<4.2 MACROECONOMIC AIMS>  

• WHY IS ECONOMIC GROWTH A GOVERNMENT AIM?: 

  • DEFINITION: 

    • ECONOMIC GROWTH refers to increases in the value of a country’s output (Real GDP) which is equal to its total spending on domestic output by households (C), firms (I), the government (G), and foreigners when they buy exports (X), minus any spending on imports (M). 

  • MORE OUTPUT => HIGHER LIVING STANDARDS=> EVEN MORE OUTPUT

    • More output should result in GREATER DOMESTIC CONSUMPTION at LOWER PRICES which should RAISE THE LIVING STANDARDS of the average citizen. 

    • In addition, more business activity results in GREATER TAX REVENUE which the government can redistribute to ensure low-income people have access to better education and healthcare (MERIT GOODS), which will further improve the productivity of the economy.​ 

CRITERIA?: Potential productive capacity is always increasing due to population growth and advancements in technology which improves productivity, therefore governments will always aim to be as close to this full-capacity/employment level as possible.​ 

• WHY IS LOW UNEMPLOYMENT A GOVERNMENT AIM?: 

  • • LOW-UNEMPLOYMENT => INCREASE IN GDP: 

      • Unemployed labour is a LOSS OF POTENTIAL GDP for the economy, as they are considered 'idle resources' which could contribute to economic output (Real GDP).

    • LOW-UNEMPLOYMENT => GREATER TAX REVENUE: 

      • The unemployed workers will need to be SUPPORTED BY GOVERNMENT TAX REVENUE IN THE FORM OF UNEMPLOYMENT BENEFITS which has an OPPORTUNITY COST and will WORSEN THE BUDGET DEFICIT.

• CRITERIA?: There can never be 0% unemployment, there will always be people ‘in-between’ jobs, or who don’t have the required skill set, and who need retraining.  

• WHY IS PRICE STABILITY A GOVERNMENT AIM?: 

  • INCREASE INVESTMENT ACTIVITY => INCREASE IN GDP: 

    • Investment is essential for economic growth and all investment activity uses borrowed funds, which of course involves future payments, hence CERTAINTY ABOUT THE 'REAL' (PURCHASING POWER) OF THESE FUTURE RETURNS IS ESSENTIAL for the lending to take place. 

    • Inflation REDUCES PURCHASING POWER, hence a stable and predictable price level allows lenders to include this rate into the interest rate that they charge the borrower (For example if you are confident that the price level rises by 2% every year and you want to make a 5% increase in your funds you can charge the borrower 7%).

    • Hence STABLE PRICES GIVE CERTAINTY TO BORROWERS AND LENDER ABOUT FUTURE REAL RETURNS encouraging said investments.

• CRITERIA?: The aim is not for 0% inflation, because the idea that prices will always rise means consumers will spend money today rather than postpone spending which lowers GDP and increases unemployment, hence a 2% target is usual.

• WHY IS THE REDISTRIBUTION OF INCOME A GOVERNMENT AIM?: 

  • WHY IS INCOME DISTRIBUTION UNEQUAL IN THE FIRST PLACE? 

    • The market system ONLY rewards the OWNERS OF PRODUCTIVE IN-DEMAND FACTORS OF PRODUCTION e.g, ARABLE LAND OWNERS, however, the DISTRIBUTION OF THIS OWNERSHIP is UNEQUAL, hence INCOMES ARE UNEQUAL, hence the government attempts to redistribute income from the rich to the poor, mainly through collecting progressively more taxes from the rich and spending them on goods and services to help lower-income earners.

  • MORE REDISTRIBUTION => MORE HUMAN CAPITAL => ECO. GROWTH

    • The more money redistributed to produce MERIT GOODS such as PUBLIC EDUCATION and HEALTHCARE the GREATER THE LEVEL OF HUMAN CAPITAL in the economy which leads to GREATER LEVELS of PRODUCTIVITY and hence ECONOMIC GROWTH.

• CRITERIA?: The government does not aim for ‘EQUALITY OF INCOME’ by taxing the rich heavily and providing generous benefits to the poor as this will disincentivize people from working hard and seeking work. The goal is to give everyone, regardless of income level’ equal access to education and healthcare as well as income to afford the basic necessities in life.​ 

• WHY IS BOP STABILITY A GOVERNMENT AIM?: 

  • DEFINITION: The Balance Of Payments (BOP), generally refers to the 'trade balance' of a country in terms of the value of its exports less the value of its imports (X-M) or 'NET-EXPORTS'. 

  • BOP STABILITY => LESS DEBT

    • If the BOP is in 'DEFICIT' (X<M) a country is spending more on imports than it is earning on exports, hence it likely needs to borrow to fund the difference which leads to debt accumulation.

  • BOP STABILITY => LESS DOMESTIC CONSUMPTION

    • If the BOP is in 'SURPLUS' (X>M) a country is earning more from exports than it is spending on imports, implying fewer goods are being consumed domestically.

• CRITERIA?: Governments would prefer a balance, but will accept deficits if the imports are capital goods that will result in greater productivity and contribute to greater export competitiveness in the future. 

• To achieve Low unemployment, you need more demand (Greater economic activity) for goods and services.​ More demand means more output which requires more workers to produce, hence LOWER UNEMPLOYMENT is achieved, HOWEVER, as soon as maximum production capacity is reached output will slow down yet demand will continue creating shortages, resulting in prices being 'bid-upwards', hence PRICES will start to RISE.

• To achieve ECONOMIC GROWTH, you need more output (GDP).​ More output means more income, which means more demand/spending. ​As we know from the ‘demand’ unit extra demand results in shortages and prices rising, hence PRICES will start to RISE.