2.6 - Possible macroeconomic objectives Flashcards
Macroeconomic objectives and policies
Economic Growth
- Economic growth refers to an increase in the production of goods and services in an economy over a period of time,
- typically measured as the percentage increase in real GDP
Benefits of economic growth
- Higher Living Standards: Increased income and improved quality of life.
- Employment: More job opportunities as firms expand.
Costs of economic growth
- Inflation: Rapid growth can lead to rising prices.
- Environmental Impact: Increased production can harm the environment.
Low Unemployment
- Low unemployment means that a large proportion of the labour force is employed, leading to higher income and production levels in the economy.
Benefits of low unemployment
- Higher Income: More people earning wages.
- Social Stability: Reduced poverty and social unrest.
- Gov can reduce spending on benefits such as job seekers allowance and spend elsewhere
Costs of low unemployment
- Inflation: Low unemployment can drive wages up, leading to an increase in consumption and so an increase in aggregate demand so, inflation.
- Skill Mismatches: Over time, job types change, and not all workers may have the skills needed.
Low and Stable Rate of Inflation
A low and stable rate of inflation means that prices of goods and services rise slowly and predictably over time
Benefits of low and stable inflation
- Predictability: Helps businesses plan for the future - eg: investments
- Maintained Purchasing Power: Protects consumer savings
- Can mean low interest rates which can stimulate investment and decrease saving (price of borrowing decreases and returns on savings decrease)
What is the inflation target for the European Central Bank ?
2%
Costs of low and stable inflation
- Deflation Risk: If inflation is too low, the economy may slip into deflation, which can be harmful (decreased profits & investments from firms)
Balance of Payments Equilibrium on Current Account
This refers to a situation where the value of exports of goods and services is roughly equal to the value of imports, avoiding large deficits or surpluses.
Benefits of balance of Payments Equilibrium on the Current Account
- Economic Stability: Reduces reliance on foreign debt. (less reliance on exports+imports)
- Exchange Rate Stability: Avoids large fluctuations in currency value.
Costs of Balance of Payments Equilibrium on Current Account
- Export Dependency: Too much focus on exports can make the economy vulnerable to global downturns/fluctuations in global market
- Consumption Sacrifice: May require reduced domestic consumption on imports to balance trade.
Balanced Government Budget
A balanced budget occurs when government revenues equal government expenditures over a fiscal period.
Benefits of Balanced Government Budget
- Debt Control: Prevents the accumulation of national debt.
- Investor Confidence: Attracts foreign investment by showing fiscal responsibility
Costs of balanced government budget
- Public Services: May require cuts in public services or higher taxes. (austerity measures)
- Flexibility: Reduces government’s ability to respond to economic crises
Protection of the Environment
This involves policies aimed at reducing pollution, conserving natural resources, and promoting sustainable practices.
Benefits of Protection of the Environment
- Sustainable Development: Ensures resources are available for future generations.
- Health Benefits: Reduces pollution-related health issues. (reduction in negative externalities)
Costs of protection of the environment
- Economic Trade-Offs: Environmental regulations can increase production costs.
- Competitive Disadvantage: Stricter regulations can make domestic firms less competitive internationally.
Greater Income Equality
Greater income equality means a more equitable distribution of income across society, reducing the gap between the rich and the poor.
Benefits of greater income equality
- Social Cohesion: Reduces social tensions and promotes fairness.
- Economic Stability: More equal societies tend to have more stable economies.
Costs of reducing income inequality
- Incentives: High redistribution may reduce incentives to work and invest.
- Government Spending: Requires significant government intervention and spending. (opportunity cost)
What are the macroeconomic objectives?
- Economic growth
- Low unemployment
- Low and stable rate of inflation
- Balance of payments equilibrium on current account
- Balanced government budget
- Protection of the environment
- Greater income equality
