A government announces that it wants faster growth, lower unemployment, stable prices and a healthier trade position. Every one of those sounds obviously desirable, and no sensible person would argue against any of them. The difficulty is that pursuing one of them hard enough tends to damage another, and no policy exists that improves all four at once. Macroeconomic policy is not a list of good intentions. It is a series of choices about which objective to sacrifice.
What governments are trying to do
Governments act in an economy in several distinct roles at once. They produce goods and services directly, running schools, hospitals and defence. They employ a large share of the workforce. They regulate the behaviour of firms, setting standards and enforcing competition. They redistribute income through taxes and benefits. And above all these, they attempt to manage the economy as a whole. It is that last role, macroeconomic management, that this note is about.
Macroeconomic aims
The main objectives a government pursues for the economy as a whole: economic growth, low unemployment, price stability, a stable balance of payments position and a fairer distribution of income.
Each aim has a reason behind it, and stating the reason rather than just the aim is what turns a list into an answer. Economic growth raises output and therefore average incomes and living standards. Low unemployment means fewer people without income and less output wasted, and it reduces the benefit bill. Price stability protects the value of money and of savings, and makes planning possible for households and firms. Balance of payments stability matters because a persistent current account deficit has to be financed by borrowing or by selling assets. Redistribution addresses the fact that a growing economy does not automatically share its gains.
Questions asking for macroeconomic aims are usually worth two or four marks and want distinct aims, not one aim in four costumes. 'Low unemployment' and 'more people in work' are the same answer twice. Where the marks allow, add the reason: 'price stability, so that the value of savings is protected' is a fuller answer than 'low inflation' and often earns the second mark.
Unemployment rate = (number unemployed / labour force) x 100The labour force is those working plus those actively seeking work. People who are not looking for work, such as students, the retired and those unable to work, are outside it entirely and are not counted as unemployed. Formulae are not printed in any 9708 paper, so recall it.
Calculating an unemployment rate from population data
A country has a population of 40 million. Of these, 24 million are in the labour force and 22.2 million are employed. Calculate the number unemployed and the unemployment rate. Then explain why the rate would fall if discouraged workers stopped looking for work.
Why the aims conflict
The clearest conflict is between growth and inflation. A government stimulating the economy to raise output and cut unemployment is increasing total demand, and if the economy is already near its capacity, the extra demand pushes prices up rather than output. The second conflict runs through trade. As incomes rise, households buy more of everything, including imports, so a policy that succeeds in raising growth tends to worsen the current account. A third conflict is between growth now and growth later, since building the factories and infrastructure that raise future output means producing fewer consumer goods today.
Draw a production possibility curve with capital goods on one axis and consumer goods on the other. Mark two points, one with high consumer goods output and one with high capital goods output. Then sketch where each economy's PPC would sit several years later.
This is the growth-now-against-growth-later conflict in a single picture. The economy choosing more consumer goods enjoys higher living standards today but its curve shifts out less. The one choosing capital goods sacrifices present consumption for a larger curve later. Neither choice is wrong, which is exactly why it is a conflict rather than a mistake.
A country's unemployment rate falls from 8% to 7% while the number of people employed is unchanged. The most likely explanation is:
A government successfully raises economic growth. Which macroeconomic aim is most likely to be harmed as a result?