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    Macroeconomics Aims of Government

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    Macroeconomics Aims of Government

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    33 views8 pages

    Macroeconomics Aims of Government

    Uploaded by

    wayandragon247

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
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    MACROECONOMICS

    AIMS OF
    GOVERNMENT.
    Grade 10
    The government’s major macroeconomic objectives are:
    •Economic Growth: economic growth refers to an increase in the
    gross domestic product (GDP), the amount of goods and services
    produced in the economy, over a period of time. More output means
    economic growth. But if output falls over time (economic recession),
    it can cause:
    • fall in employment, incomes and living standards of the people
    • fall in the tax revenue the govt. collects from goods and
    services and incomes, which will, in turn, lead to a cut in govt.
    spending
    • fall in the revenues and profits of firms
    • low investments, that is, people won’t invest in production as
    economic conditions are poor and they will yield low profits
    •Price Stability: inflation is the continuous rise in the average price levels
    in an economy during a time period. Governments usually target an
    inflation rate it should maintain in a year, say 3%. If prices rise too quickly
    it can negatively affect the economy because it:
    • reduces people’s purchasing powers as people will be able to buy less
    with the money they have now than before
    • causes hardship for the poor
    • increases business costs especially as workers will demand higher
    wages to support their livelihood
    • makes products more expensive than products of other countries with
    low inflation. This will make exports less competitive in the
    international market.
    •Full Employment: if there is a high level of unemployment in a country,
    the following may happen:
    • the total national output (goods produced) will fall
    • The government will have to give out welfare payments
    (unemployment benefits) to the unemployed, increasing public
    expenditure while income taxes fall – causing a budget deficit
    • large unemployment causes public unrest and anger towards the
    government.

    •Balance of Payments Stability: economies export (sell) many of their


    products to overseas residents, and receive income and investment from
    abroad; they also import (buy) goods and services from other economies,
    and make investments in other countries.
    •Income Redistribution: to reduce the inequality of
    income among its citizens, the government will
    redistribute incomes from the rich to the poor by imposing
    taxes on the rich and using them to finance welfare
    schemes for the poor. All governments struggle with
    income inequality and try to solve it because:
    • widening inequality means higher levels of poverty
    • poverty and hardship restrict the economy from
    reaching its maximum productive capacity.
    Conflict of Macroeconomic Aims
    When a policy is introduced to achieve one macroeconomic aim, it tends to conflict with one or
    more other aims. In other words, as one aim is achieved, another aim is undone. Let’s look at some
    conflicts of government macroeconomic aims.

    Full Employment v/s Price Stability


    Low rates of unemployment will boost incomes of businesses and workers. This rise in incomes
    mean higher demand and consumption in the economy, which causes firms to raise their prices –
    resulting in inflation. This is probably the most prominent policy conflict in the study of Economics.

    Economic Growth & Full Employment v/s BoP Stability


    Once again, as incomes rise due to economic growth and low unemployment, people will import
    more foreign products and consume relatively less domestic products. This will cause a rise in
    imports relative to exports and a deficit may arise in the balance of payments.
    Economic Growth v/s Full Employment
    In the long run, when economic growth is continuous, firms may start
    investing in more capital (machinery/equipment). More capital-intensive
    production will make a lot of people unemployed.

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