The Objectives of Macroeconomics in the United Kingdom - Essay Example

?Macroeconomics Introduction This present paper is an essay that largely focuses on macroeconomics and it covers five critical areas pertaining to this subject. The areas covered by the essay include the definition of the term macroeconomics, secondly, the objectives of macroeconomics, and thirdly, the essay will explain why macroeconomic objectives are significant in the United Kingdom. The fourth section will explain the redistribution of income and wealth narrowing the gap between the rich and the poor in the United Kingdom. Lastly, the essay will look into regional policies within the United Kingdom that encourage companies to set up factories or business establishment in low socio-economic areas in a bid to boost the quality of life in such areas. Macroeconomics As noted above, this present paper is based on the concept of macroeconomics, which has been described by Bauman and Klein (2011) as the branch of economics that majorly deals with the wider perspective of the national economy rather than a single segment of the economy. With reference to the writings by Mankiw (2011, p23) macro-economic is stated as “a branch of economics that focus on the trends and movements in the entire economy,” and some of these movements and trends concern employment, inflation, price levels, rate of growth, national income, and gross domestic product of a particular country, or region/ economic block. In comparison to the other branch of economics, Chung et al. (2007) stated that microeconomics mainly focus on smaller aspects of the economy such as the behaviour of consumers and business organisations, and how this affects quantities and prices within a particular market. According to Buiter (2010), even thou the field of macroeconomics is broad, it largely focuses on two critical areas of studies, which include the study on the causes and repercussions of short-run business cycles on the national income and the study on determinants of long-run economic growth. Dale et al. (2010) stated that usually the central government as well as the large corporations, utilise macroeconomic forecasts and models primarily to develop and evaluate economic policies and business strategies. Macroeconomic objectives In the previous sub-section, it was stated that macroeconomics is simply a branch of economics that focuses on the wider aspect of the economy; however, Keynes (2011) further added that macroeconomics also concerns itself with the conscious and deliberate management of economic variables within an economy in order to attain certain objectives. It is of essence to note that macroeconomics relies on three critical policies to attain its objectives, and these policies include the monetary policies, fiscal policies and supply-side policies. Monetary policies are defined by Krugman and Wells (2009), as measures that are adopted by the central government through the central bank in order to increase or decrease the supply of money in circulation while fiscal policies are the policies of the central government, which focus on the country’s budget and especially issues pertaining to borrowing and taxation. As for supply-side policies, they are mainly devised to ensure that the market works efficiently. According to the writings by Bauman and Klein (2011), they wrote that the top objectives of macroeconomics include price stability, exchange stability, full employment, growth of the economy, and the balance of payment equilibrium. a) Price stability According to Buiter (2010), the maintenance of price stability is crucial to the national economy because higher price levels contribute to various problems pertaining to consumption, distribution, exchange, and production. For example, inflation distorts economic calculations as well as expectations and it generates varying problems in different sections of the economy. Moreover, Buiter (2010) stated that during inflation creditors lose while debtors gain. Furthermore, inflation strains the relationship between capital and labour, and the distribution of national income becomes uneconomic and uncertain. In the scenario whereby price level falls, Dale et al. (2010) lamented that there is an equal decline in income, output, profit, employment, accumulation, capital, and profit, which collectively leads to economic depression. Therefore, both an increase and decrease in the price levels is harmful to the economy and therefore, macroeconomic aims at stabilizing price levels in order to promote confidence in business, trade, and commerce, which collectively increase the output, income, and employment. Dale et al. (2010) further stated that price stability enables money to perform effectively its function as the store of value and a standard of deferred payments. b) Exchange stability According to Chung et al. (2007), the advent of international trade required that macroeconomics work towards ensuring that the stability in exchange rate is maintained, which equally contributes to internal stability. Instability in the exchange rate is harmful because a fall in the external value of a currency leads to the promotion of export and restrictions of imports, which can potentially raise internal price levels. Secondly, exchange rate instability creates an opportunity for speculation in foreign exchange market and this negatively affects investments and lending in different countries. Thirdly, exchange rate instability may contribute to the outflow of capital, which can potentially affect the growth and formation of capital. Farrell and Weale (2010) stated that macroeconomics aims at attaining stability in the exchange rate in order to promote confidence in the local currency and equally promote international trade. c) Full employment With reference to the studies by Schmitt-Grohe and Uribe (2004), he stated that during the 1930’s economic recession, there was a massive rate of unemployment that was also witnessed in the past 2008 to 2010 economic recession, and therefore, employment was tagged as economically wasteful, socially harmful, and morally deplorable. It is for this reason that the attainment of full employment is also regarded as an important objective of macroeconomics. Kirsanova et al. (2009) stated that full employment occurs in a situation whereby potential job seekers outnumber the available job positions. As for Wren-Lewis (2008), he described full employment as a situation whereby unemployment has been reduced to short intervals of standing but with the certainty that in the near future one would be recalled back to his old job or a new job. Full employment is an objective of macroeconomics because it can maintain a high level of aggregate demand and thereby eliminate stagnation, fluctuations, and under consumption. As part of attaining the macroeconomic objective of full employment, investment can be made to surpass savings and then allow a slow rate price increase; this strategy gives incentive for the maximum utilization of resources and for increased output, income, and employment (Kirsanova et al. 2009). Mankiw (2011) stated that for the central government to maintain full employment it will be required to maintain the stability of exchange rate, the stability of internal prices, and equality between saving and investment. d) Economic growth With reference to the writings by Schmitt-Grohe and Uribe (2004), the macroeconomic objective of economic growth is essential mostly in the developing and under developed nations and it refers to that actual growth of output per capita. According to Wren-Lewis S (2008), if the United Kingdom government intends to grow the economy of the country then it has to increase the capacity of the economy to produce higher output per capita and equally increase the demand for goods and services. However, it is critical to maintain a balance between the aggregate effective demand and the productive capacity. Chung et al. (2007) wrote that macroeconomics is able to contribute to the growth of the economy by creating a favorable environment whereby the saving and investments are high, and there is a demand for goods and services. e) Balance of payments equilibrium The macroeconomic objective of maintaining a balance of payment equilibrium has received more attention in the recent past more so in the European region whereby there has being a grappling problem of debt crisis that greatly affected Greece. In the view of this shortage in international liquidity, it has become evidently clear to countries such as the UK that a deficit in the balance of payment could potentially hinder the economy from attaining the other macroeconomic objectives (Keynes, 2011). According to Mankiw (2011), the balance of payment equilibrium is achieved when the when a country has repaid its debts and it has attained at considerable size of reserve with a minimal or zero balance. One sure way of maintaining the balance of payment equilibrium is by reducing total imports Significance of macroeconomic objectives The significance of macroeconomic objectives can be demonstrated with the IS-LM graph. LM Interest Rate 1 2 I 1 IS 1 IS2 Y1 Y2 National Income or GDP The IS curve represents various combination of the rate of interest and income which equate savings and investments, and LM curve represents the various combination of interest and income which equate demand for and supply of money. National income or GDP is represented by the horizontal axis and interest rate is represented by the vertical axis. The effectiveness of the UK’s deficit budget is well demonstrated by IS-LM model. In implementing the macroeconomic objectives that leads to deficit spending by the government, it will transpire to increased private investments and lower saving rate. Both will increase the aggregate demand in the economy at each individual interest rate. Thus the government’s increased deficit causes the IS curve to shift to the right, this results to equilibrium interest rate moving from i-1 to i-2 and real gross domestic product moves from Y-1to Y-2. Increased government spending or borrowing has the overall impact of increasing the country’s GDP and this effectively helped the UK to come out of the past financial crises (Bauman and Klein, 2011). Redistribution of income and wealth narrowing the gap between the rich and the poor According to the writings by Dooley and Garber (2009), it is the prerogative of the central government to have fair distribution of income and wealth at both personal and regional level and this entails each individual and region having a fair share of the national cake in terms of the opportunities available and even economic developments. To begin with, the causes of unequal distribution of income and wealth are the differences in regional endowment of natural resources, education and training disparities amongst citizens of a nation, forms of government that could either support public or private ownership, and social evils whereby certain people acquire massive wealth through corrupt means. Dooley and Garber (2009) stated that governments should strive to attain equal distribution of income and wealth because it is capable of reducing rural to urban migration, it improves that overall living standard of the country, and it creates political stability within a country, and ensures peace prevails within a country. According to Farrell and Weale (2010), so far the UK’s government has being able to largely attain equal redistribution of income and wealth thus narrowing the gap between the rich and poor by ensuring that each UK citizens has equal access to employment opportunities, which ensures that people from different background regardless of socio-economic status are able to secure employment. Secondly, the government agitates and even provides incentives for the establishment of various business organisations in various parts of the country especially in rural areas in order to ensure that each region experiences economic development. Regional policies encouraging companies to set up factories in poorest areas As part of the strategies for ensuring that the entire country experiences equal growth and fair distribution of wealth, the UK government has been keen on ensuring that business organisations also establish their operations in low socio-economic areas within the region. The government supports this objective with the secondary objective of discouraging rural to urban migration. The government provides certain incentives for companies that set-up factories in poorest areas within the country and one of them is subsidized credit facility especially during the start-up stage, this subsidized credit facility is meant to encourage more companies in setting-up factories in the poorest areas. Additionally, the government also offer such companies subsidized tax rate. Thirdly, the government encourages companies to set up factories in poorest areas by providing them with free or cheap land. Moreover, the government also develops necessary infrastructures such as roads, pipelines for water, and electricity connections in order to make the poor areas appealing and convenient for setting up factories. Conclusion This present essay has largely focused on the subject of macroeconomic and it was noted that macroeconomics is a branch of economics that mainly focus on the entire economy of a country or a region. Summarily, the study has stated that the main macroeconomic objectives include establishing price stability, stability in the exchange rate, full employment, economic growth, and balance of payment equilibrium. In conclusion, it was noted that macroeconomics generally aims at ensuring that there is stability in the general economy and even long-term economic growth is sustained. References Bauman, Y. and Klein, G. (2011). The Cartoon Introduction to Economics: Volume Two: Macroeconomics. New York, U.S: Hill and Wang Buiter W. (2010), The Limits to Fiscal Stimulus, Oxford Review of Economic Policy pp 48-70. Chung, H. Davig T and Leeper E. (2007), Monetary and Fiscal Policy Switching. Journal of Money, Credit and Banking Vol 8 (12). 809-42 Dale S., Proudman J., and Westaway P. (2010), The Inflation-targeting Regime in the United Kingdom: A View from Thread needle Street. Oxford Review of Economic Policy pp 3-14 Dooley M., and Garber P (2009), Global Imbalances and the Crisis: A Solution in Search of a Problem. Vox EU. P 45-67 Farrell R., and Weale M., (2010), Fiscal Policy, Fairness between Generations, and National Saving, Oxford Review of Economic Policy, pp 87-117. Keynes, J. (2011). The General Theory Of Employment, Interest, And Money. U.S: CreateSpace Independent Publishing Platform Kirsanova T., Leith C., and Wren-Lewis S. (2009), Monetary and Fiscal Policy Interaction: The Current Consensus Assignment in the Light of Recent Developments. The Economic Journal pp 482-96 Krugman, P. and Wells, R. (2009). Economics. (2nd edition). Worth Publishers Mankiw, G (2011). Principles of Macroeconomics. USA. Cengage Learning Schmitt-Grohe S. and Uribe M. 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