Economic Policy Objectives

Economic Policy Objectives – Ch 11

• Governments have a wide range of responsibilities and functions, not all are economic focus, regulate business operation, provide public goods and services as well as provide a social welfare.
• Government management in macroeconomics helps to reduce the fluctuations in economic activity associated with the business cycle.

Two government statements outlining government economic objectives:

• 1945 White Paper – “stimulate spending on goods and services to the extent necessary to maintain full employment.”
• 1965 Vernon Report – “high rate of economic and population growth with full employment, increasing productivity, rising standards of living, external viability and stability of costs and prices.”

These statements are rendered invalid now as rapid economic growth is now regarded as unstable, and during the time periods in which these reports were produced, growth was required to support infrastructure and resource projects.

If a current list of economic objectives were created now they would go like this:

• Sustainable rate of economic growth, as standard of living depends on the foundation.
• Price stability is crucial to maintain the spending power of our income and competitiveness of the economy.
• High employment.

The RBA operates independently of the government and does not accept instruction when it comes to defining interest rates, it prevents the manipulation of interest rates for political ends, and keeps monetary policy focused on long term goals. These are the RBA specific goals:

• The stability of the currency of Australia, meaning price stability;
• The maintenance of full employment in Australia;
• The economic prosperity and welfare of the people of Australia.

Economic growth is defined as the increasing capacity of the economy to satisfy the material needs and wants of its members, usually measured by calculating the change in real GDP over a period of time, the target rate for AU is 3-4% per annum.

GDP is determined by growth in labour force and growth in productivity.

Growth is an important objective as it delivers higher real income and enables people to consume of more goods and services. Growth creates more demand for productive resources, including labour. Growth regarding full employment depends on if it exceeds the growth in population as well.

When there is either extreme high growth or low growth it can severely impact the economy, either through demand pull inflation as the prices go to high in growth that is extreme or the inability to use the resources effectively in a low point of growth.

Price stability occurs when there is little change in the general price level, that is, there are low rates of inflation. The appropriate rate of inflation is 2-3%.

Controlling inflation is very important as it affects buying power, pressure on interest rates, erodes international competitiveness, widens the distribution of wealth and distorts the allocation of resources.

Full employment occurs when everyone in the workplace who is willing to work can find a job. Opportunity cost, monetary cost, PPF, average 1.5 to 2.5 frictional unemployment.

Equitable distribution of income and welfare are other economic objectives as well as efficient resource allocation. These are by products of the main goals.

A compatible economic objective is one that can be pursued simultaneously, and they help each other, conflicting objectives can not be achieved at the same time.

Compatible: