Government Policy Objectives
The four major objectives are:
(i) full employment,
(ii) price stability,
(iii) a high, but sustainable, rate of economic growth,
(iv) keeping the Balance of Payments in equilibrium
Policy instruments - macroeconomic quantities that can be directly controlled by the government to achieve its policies
Policy indicators - Statistics used to measure current conditions as well as to forecast financial or economic trends
Policy framework in the UK:
Monetary policy - The Bank of England sets monthly interest rates
Fiscal policy - the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand, output and jobs.
Exchange rates - The UK operates with a floating exchange rate and the Bank of England has not intervened in the currency markets to manipulate the value of sterling against other currencies. This means that the exchange rate is determined by the market forces of supply and demand.
(i) full employment,
(ii) price stability,
(iii) a high, but sustainable, rate of economic growth,
(iv) keeping the Balance of Payments in equilibrium
Policy instruments - macroeconomic quantities that can be directly controlled by the government to achieve its policies
Policy indicators - Statistics used to measure current conditions as well as to forecast financial or economic trends
Policy framework in the UK:
Monetary policy - The Bank of England sets monthly interest rates
Fiscal policy - the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand, output and jobs.
Exchange rates - The UK operates with a floating exchange rate and the Bank of England has not intervened in the currency markets to manipulate the value of sterling against other currencies. This means that the exchange rate is determined by the market forces of supply and demand.
Policy objectives and economic welfare
Conflicts
Possible conflicts between macro objectives
It is rare for a country to achieve all of its main objectives at the same time
Frequently conflicts appear between the different aims and as a result, choices might have to be made about which objectives are to be given greatest priority.
This will vary from one country to another since the needs of different nations will differ according to their stage of economic development.
Here are some possible policy conflicts:
Inflation and unemployment - Falling unemployment might create demand-pull and cost-push inflationary pressures leading to a fall in the value of money
Economic growth and environmental sustainability - Rapid economic growth and development frequently puts extra pressure on scarce environmental resources threatening the sustainability of living standards in the future
Economic growth and inflation – an overheating economy may suffer accelerating inflation which then has negative effects on trade performance, business profits and jobs. Stagflation could also occur (a period of economic stagnation accompanied by rising inflation) which can happen when an economy goes into a downturn or a recession but when other external forces are bringing out higher inflation
Economic growth and the balance of payments - Strong GDP growth fuelled by high levels of consumer demand for goods and services might lead to a worsening of the trade balance. This is particularly true when an economy has a high marginal propensity to import.
It is rare for a country to achieve all of its main objectives at the same time
Frequently conflicts appear between the different aims and as a result, choices might have to be made about which objectives are to be given greatest priority.
This will vary from one country to another since the needs of different nations will differ according to their stage of economic development.
Here are some possible policy conflicts:
Inflation and unemployment - Falling unemployment might create demand-pull and cost-push inflationary pressures leading to a fall in the value of money
Economic growth and environmental sustainability - Rapid economic growth and development frequently puts extra pressure on scarce environmental resources threatening the sustainability of living standards in the future
Economic growth and inflation – an overheating economy may suffer accelerating inflation which then has negative effects on trade performance, business profits and jobs. Stagflation could also occur (a period of economic stagnation accompanied by rising inflation) which can happen when an economy goes into a downturn or a recession but when other external forces are bringing out higher inflation
Economic growth and the balance of payments - Strong GDP growth fuelled by high levels of consumer demand for goods and services might lead to a worsening of the trade balance. This is particularly true when an economy has a high marginal propensity to import.
Real Example
Greece has suffered from a severe rise in unemployment and is now seeing her relative living standards fall. A deflationary depression is a risk for Greece.
Measuring Performance
Policy indicators are used to measure the meeting of objectives and policies set, examples are:
• Real GDP Growth (short term and long term)
• Jobs (unemployment and employment rates)
• Prices e.g. as measured by the annual change in the consumer price index
• Trade balances and measures of competitiveness
• Productivity of labour and capita inputs
• Average standard of living e.g. measured by per capita GDP (PPP adjusted)
• Quality and accessibility of public services
Economic growth - This is based on the country's change in GDP, compared usually over quarters. This is also adjusted for inflation as the nominal value proves inaccurate through time. Two consecutive negative values for quarter signal a recession
Full employment - this can be defined, more realistically, as when a country is operating at its maximum output level. In practise it is hard to attain full capacity because firms usually operate at less than 90% of capacity. It will also lead to a boom period as the income of consumers will become much larger.
Inflation - the consumer price index (CPI) is a weighted price index which measures the monthly change in the prices of goods and services. This compares what goods can be bought for the changing value of the currency, showing whether its worthiness is depleting or not.
Trade flows - this will take into account the imports and exports from different countries to see the balance of payments value, using formula X-M.
• Real GDP Growth (short term and long term)
• Jobs (unemployment and employment rates)
• Prices e.g. as measured by the annual change in the consumer price index
• Trade balances and measures of competitiveness
• Productivity of labour and capita inputs
• Average standard of living e.g. measured by per capita GDP (PPP adjusted)
• Quality and accessibility of public services
Economic growth - This is based on the country's change in GDP, compared usually over quarters. This is also adjusted for inflation as the nominal value proves inaccurate through time. Two consecutive negative values for quarter signal a recession
Full employment - this can be defined, more realistically, as when a country is operating at its maximum output level. In practise it is hard to attain full capacity because firms usually operate at less than 90% of capacity. It will also lead to a boom period as the income of consumers will become much larger.
Inflation - the consumer price index (CPI) is a weighted price index which measures the monthly change in the prices of goods and services. This compares what goods can be bought for the changing value of the currency, showing whether its worthiness is depleting or not.
Trade flows - this will take into account the imports and exports from different countries to see the balance of payments value, using formula X-M.