Conflict between the Governments Macroeconomic Objectives - Essay Example

 Macroeconomic Objectives Conflict between the Governments Macroeconomic Objectives Introduction Microeconomics is a branch of economics that deals with the study of the collective behavior of the economy. It does not deal with the individual market but with the behavior and structure of whole economy. Moreover it is related with national income, rate of growth, rate of inflation, rate of employment, gross domestic product, gross national product and other variables which may influence the economy. In US, Macroeconomics helps to forecast economic conditions in making better decision for better standard of living and growth for firms, industry and government. Most of the time conflict may arise when the objectives and goals are not met. In this regard, we will evaluate the objectives and the conflicts that may arise when the focus of macroeconomics is on national output, employment and Inflation (Drazen, 2004). Outline Objectives of Macroeconomics Policies to implement Macroeconomics by US government Policies of implementation of Macroeconomics Conflicts in implementing the macroeconomic policies Conclusion Objectives The following key objectives are considered by US government in macroeconomics: Price stability or control of inflation rate Increase in Inflation rate which is defined as the regular rise in prices. To have stability in prices, the inflation rate should be zero. Having zero inflation rate is hard to achieve and also undesirable for an economy. A basic objective of the government to keep the inflation rate low and keep it in that level at a prolonged period of time (Munasinghe, 1996). In this regard internal balance is aimed which is full employment with zero rate of inflation. Technically, it is measured as the annual rate of change of the Retail Price Index (RPI). Full employment Full employment is achieved when all the human recourse which are capable of work and willing to work in an economy are fully employed in different sectors. Though this is realistically not achievable that’s what frictional and structural unemployment is considered to be present at the same time. High and sustainable economic growth: A high economic growth is achieved by allowing increase in the living standards .In this regard the no structural and environmental difficulties should be present to hinder the growth in economy (Oliver & Perkins, 1997). Economic growth tends to be measured in terms of the rate of change of real GDP (Gross Domestic Product). Equilibrium in the balance of payments The aim is to bring balance in the payment with the use of any artificial constraint: the goal is to achieve balance in exports and imports in long run. Deficit of payments should be balanced by the surplus in other payments to achieve the complete balance. Policies of Macroeconomics Here is a current framework for macroeconomic policy in the US: Monetary policy The Bank of America maintains control over monetary policy and sets policy interest rates on a monthly basis. Fiscal policy The government is in charge of fiscal policy. For the period of the recession the government chose to use changes in expenditure and taxation to help the economy from the effects .Most of the time the fiscal policy is tightened and government spending is cut and tax rate is increased to help in the budget deficit (Dwivedi, 2010). Exchange rates Floating exchange rate is operated in US. The exchange rate is determined on the supply and demand forces of the market. The government may interfere in the currency markets to manipulate the value of Dollar against other currencies. As supply and demand for money determine the interest rate that must be paid for the loaned money. So if the Federal Reserve increases the money supply, interest rates will fall, making it less expensive to borrow money. In that case, individuals who want to borrow money will use that money on products. If the Federal Reserve decreases the money supply, interest rates will increase, hence few amount will be borrowed or loaned (McEachern, 2012). See in the figure below: Figure: 1 In the above figure, the official exchange rate has been fixed at a level of $A1.00 = $US0.60, which is above the market rate of $A1.00 = $US0.50. For the exchange rate to be at a level higher than the market rate requires official involvement by the Reserve Bank, this will bring demand and supply of money at a equilibrium. Possible Conflicts of Macroeconomics Objectives It is uncommon for a country to attain all of its main objectives at the same time of macroeconomics at the same time as the key focus is on national gross product, unemployment and inflation Due to the frequent conflict, the government may have to prioritize some objectives over another. This vary from country to country is based on the needs according to their economic growth (Ezigbo, 2012). Here are some possible policy conflicts: Inflation and unemployment The value of money may fall due to unemployment .Demand-pull and cost-push inflationary pressures may arise. Economic growth and environmental sustainability Due to lack of recourses, economic growth may not be as rapid as aimed and standard of living and sustainability may be in threatened. Economic growth and inflation Inflation may occur at an accelerating rate and the negative effects on business profits, employment and trade performance will rise. Economic growth and the balance of payments Strong GDP growth powered by high levels of consumer demand for goods and services can increasingly lead to a deteriorating of the trade balance. This is predominantly true when an economy has an extraordinary marginal tendency to import. Initially the US banks purposely dealt with the excessive money of those wanted to prevent pause in the ‘idle’ money. In order to fulfill this condition bank took initiative in the 18th Century by giving that money to other party by offering some amount of interest in the form of commercial bills of exchange. In that perspectives the money lent to the party would be obliged to pay with interest amount to the borrower on the decided date. If somehow, possess a part only holding bills of exchange and are liable to pay the installments according to the settlements, needs urgent cash then bank would support by buying the factory owner bill of exchange with another factory owner and also by assuring the repayment in two months’ time. Banks would facilitate the first factory owner by allowing them to have cash it needed and provide them Banks own banknotes which would be applicable to the creditor and the borrower as the money. Bank also makes profit by purchasing the bills of exchange in a lesser amount than the actual (Mussa, 2011). Conflict between employment and prices By expansionary fiscal and monetary policy if demand of jobs, is increased it may increase the price level. Economic growth and stable prices This conflict is similar to the unemployment-inflation trade-off. If, Fiscal or monetary inducement of aggregate demand, the economy nurtures too rapidly, collective supply may raise the prices. The unit labor costs of emerging markets are likely to increase with increase in their national wealth and exchange rates. US manufacturing sector can supply its own share of demand in niches where it has competitive edge. The important factor is using this edge while maintaining cost differentials. Emerging markets will claim a large chunk of high value-added manufacturing activity, but astute and lissome firms may take advantage, in collaboration with much larger global actors. Due to geographically and demographically dispersed customer demands a joint effort will result in intricate personalized combinations of products and services. UK must find inimitable, knowledge-based alcove and apply their competitive edge aiming towards continuous improvement (Swanenberg, 2005). Economic growth and balance of payments As an economy grows, import spending is encouraged relative to export revenue. This could lead to balance of payments problems. Undoubtedly, the US had gathered the supremacy in the field of industrialization at around 18th century but now that supremacy is being shared by the China either. In the 21st Century, China by offering low rates has surpassed to dominate all over and has become the industrial revolutionize country. Initially the US was the only industrialized country and its eminency could only be seen in the agriculture department but later became as the compatible industrial region in around 1860 due to those agriculture workers having the efficiency, participated largely in the textile industries. Another factor to get the textile industry firm was the increased investment in bringing highly productive machines. Owner also took initiative by lowering the price on products enhanced the outcome and demands (Pisani, 2010). Conclusion Macroeconomics help consumers to find work, determine cost of different good and services. Businesses use macroeconomic analysis to determine whether expanding production will be welcomed by the market. Governments transform to the macroeconomics when planning disbursements, formulation of taxes, determining on interest rates and defining policy based resolutions but conflicts may arise and all the key objectives may hinder the economic growth. Detail check of resources with the goals should be done by the policy makers. Economic conditions present and future should be viewed before implementing fiscal or monetary policy. Exchange rate should be kept lower, higher or fixed according to the present condition of economy. The government may decide this based on the adverse effects on the economy, so that the desire to achieve short term stability might not be at risk the prospects for long term growth. Whenever administrations run plan setbacks (either by cutting expenses or expanding consumption) accessible safeguarding is negative, which decreases national safeguarding, regardless of the possibility that it may additionally expand private recovering as a response. The economists of the “Ricardian Equivalence” school contend that any plan deficiency generated by an assessment cut financed by deferred payment, creators buyers to spare 100% of it, so shortages have no impact on national safeguarding, however most economist feel that the included private safeguarding is just a portion of the assessment cut. Safeguarding equivalents the aggregate of financing and net fares, a plan shortfall lessens backing or net fares or both with a specific end goal to match the fall in national safeguarding. In the event that net fares fall, then the exchange shortfall advancements, with the intention that plan setbacks make a rush of stakes abroad. References Drazen, A., 2004. Political Economy In Macro Economics. s.l.:Orient Blackswan. Dwivedi, 2010. Macroeconomics, 3E. s.l.:Tata McGraw-Hill Education. Ezigbo, C., 2012. Justification and Implication of Macroeconomic Management for Sustainable Development. Journal of Economics and Sustainable Development, 3(11). McEachern, W. A., 2012. Macroeconomics: A Contemporary Approach. s.l.:Cengage Learning. Munasinghe, M., 1996. Environmental Impacts of Macroeconomic and Sectoral Policies. s.l.:World Bank Publications. Mussa, M., 2011. U.S. MACROECONOMIC POLICY AND THIRD WORLD DEBT. [Online] Available at: http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/1984/5/cj4n1-5.pdf [Accessed 3 May 2014]. Oliver, J. & Perkins, N., 1997. Budget Deficits and Macroeconomic Policy. s.l.:St. Martin's Press. Pisani, J., 2010. Economic Policy: Theory and Practice. s.l.:Oxford University Press. Swanenberg, 2005. Macroeconomics Demystified. s.l.:Tata McGraw-Hill Education. Read More