Macroeconomic Aims of the Government

The 4 macroeconomic aims of the government are:

1. Economic Growth
2. Low unemployment
3. Price stability(low and stable inflation)
4. Redistribution of income

Economic Growth

Economic growth is a sustained increase in an economy’s output (economic growth in the short run is referred to as actual economic growth).

*Displayed on PPC using OUTWARDS SHIFT

Aggregate demand is the total demand for a country’s products at a given price level. 

Aggregate demand (AD)= C+I+G+(X-M)

*C=consumption

*I=investment

*G=government

*X-M=net exports(derived by exports-imports)

Aggregate supply is the amount of goods and services that domestic firms are willing and able to sell at a given price level. 

Actual Growth vs Potential Growth

Why does the government aim for economic growth?

1. Raise people’s living standards: as an economy produces more goods it enables people to consume more goods and services
2. Employment is likely to rise: as a result of economic growth, the rate of unemployment should decrease, enabling the economy to allocate more resources.
3. Extra tax revenue may be generated: as the economy is now able to produce more goods and services, the government receives more tax from the increased production and consumption of these goods. 
4. International trade position may be improved: if a country’s output increases, it is more likely to export more goods which can improve the economy’s international trade position.

2. Low Unemployment

The government aims to achieve low unemployment because:

• Increases existing resources for economic growth: if more people are employed, they will contribute to the production of goods and services, which will lead to economic growth.
• Reduces tax revenue spent on helping the poor: the government would need to devote fewer resources to helping the poor if they started earning and put these funds to eg. build schools. 

Unemployment rate = (unemployment/labor force)*100

3. Price Stability

Price stability refers to when the price level in an economy is not changing significantly over time.

The government aims for pierce stability because:

• Keeps national firms competitive in the national market: if the price level keeps rising, national firms may not be able to compete in an international market.
• Confidence: price stability helps consumers and firms to plan for the future without having to worry about serious rises in prices.

Inflation is a sustained increase in the average price of goods and services available for sale in an economy.

4. Balance of payments stability 

A key part of a country’s balance of payments is in its records of revenue received from selling exports and its expenditure on imports. 

Governments aim for balance of payments:

• To avoid debts: if an economy’s expenditure on imports exceeds revenue from exports for a long period of time, the country is in risk of going into debt. 

If export revenue is greater than import expenditure, the inhabitants will not be enjoying as many products as possible. 

Policies

Policy instruments are ‘tools’ that the government enforces to change or influence total demand and supply in order to achieve their economic objectives for inflation, employment, output, and international trade. 

Demand-side policies influence or change total demand in an economy. They use several policy tools including:

1. Total public expenditure
2. The overall level of taxation
3. The rate of interest

Supply-side policies aim to boost the productive potential of an economy. Supply-side policy instruments include:

1. Targeted public expenditure
2. Targeted tax changes
3. New regulations(such as prevention of uncompetitive practices)

Conflicting Macroeconomic Aims

It is challenging to achieve different macroeconomic objectives at the same time. For example,

• If the government makes more jobs available, more people will be able to demand goods and services which could lead to rapid inflation. 
• The government may aim to reduce public expenditure by introducing taxes, which may slow down inflation as the demand for goods decreases, however, this may lead to firms reducing workforce due to a lack of trade.
• The government could cut taxes on income to increase public expenditure, however, this may lead to consumers demanding more imported goods, which will affect the stability of the balance of payments.