6.5 - Macroeconomic Objectives of Governments
The meaning of macroeconomic objectives
Macroeconomic objectives represent the broad targets that governments establish to guide the performance of the entire economy.
Key macroeconomic objectives
Governments typically prioritise a set of core objectives to promote a healthy economy.
The main macroeconomic objectives:
- Economic growth - This refers to the yearly percentage rise in a country's total output, measured as gross domestic product (GDP). It is usually assessed through changes in real GDP.
- Low price inflation - This involves keeping the average annual increase in consumer prices at a manageable level.
- Low rate of unemployment - The aim is to minimise the proportion of the workforce that is without jobs.
- Long-term balance of payments - This objective seeks equilibrium between the value of a country's imports and exports over time.
- Exchange rate stability - Governments work to avoid sharp fluctuations in the currency's value against others.
Conflicts between macroeconomic objectives
Achieving one macroeconomic objective can sometimes undermine progress towards another, creating trade-offs that governments must navigate.
Reasons for conflicts in objectives:
- Policies designed to boost one aspect may intensify pressures in another.
- Limited resources mean that focusing on reducing unemployment could divert attention from maintaining a balanced trade position.
- External factors can amplify these tensions, making it challenging to pursue all objectives simultaneously without compromises.
Examples of conflicting objectives
Conflicts often arise when governments use specific policies to address one issue, only to create challenges in another area.
Conflict between low inflation and low unemployment
When inflation is high, governments may adopt contractionary fiscal policies, such as cutting public spending, to slow down price increases. However, these measures can reduce overall demand in the economy, leading firms to cut back on production and dismiss staff, which raises unemployment levels.