Governments Various Macroeconomic Objectives and Their Importance to UK Economy - Assignment Example

? Government’s Various Macroeconomic Objectives and Their Importance to UK Economy by of the of the of the School City, State 20 May, 2013 Definition of Macroeconomics Macroeconomics and microeconomics vary in the scope of study, so macroeconomics covers the aggregate study of various units combined together, while the microeconomics handles a particular unit of an economy. In the overall economic phenomenon of macroeconomics, it handles issues of aggregate investment, consumption, savings and production, and is used to solve emerging problems of the general economy such as disequilibrium in BOP, unemployment, inflation, economic fluctuation, and monetary issues (Deepashree, 2007). It is an indispensable field for its purposes in formulating the government economic policies and analysing the complex economic systems and trend to give a clear understanding of the aggregate or national performance so that economic problems can also be solved effectively and efficiently. Macroeconomic Objectives Economic growth Every nation aims at achieving steady economic growth. It appears to be a common and prioritised objective of most developing countries to improve the living standards of the countries’ population. It is a policy that is concerned with increasing the national output through an increase in goods and services generated, which are factors that enable improvements in living standards of masses in a country (A. Glanville and J. Glanville, 2011). It acts as the foundation that, when well facilitated, would allow development to take place. Nevertheless, economic growth can occur without development but may be constrained by investment funds. Since the emergence of globalisation, there has been an expansion of markets and economies integrated through the businesses, while organisation partnerships and mergers have been established across the boundaries of nations so that their economies grow over time and benefit the living standards of people through higher production generated as the national output increases. If economic growth translates into development, the gap between the poor and the wealthy may narrow down. However, economic growth comes with some benefits and weaknesses that could affect them in future. The growth could be affected by external or internal factors to form variations in spending that either exceed or support the production of an economy. From such, the downturn and peaks in economies may be exhibited over time. The UK government has opted to promote economic growth with reasonable measures to prevent future negative effects. In the UK, economic growth is a crucial factor that determines the availability of funds for public expenditure, minimising tax burdens, and servicing government debt (The long game, n.d.). For most governments, economic growth comes with the creation of new jobs as more investments are made, which provide employment opportunities, contribute to the growth of domestic product, and support in eradicating poverty levels. At a higher level, the nation associated with the growth achieves more respect in the world community and increases its ability to solve its internal economic problems, support its citizens and maintain its pride as a nation. It is also a measure of determining whether the economic target is being realised. The disadvantage is that economic growth may be steered without appropriate measures to preserve the environment and the resources. In some cases, the growth has been realised unsustainably, excessively exploiting the natural resources and degrading the environment, which reduces the production capacity of future generations (Everett, 2010). These natural assets should be maintained to sustain growth in the long run. Low inflation Every inflation has a cost in the long run, after the sustained growth in the overall price level. Economists of most countries strive to maintain inflation in their countries, but since it is an inevitable factor, the best economies aim to achieve low inflation instead of high one. Besides, governments aim to have steady low inflations, which are more predictable and associated with lesser economic and social costs than the varying inflations (Baumol and Blinder, 2009). Economies have to deal with the problem of changes in the price level, which affect the distribution of income for the people and the economy as a whole. If the price levels are not stabilised, suppliers can take control to double the prices for their gain, which means the costs of living also increases due to the price push. When the price is stabilised in low inflations, it means the cost of living and the price level may increase in the long term, but the advantage would be the fairly constant rate which the economy can adjust and handle without much strain by controlling the demand and monetary policies. It is a type of inflation considered modest for an economic growth. However, even being low, the inflation may influence the writing of long term contracts and could create a sense of uncertainty in business and investment, especially if it is a varying type of low inflation (Baumol and Blinder, 2009). Sometimes the price changes that reflect the market value do not change because of the changing scarcities, but due to inflation in an economy. This ends up causing arbitrary price changes, which give wrong implication in the market. Due to that, there is arbitrary redistribution of resources, causing redistribution costs, so that those with fixed incomes would suffer even in low inflation, and lenders would have to lose to the borrowers. Low inflation is of importance to the UK economy to increase optimism and confidence in investment (especially with a steady low inflation), prevent cyclical fluctuations in the economy, promote market competitiveness for its goods and services, and prevent deterioration in the current account of BOP (‘Discuss’, n.d.). Low unemployment Achieving and maintaining high rates of employment is a major objective for any economy to steer growth and development. This policy aims to ensure those without jobs and unemployed acquire jobs and more so, their skills are used maximally and effectively. Most people lie idle while they have the potential and skills to perform in various jobs, if not in a particular profession. Some are underemployed; the resources used to train them and their skills, then, go to waste because they are not fully utilised, which means the economy and labour force fail to realise the benefits of employment because a portion of additional output is lost in the course of unemployment. Governments have an obligation to improve and maintain their economies close to full employment as much as possible to control inflation, inequality and poverty. Even though the employment rate changes with time, high unemployment is generally wasteful for an economy. Hence as a government’s objective, more jobs are created to increase employment and fully utilise resources and labour skills to realize the additional output that could be achieved in the potential real GDP. The consequences of unemployment remain terrible enough for the economy and people as a whole. According Tragakes (2012), economic consequences include loss of income for individuals or families, GDP and tax revenue, widen the gap in income distribution and demand more to cater for unemployment benefits. If the production of more goods and services is forfeited, it means there would be lost output, and similarly, taxes that would benefit the public activities. Individuals would not engage in productive work that gives them an earning and would lead them to rely on the benefits given to the unemployed, which comes from the public taxes and is generally costly in the long run. Resources in an economy depreciate, lie idle or even go into waste because they fail to be used or are underutilised. Low unemployment in the UK mitigates the financial implications such as reducing funds for the benefit systems that come from the tax payers, and increases taxable income for the development of individuals and the economy. However, achieving low unemployment could be difficult for any economy because of lingering causes of unemployment such as the demand for a specific labour skill, changes in demand for labour according to seasons and varying needs, cyclical unemployment (since some firms lay off workers during economic recessions), and displacement by automation that minimises employment opportunities (Tragakes, 2012). Such high unemployment causes an economy to operate inefficiently inside its production possibility frontier. Balance of payment Countries have invested heavily within and across their boundaries, whether in local or foreign companies, and end up experiencing inflow and outflow of income in their economies generated from assets, liabilities, stock, investments, production, exports, and imports. As an assertion that abridges an economy’s financial transactions with those of its partnering traders in the globe, the net effect could either be a surplus or a deficit (IMF, 1996). At times, the economies import more than they export or have liabilities to foreign economies than the income flow from their investment elsewhere; this results in BOP deficit and vice versa. The government’s objective is to have the BOP in a sustainable position so that disequilibrium in BOP is minimised. An economy may have a deficit, but its capital inflow being used in productive investment may be an advantage, and could be a problem when an economy fails to finance its foreign transaction that burdens the economy with foreign debts. Therefore, a deficit or a surplus becomes beneficial if a clear plan is in place for the effective investment, or consumption that can be controlled not to risk the economy, considering it is already at disequilibrium. At equilibrium of BOP, there is no tendency to change and at the position, the financial inflow offsets the outflow, amounting to zero. With the BOP, the British economy can analyse the overall consumption of imported goods or services in the economy and economy’s performance in exportation, and remain an important tool in formulating solutions for problems such as inflation and excessive demand to control spending. Redistribution of income and wealth With the modern globalisation, individuals, families, and organisations end up investing in different industries and economies. As a result, the market forces create differences in distribution of earning between the skilled and less skilled workers. Some have higher economic power than others because of the larger ownership of properties, investments, and high income professions. Effectively, the rich are few, but those with little economic capability form the largest group in the entire population of a nation. Government economies, therefore, strive to minimise this inequality in income and wealth distribution so that economic development occurs in conjunction with social justice. It is an objective of fiscal policy through taxation and subsidies to minimise the inequality. Heavy taxes can be imposed on the rich and luxury goods, while essential goods prices are to be minimised by providing subsidies. Basically, the governments have to use suitable policies in expenditure, provision of social welfare, and taxations to narrow the gap between the rich and the poor, which means equal distribution would enable people to be concentrated around the average. As a social justice, the poor in the population would manage an income above subsistence and support eradication of poverty. The wealth collected from the progressive taxation is channelled back into the economy to provide social services to the needy and poor. Economies ensuring equity in resource distribution would translate into equal power and opportunity for individuals to compete fairly. The political economy brings a democratisation concept connecting the market with politics. According to Tool (1988), political inequality is threatened by inequality of economic status, hence with equity, societies can gain better legal representation, political access and public participation. Income redistribution is itself an attempt to restore political equality in a society. In the UK, the objective is crucial to improve the living standards and the social wellbeing of individuals and families. Regional policy The economic welfare of individuals and societies in a nation is usually affected by the disparities of certain variables that persist in a region. Due to such differences, the resources may not be well distributed and end up causing other political and social problems. Some of the problems caused by the disparity can be solved by the development of a regional policy as a national economic objective. According to Nicke (2007), regional policy entails strategies, laws, and measures, which set and influence processes or a framework in certain areas within a nation where the government aims to reduce spatial differences in an economy. In their application, they influence the allocation of productive resources and modify the expenditure and income patterns in the regions. As a result, labour and capital flows in different parts of the region promote growth and development in marginalised areas. The government can intervene to promote market and growth through special programmes and subsidise enterprises. The regional policy should ensure fair investment and mobilisation of assets in the region for maximum utilisation to achieve potential growth. In the UK, the regional policy is an important tool for sustainable improvement of economic performance in all regions, increasing the social wellbeing and reducing the persistent growth gap among the different regions (Tomaney, 2009). It is a critical aim for economic and social cohesion in development because as the economic situation improves, the living standards of the inhabitants in a nation also improve, with better jobs, more employment, and income. The political and economic aspect of the regional policy has also embarked on supporting legislative representation and bargaining power of regional societies so that it engages in the polity of the respective economy. The economy can then be promoted through policies such as free trade between regions or solve issues such as immigration and unemployment. Productivity (efficiency) The objective goes hand in hand with lower unemployment to facilitate the maximum output of an economy. An economy is said to produce efficiency when maximum output is generated with full utilisation of the available resources, so that there is minimisation of cost for a given maximum production. Economies aim at achieving production efficiency for productivity gain even through the many constraints to realise it. All the same, an economy can achieve the objective but compromise other objectives such as the optimal distribution of resources. There are numerous and scarce resources that fail to be deployed or utilised for maximum production of goods and services. The unemployment, underemployment, idle lands, inefficiently running industries and knowledge with the people that can be used in innovation, creativity, and boosting of production. As a result, the effect of the inefficiency makes production stick within the PPF (a curve showing tradeoff in production when between the adjustments of resources investment and consumption). Technology and innovation have been the latest trend in economies to achieve production efficiency, allowing operating systems and automation to speed up and increase productivity and quality that would take human labour ages to complete. Enhancing technology in different sectors of productivity could bring about a product or process innovation, which leads to efficiency in the long run. However, production efficiency requires investment and funds. Governments have to be willing to fund research and development for the creation and realisation of new ideas to improve productivity and support its efficiency, improve human capabilities, know where to invest next, and allocate resources to avoid inefficiency in the future. The objective concurs with the UK’s long term objective in improving labour productivity and capital investment that would increase production efficiency and competition in trade within the European market. References Baumol, W. J. and Blinder, A. S., 2009. Macroeconomics: principles and policy. 11th ed. Mason, OH: South West Cengage learning. Deepashree, 2007. Microeconomics and macroeconomic environment for Ca Pe I. 4th ed. New Delhi: Tata McGraw-Hill Publishing Company. Discuss whether the primary macro economic target of the govt should be low inflation, n.d. [online] Available at: < http://www.economicshelp.org/macroeconomics/inflation/low_inflation.html > [Accessed 21 May 2013]. Everett, T., Ishwaran, M., Ansaloni, G. P. and Rubin, A., 2010. Economic growth and the environment. [Online] Available at: [Accessed 20 May 2013]. Glanville, A. and Glanville, J., 2011.Economics from a global perspective: a text book for use with the IB diploma programme. 3rd ed. Winkleigh: Glanville Books. International Monetary Fund, ed., 1996. Balance of payments textbook, Volume 31. Washington DC: International Monetary Fund. Nicke, C., 2007. Tools for regional policy with case study: success of regional policy in Burgenland, Austria. Munich: GRIN Verlag publishers The long game: increasing UK economic growth, n.d. [Online] Available at: [Accessed 20 May 2013].  Tomaney, J., ed., 2009. The future of regional policy. [Online] Available at: [Accessed 21 May 2013]. Tool, M. R., ed., 1988. Evolutionary economics: institutional theory and policy. New York: M. E. Sharpe. Inc. Tragakes, E., 2012. Economics for the IB diploma with CD-ROM. 2nd ed. New York: Cambridge University Press.   Read More