What are the major objectives of macroeconomic policy?

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Offline bipasha

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What are the major objectives of macroeconomic policy?
« on: July 17, 2018, 10:21:04 AM »
What are the major objectives of macroeconomic policy?

Macroeconomics is concerned with issues, objectives and policies that affect the whole economy. All economic analysis that refers to aggregates is macro. The UK unemployment rate, the UK inflation rate, the rate of economic growth in the UK; these are all UK aggregates and therefore macro issues.

The four major objectives are:

Full employment
Price stability
A high, but sustainable, rate of economic growth
Keeping the balance of payments in equilibrium.
In this Learn-It, we will look at the way in which these objectives are measured. In the next, we shall look at why these objectives are important, their relative importance and how successful recent governments have been in achieving these goals. Finally we will look at the difficulties that governments have in trying to achieve all the objectives at once.

How are these objectives measured?
1. Full employment, or low unemployment.

The claimant count is the older, more out-of-date, measure of unemployment used in the UK. Those counted must be out of work, physically able to work and looking for it, and actually claiming benefit.

For a more realistic count, and for international comparisons, the ILO (International Labour Organisation) measure is used. This includes the young unemployed who are not always eligible to claim, married women who can't claim if their husband is earning enough, and those who claim sickness and invalidity benefits. Many only slightly inconvenienced unemployed workers are paid these benefits rather than swell the claimant count of unemployment.

Note the issue of active and inactive members of the population of working age. Only those who are active are included in the working population (or labour force), which is defined as all those who are employed or registered unemployed. But some of the inactive are in this category by choice, for instance, students and those who retire early.

At the moment in the UK, the level of employment is the highest ever (nearly 28 million workers). But one should note the significant difference in the numbers employed in manufacturing compared with the services (approximately 4 million against nearly 18 million).

2. Price stability

Inflation is usually defined as a sustained rise in the general level of prices. Technically, it is measured as the annual rate of change of the Retail Price Index (RPI), often referred to as the headline rate of inflation. For prices to be stable, therefore, the inflation rate should be zero. Generally, governments are happy if they can keep the inflation rate down to a low percentage. For an explanation of how the RPI is formulated, see the topic called 'Unemployment and inflation'. The UK government prefers to target the underlying rate of inflation, or the annual percentage change in the RPIX. This is the same as the RPI except housing costs are removed in the shape of mortgage interest payments. It makes sense for the government to use this measure because the weapon they use to control inflation, interest rates, directly affects the RPI itself.

Other less popular measures include the RPIY, which takes RPIX a stage further by also taking out the effects of indirect taxation (e.g. VAT), and the consumer price index, which is often used when making international comparisons.

The inflation rates based on these measures for the whole of 1999 were: RPI, 1.5%; RPIX, 2.2% and RPIY, 1.6%. Another important statistic is that of average earnings growth. Most economists believe that the growth in wages directly affects the price level. The 4.6% figure for 1999 is reasonably low historically (certainly compared with the early 90s), but there are fears that it will have picked up during 2000. At the time of writing it was too early to get figures for the whole of 2000. This is something that you should look up yourself.

3. High (but sustainable) economic growth

Economic growth tends to be measured interms of the rate of change of real GDP (Gross Domestic Product). When the word real accompanies any statistic, it means that the effects of inflation have been removed. GDP is a measure of the annual output (or income, or expenditure) of an economy. Sometimes GNP (Gross National Product) is used, which is very similar to GDP. The only difference is that income earned from assets held abroad is added and the income earned by foreigners who have assets in the UK is taken away (officially called net property income from abroad). Growth figures are published quarterly, both in terms of the change quarter on quarter and as annual percentage changes.

UK real GDP growth was 1.8% in 1999, which is lower than the mid-90s, but much better than the recession of the early 90s. Remember that many economists were predicting 1999 to be a year of recession, so the final figure is really quite reasonable. Note also that there is a big difference between the growth rates of the manufacturing sector (-0.4%) and the service sector (2.8%). The service sector has been healthy for years, whereas the manufacturing sector, some would argue, has barely recovered from the recession of the early 90s.

4. Balance of payments in equilibrium

This is a very big topic in itself. Look at the topic called 'The balance of payments' for much more detail. Briefly, this records all flows of money into, and out of, the UK over a given time period (usually a year). It is split into two: the Current Account and the Capital and Financial Accounts (formerly the capital account, although examiners do still accept this name).

Probably the most important is the current account because this records how well the UK is doing in terms of its exports of goods and services relative to its imports. If the UK is to 'pay its way' in the world over the long term, then it needs to keep earning enough foreign currency from its exports to pay for its imports. If this is not the case, the current account will be in deficit.

Japan has the largest current account surplus in the world. Although a surplus sounds better then a deficit, both can be bad. Japan's surplus forces other countries in the world to have deficits. In fact, while Japan's surplus is the biggest in the world, the USA's deficit is the biggest in the world. This is not a coincidence! The UK tends to be in deficit, although the current account was in surplus a couple of years ago, mainly due to our strength in the service sector.


Offline Raisa

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Re: What are the major objectives of macroeconomic policy?
« Reply #1 on: July 22, 2018, 12:40:34 PM »