economic-government-macroeconomic-objectives

An introduction to macroeconomic objectives

• Macroeconomic objectives are the main goals that a government tries to achieve in the wider economy to keep the economy stable and growing

• Successfully meeting the objectives helps improve living standards and create a strong business environment

• Macroeconomic objectives usually include

  • Economic growth – increasing the total output of goods and services in the country (measured by GDP)

  • Low unemployment – making sure most people who want to work can find a job

  • Low and stable inflation – keeping prices from rising too quickly

Low unemployment

• The target unemployment rate for many economies is between 2-5%

  • In December 2022 the unemployment rate in the USA was 3.7% and in Singapore it was 2.6%

• Low unemployment rates like this are close to the full employment level of labour

  • There will always be a level of frictional, seasonal and structural unemployment

  • This makes it impossible to achieve 100% employment

• Different economies have different unemployment rates that are considered to be close to the full employment level of labour

  • E.g. Japan’s level is about 2.5% while India’s is about 5.7%

• There is an increased emphasis on the unemployment rate within different sections of the population

  • E.g. Youth unemployment, ethnic/racial unemployment by group

    • In 2021, black unemployment in the UK was 11% and white unemployment was 4.%

• Unemployment tends to be inversely proportional to real GDP growth

  • When real GDP increases, unemployment falls

  • When real GDP decreases, unemployment rises

Impact on business activity

• Higher employment levels mean more people have income to spend, which increases consumer demand for goods and services

• Lower unemployment reduces the availability of labour, making it harder for firms to recruit – this may push up wage costs

• High employment increases business confidence, encouraging firms to invest and expand

• In areas or sectors with high unemployment, demand may fall, leading to lower sales and possible business closures

• Businesses may be able to recruit workers more cheaply during periods of high unemployment, improving labour cost competitiveness

Low and stable inflation

• Many economies have a target inflation rate of 2% using the Consumer Price Index (CPI)

• A low and stable rate of inflation is desirable, as it is a symptom of economic growth

• The different causes of inflation (cost push or demand pull) require different policy responses from the Government

  • Demand-side policies ease demand pull inflation

  • Supply-side policies ease cost push inflation

• In the UK, a significant deviation from the target of 2% would not be considered stable

  • An inflation ratea of 3% is considered to be unstable, eroding household purchasing power

  • By October 2022 the inflation rate in Australia had risen to 6.59%

• A low and stable rate of inflation is important as it

  • Allows firms to confidently plan for future investment

  • Offers price stability to consumers

Impact on business activity

• Low and stable inflation helps businesses plan ahead with greater confidence in costs and pricing strategies

• High inflation increases input costs (e.g., wages, raw materials), reducing profit margins unless firms can raise prices

• Unstable inflation creates uncertainty, making it harder to budget, forecast, or make investment decisions

• Inflation may erode consumer purchasing power, reducing demand for non-essential goods and services

• In countries with high inflation, businesses may face pressure to increase wages, which can increase overall operational costs

Economic growth

• Economic growth is a central macroeconomic aim of most governments

• Many developed nations have an annual target rate of 2-3%

  • This is considered to be sustainable growth

  • Growth at this rate is less likely to cause excessive demand pull inflation

• Politicians use the economic growth rate as a measure of the effectiveness of their policies and leadership

• Economic growth has positive impacts on confidence, consumption, investment, employment, incomes, living standards and government budgets

Economic growth trends in the UK since 1998

1998 – 2007

• Steady growth fluctuating between 2-4%

2008 – 2015

• Global financial crisis followed by a rapid bounce back due to government intervention – and then steady growth

2016 – 2019

• Gradual disinflation possibly due to future expectations regarding the impact of the Brexit vote

2020 – 2021

• Covid resulted in significant economic slumps on a global basis during 2020

  • These created a deep recession (short-lived due to government intervention)

• Many economies rebounded in 2021

2022 – 2025

• Supply chain issues due to Covid and Brexit continued

• Increases in the interest rate reduced the level of economic activity

Impact on business activity

• Growth boosts consumer incomes and spending power, increasing demand for most goods and services

• Rising demand encourages businesses to expand capacity, hire more workers, and invest in new products or technology

• Economic booms can lead to higher profits for firms, improving shareholder returns and business sustainability

• High growth can also cause overheating, leading to labour shortages or inflationary pressures, which may affect input costs

• A lack of growth (or recession) can lead to lower consumer confidence, reduced investment, and declining business revenues