6 Main Macroeconomic Objectives of an Economy
Macroeconomic objectives explain what a country wishes to achieve as an economy overall. Government, central bank, and other responsible parties of a country decide the macroeconomic objectives that the country should achieve.
To achieve these macroeconomic objectives, a government implements different types of macroeconomic policies. demand-side policies (fiscal policy, monetary policy) and supply-side policies.
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3 types of macroeconomic policies that can solve economic issues
There are two major types of economic policies. They are,
1. Demand side policies
Demand-side economic policies refer to the economic policies that can be used to stronger or weaken the aggregate demand sector of a nation.
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2. Supply side policies.
Supply-side economic policies refer to the economic policies that can be used to stronger or weaken the aggregate supply of a nation. In other words, supply-side economic policies mean economic policies to improve the productivity and efficiency of a nation.
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Supply Side policies – With Examples
Some macroeconomic goals may be regarded as more important than others because different governments may have different priorities. When elections come around in democracies, the opposing parties will present the electorate with their respective economic priorities and policies. Macroeconomic goals can occasionally clash and involve a trade-off. Performance improvements for a particular objective occur at a cost of declining performance for another.
Macroeconomic objectives 1 – Sustainable economic growth
Achieving sustainable economic growth is a very important macroeconomic goal for an economy. When economy grows, it increases the aggregate output and income level of the people. In other words, when economy grows, business organizations increase their production and households increase their consumption.
Growth of an economy is clearly presented by the growth of the gross domestic product of an economy. GDP includes the total value of an economy in dollars for private consumption, private investments, government expenditure, and net exports. According to the World Bank statistics in 2022, the USA has recorded the highest GDP in the world.
By expanding access to basic education and enhancing infrastructure like roads, electricity supplies, and telecommunications, less developed nations can attain very high rates of development of 10% or more. These measures have already been taken by rich countries, where growth is typically significantly slower (2–3%). It is likely to be accomplished by making small technological advances and using more productive work methods.
Sustainable growth is achieved by increasing productivity, more output per unit of input, such as labor. That is done by enhancing both the quantity and quality of production factors, including by advancing technology. By raising productivity, we can produce more goods and services while keeping costs flat, which leads to reduced prices.
Promoting strong, sustainable, balanced and inclusive growth is a priority for G20 governments, including the United Kingdom’s, reflecting the need to drive improvements in labour and resource productivity through more and better investments in innovation, infrastructure and skills.
If you are interested in to read more about sustainable economic growth of United Kingdom, kindly click on “Sustainable growth in the UK“
Real GDP and Potential GDP
When economy has a sustainable economic growth, there should be an expansion of both real GDP and potential GDP level.
When nominal GDP is adjusted for the changes of the general price level (inflation or deflation), we call it “real GDP”. Since the real GDP is free from price level changes, it is highly acceptable to measure the economic health of a country.
Potential GDP is the level of gross domestic product (GDP) that the economy able to achieve by operating at a full employment output level. So, potential GDP presents the output level that maximum using the resources within the productive capacity, especially at a constant inflation rate.
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How the AD-AS model presents economic growth
Long-run economic growth can be achieved through an increase of productivity. When productivity is increasing, the short-run aggregate supply curve shifts to rightward. Continued increase of productivity may lead to the rightward shift of the long-run aggregate supply curve (rightward shift of the full employment level of the economy).
The following graph shows how the economy has grown for three years. In this economy, the short-run aggregate supply curve (SRAS) has shifted to rightward from SRAS0 to SRAS1 and to SRAS2 as a result of the productivity increase. Long-run aggregate supply (full employment output level) has increased from LRAS0 to LRAS1 and to LRAS2.
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Macroeconomic objectives 2 – Reduce the unemployment
Unemployment can be defined as the percentage of unemployed individuals in a labor force. Accurately measuring unemployment is challenging, and most calculations ignore part-time workers who would prefer full-time employment. Reducing unemployment is one of the main macroeconomic objective of any nation.
However, zero unemployment is not a practical scenario. Because there are kinds of unemployment such as voluntary, frictional, and seasonal unemployment. for instance, as some workers find themselves between jobs. Some people are unemployed because they do not have sufficient skills as the market demands. We cannot avoid these types of unemployment.
It is acceptable to maintain approximately 4 percent of unemployment. Government implement economic policies to maintain approximately 4 percent of unemployment.
According to the latest statistics, unemployment statistics of United Kingdom remain low.
- The UK unemployment rate was 3.8%, and 1.30 million people aged 16+ were unemployed. Unemployment levels have risen in the last quarter and stayed at a similar level to the previous year. They were 71,000 below their pre-pandemic levels.
- In February to April 2023, the number of people aged 16+ in employment was 33.09 million, and the employment rate for people aged 16-64 was 76.0%, up from 75.7% in the previous quarter. Employment levels increased in the last quarter and over the last year, and continued to be above pre-pandemic levels (January to March 2020), after surpassing them for the first time in January to March 2023.
If you are interested in to read more about unemployment statistics of United Kingdom, kindly click on “UK Labour Market Statistics“
Reducing unemployment is not only an economic objective it is one of the social objectives of a nation. Every government tries to reduce unemployment as they can maximum. The central bank of a country uses monetary policy with the objective of reducing involuntary unemployment.
Macroeconomic objectives 3 – Maintain the price stability and a lower level of inflation
Achieving price stability in other words, avoiding higher inflations and deflation is one of the major economic objectives of any country. Because price fluctuations not only destroy the economic wellbeing of the nation but also destroys the political stability of the nation.
To maintain the price stability of a country, government tries to reduce the inflation level. Inflation can be defined as the increase in the general price level of goods and services. Inflation occurs as a result of different social, economic, and political factors.
The inflation is not a negative economic scenario at all times. Usually, inflation occurs when the economy is expanding. Federal Reserve Bank target to remain at 2 percent of inflation. The Bank of England in the UK is in charge of ensuring that the inflation rate stays within 1% of the primary target of 2%.
But higher inflation is not beneficial for any economy. It decreases the purchasing power of money and worsens the living standards of the people. This can be explained using following picture.
On the other hand, an objective of zero inflation increases the likelihood of deflation, in which prices and wages decline in parallel. As a result, aggregate demand decreases and the economy slips into a recession.
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US inflation rate will remain low end of 2023
Macroeconomic objectives 4 – Reduce the income disparity
Income disparity means the income gap between rich people and poor people of a country. The government has main macroeconomic objective of reducing this gap. Reduce income disparity does not mean the distribute the income equally between the people. But economy should be distributed fairly. Fair is a relative concept. What could be fair to one person, may not be fair to another.
The Resolution Foundation of United Kingdom expects income inequality to fall during 2022/23 and 2023/24. This is due to benefits being uprated by 10.1% in April 2023 and targeted Government support for low-income households in the form of cost of living payments.
Macroeconomic objectives 5 – Reduce the surpluses and deficits of the BOP (Balance of payment)
Balance of payment (BOP) presents how foreign cash inflows and foreign cash outflows are occurred in an economy. When the quantity of foreign money entering and leaving a country is equal, the balance of payments is said to be in equilibrium. In other words, the money we spend and invest internationally equals the money that foreigners spend and invest here at domestic country. As a result, neither our foreign reserves nor their value change.
Sometimes, a country may not able to maintain the Equilibrium in Balance of Payments. But having too large BOP deficits and surpluses is not good an economy.
A high deficit means that country spends more than its income. However, a persistently large surplus means the country is not enjoying the standard of living it could have if it imported more. That means the country is spending less than it is earning. Both of these situations are harmful for an economy. So, the government has a macroeconomic goal to reduce the surpluses and deficits of the BOP.
Key findings of United Kingdom BOP statistics as follows.
- The value of goods imports decreased by £0.7 billion (1.4%) in April 2023; after removing the effect of inflation, imports of goods fell by 0.4%.
- The value of goods exports increased by £1.0 billion (3.4%) in April 2023; after removing the effect of inflation, exports of goods rose by a similar amount.
- Both imports and exports of goods displayed an increase in trade with non-EU countries, while trade with EU countries fell in April 2023.
If you are interested in to read more about BOP statistics of United Kingdom, kindly click on “UK trade: April 2023“
Macroeconomic objectives 6 – Maintain a stable foreign exchange level
Achieving a stable foreign exchange level is very important for any country to succeed in international trade, to attract foreign investors, and so on. So, a central bank should decide the trade-off between the internal price stability and external price stability level in other words foreign exchange stability. Sometimes, a central bank has to sacrifice the internal price stability to protect the external price stability.
