What this lesson teaches
I can state the government's macroeconomic aims, explain why they are chosen, and show where they conflict.
Syllabus K343, 4.1.1. Macroeconomic aims: the macroeconomic aims of government: economic growth, full employment/low unemployment, stable prices/low inflation, balance of payments stability, redistribution of income, environmental sustainability; reasons behind the choice of aims and the criteria that governments may set for meeting each aim; possible conflicts between macroeconomic aims: full employment and stable prices, economic growth and environmental sustainability, full employment and balance of payments stability
Make a guess
What inflation rate do most governments aim for?
- Zero, so that prices never change.
- As high as possible, so that wages rise faster.
- Low and stable, around 2% a year.
Show the answer
Low and stable, around 2% a year.
A little steady inflation helps firms plan. Falling prices can make people delay spending, so most governments do not aim for zero.
Governments aim for growth, low unemployment, low inflation, a stable balance of payments, fairer income and sustainability.
Macroeconomics studies the whole economy. Governments usually have six macroeconomic aims. Economic growth: a rising output of goods and services. Full employment, or low unemployment: jobs for those who want to work. Stable prices, or low inflation.
Balance of payments stability: no large, lasting deficit or surplus in trade with other countries. Redistribution of income: a fairer spread of income between rich and poor. Environmental sustainability: growth that does not use up resources or harm the environment for future generations.
Governments choose aims because each improves living standards. Growth raises incomes. Jobs give people income and dignity. Low inflation protects the value of money and helps firms plan.
Governments often set criteria, or targets, for each aim. Examples are steady growth of a few per cent a year, inflation of around 2%, and a low unemployment rate.
- Six aims
- Growth, full employment, stable prices, BOP stability, redistribution, sustainability.
- Criteria
- Targets such as 2% inflation or 2-3% growth.
Worked example: Turning aims into targets
Here is how a government might express its aims as criteria.
- Growth: real GDP to grow by 2% to 3% a year.
- Inflation: consumer prices to rise by around 2% a year.
- Unemployment: kept low, for example below 3% of the labour force.
- Sustainability: cut carbon emissions to an agreed level by a target year.
Watch out for this
Governments want inflation to be zero.
Most governments aim for low and stable inflation, around 2%, not zero. Falling prices can make people delay spending, which can harm the economy.
Check your understanding
A government raises taxes on high earners to fund support for low-income households. Which macroeconomic aim does this serve?
- Redistribution: a fairer spread of income.
- Balance of payments: no large, lasting trade gap.
- Stable prices: inflation kept around 2% a year.
Show the answer
Redistribution: a fairer spread of income.
Right. Moving income from rich to poor households serves the aim of redistribution.
Check your understanding
A government wants growth that does not use up the resources future generations will need. Which aim is this?
- Redistribution of income
- Environmental sustainability
- Full employment
- Balance of payments stability
Show the answer
Environmental sustainability
Right. Growth that protects resources and the environment for the future is sustainable growth.