The Macroeconomic Policy Objectives
a) Full employment
Full employment has been ranked among the foremost objectives of economic
policy. But there is no unanimity of views on the meaning of full employment.
Prof. Ackley regards it as a ―slippery concept.‖ But the credit of popularizing
goes to Keynes, and since the Second World War it has been accepted as one of
the important goals of macro economics policy.
The classical economists always believed in the existence of full employment in
the economy. To them full employment was a normal situation and any
deviation from this was regarded as something abnormal. According to pigou,
the tendency of the economic system was to automatically provide full� employment in the labour market. Unemployment was a normal situation and
any deviation from this was regarded as something abnormal. According to
pigou the tendency of the economic system was to automatically provide full
employment in the labour market, employment resulted from rigidity in the
wage structure and interference in the working of market system in the form of
trade union legislation, minimum wage legislation, etc. full employment existed
when everybody who are the running rate of wages which‘s to be employed.
Those who are not prepared to work and the existing wage rate are not
unemployed in the pigovian sense because they are voluntarily unemployed.
However, no possibility of involuntarily unemployment in the sense that people
are prepaid to work but they could not find work. According to pigou, with
perfectly free completion- there will always be at work a strong tendency for
wage rate to be so related to demand that everybody is employed‖. However,
the classical view of full employment is consistence of the sum amount of
frictional, voluntary, seasonal, and structural.
According to Keynes, full employment means the absence of involuntary
unemployment. In other word, full employment is a situation in which
everybody who wants to work gets work. Full employment so defined is
consistent with frictional and voluntary unemployment. Keynes assumed that
with a given organization, equipment and techniques, real wages and the
volume of out-put (and hence of employment)are uniquely co-related, so that,
in general an increase in employment can only occur to the accompaniment of
a decline in the rate of wages. Thus the problem of full employment is one of
maintaining adequate effective demand Keynes gave an alternative definition of
full employment at another place in his general theory thus: ―it is a situation in
which aggregate employment is inelastic in response to an increase in the
effective demand for its out-put. ―It means that the test of full employment is
when any further increase in effective demand is when increase in effective
demand is not accompanied by any increase in output. Since the supply of
output becomes inelastic at the full employment level, any further increase in
effective demand will lead to inflation in the economy. Thus the Keynesian
concept of full employment involves three conditions (i) reduction in the real
wage rate; (ii) increase in effective demand; and (iii) inelastic supply of output
at the level of full employment.
According to Professor W.W. Hart attempting to define full employment raises
many people‘s blood pressure. Right so because there is hardly any economist
who does not define it in his own way. Lord Beveridge in his book full
employment in a free society defined it as a situation where there was more
vacant job than unemployed men so that normal lag between losing one job and
finding another will be very short. By full employment he does not mean zero
employment which means the full employment is not always full. There is
always a certain amount of frictional in the economy even when there is full
employment. He estimated frictional unemployment of 3% in a full
employment situation for England. But his pleading for more vacant jobs than
the unemployed cannot be accepted as the full employment level. According to
the America economic association committee, ―full employment is a situation
where all qualified person who want job at current wage rate find full-time� jobs.‖ It does not mean unemployment is zero. Here again like Beveridge, the
committee considered full employment to be consistent with some amount of
unemployment.
b) Price stability or low inflation
One of the policy objectives of monetary and fiscal policy are to stabilise the
price level. Both economists and payment favour this policy because
fluctuations in prices bring uncertainty and instability to the economy. Rising
and falling prices bring uncertainly and instability to the economy. Rising and
falling prices bring uncertainty and instability to the economy. Rising and
falling prices are both bad because they bring unnecessary loss to some and
undue advantage to others. Again they are associated with business cycles. So a
policy of prices stability keeps the value of money stable, eliminates cyclical
fluctuations, brings economic stability, helps in reducing inequalities of income
and wealth, secures social justice and promotes economic welfare.
However, there are certain difficulties in pursuing a policy of stable price level.
The first problem relates to the type of price level to be stabilised. Should the
relative or general price level be stabilised, or the wholesale or retail of
consumer goods or producers goods? There is no specific criterion with regards
to the choice of a price level which would include consumers‘ goods prices as
well as wages.‖ but this will necessitate change in the quantity of money and
not by as much as is implied in the stabilisation of consumer‘s goods price.
c) Economic Growth and Development
One of the most important objectives of macroeconomics policy in recent years
has been the rapid economic growth of an economy. Economic growth is
defined as ―the process whereby the real per capital income of a country
increases over a long period of time.‖ economic growth is measured by the
increase in the amount of goods and services produced in a country. A growing
economy produces more goods and services in each successive time period.
Thus growth occurs when an economy‘s productive capacity increases which,
in turn, is used to produce more goods and services. In its wider sense,
economic growth implies raising the standard of living of the people, and
reducing inequalities of income distribution. All economists agree that
economic growth is a desirable goal for a country. But there is no agreement
over for instance the annual growth rate which an economy should attain.
d) Balance of Payment Equilibrium
Another objectives of macroeconomic policy since the 1950s has been to
maintain equilibrium in the balance of payments. The achievement of this goal
has been necessitated by the phenomenal growth in the world trade as against
the growth of international liquidity. It is also recognised that deficit in the
balance of payment will retard the attainment of other objectives. This is
because a deficit in the balance of payment leads to sizeable outflow of gold.
But ―it is not clear what constitute a satisfactory balance of payment position
but clearly a country with a net debt must be at a surplus to repay the debt over
a reasonably short period of time. Once any debt has been repaid and an� adequate reserve attain, zero balance maintenance over time would meet the
policy objective.
e) Equitable Income Redistribution
Generally, market system does not distribute income equitably because through
this system country productive resources are just distributed to where they are
mostly needed (efficient and effective distribution) without considering what
happen to the rest of the economy. The result of this is the skewness in national
resources distribution. To correct for this defect, government need to step-in
using mainly fiscal policy to redistribute income in order to promote general
well being by using the tax instrument to collect from those who earn more and
give to those that earn less through provision of social safety net..
Self Assessment Exercise:
i. List and explain macroeconomic policy objectives known to you
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