenditures and collection of revenue, is a tricky balance that needs proper timing to get desirable outcomes. The general repercussions of fiscal policy can impact individual spending, exchange rates, levels of shortfalls, capital expenditure, and interest rates. Most governments, however, strike a balance when handling the policy mix in order to achieve an all-round, and sustainable economic growth. References Buyuksalvarc?, A. 2010. The Effects of Macroeconomics Variables on Stock Returns: Evidence from Turkey. European Journal of Social Science, 14(3/4), pp404-416. Castellani, F., & Xavier, D. 2005. Designing Macroeconomic Frameworks: A Positive Analysis of Monetary and Fiscal Delegation. International Finance, 8(1), pp87-117. Ditimi, A., Nwosa, P. I., & Olaiya, S.A. 2011. An Appraisal of Monetary Policy and Its Effect on Macro Economic Stabilization in Nigeria. Journal of Emerging Trends in Economics & Management Sciences, 2(3), pp232-237. Dolton, P., O'Neill, D., & Sweetman, O. 1996. Gender Differences in the Changing Labour Market: The Role of Legislation and Inequality in Changing the Wage Gap for Qualified Workers in the United Kingdom. Journal of Human Resources, 31(3), pp549-565. Drakopoulos, S.A. 2004. Satisficing and Sequential Targets in Economic Policy: A Politico-Economic Approach. Contributions to Political Economy, 23, pp49-64. Froud, J., Moran, M., Nilsson, A., & Williams, K. 2010. Wasting a Crisis? Democracy and Markets in Britain after 2007. Political Quarterly, 81(1), pp25-38. Hart, P.E. 1990. Types of structural unemployment in the United Kingdom. International Labour Review, 129 (2), pp213-28. Jin, B. 2007. Macroeconomic Regulation Not the Answer to Rocketing Housing Prices. China Economist, 11, pp12-17. Kiefer, D. 2000. Activist Macroeconomic Policy, Election Effects and the Formation of Expectations: Evidence from OECD Economies. Economics and Politics, 12(2), pp137-54. Kiefer, D. 2008. Revealed Preferences for Macroeconomic Stabilization. Journal of Applied Economics, 11(1), pp119-43. Morgan, W. J. 2011. Adult continuing education and lifelong learning in the United Kingdom: Economic, social and cultural perspectives. International Journal of Continuing Education & Lifelong Learning, 3(2), pp7-23. Nayyar, D. 2011. Rethinking macroeconomic policies for development. Brazilian Journal of Political Economy, 31(3), pp339-351. Petrongolo, B., & Pissarides, C. A. 2008. The Ins and Outs of European Unemployment. American Economic Review, 98(2), pp256-262. Shah, A. 2006. Fiscal Decentralization and Macroeconomic Management. International Tax and Public Finance, 13(4), pp437-62. Tucker, P. 2007. Central Banking and Political Economy: The Example of the United Kingdom's Monetary Policy Committee. Bank of England Quarterly Bulletin, 47(3), pp445-52. Webb, M.C. 1991. International economic structures, government interests, and international coordination of macroeconomic adjustment policies, International Organization, 45(3), p309. Read More