When you study macroeconomics, you will study how the economy as a whole operates. It differs from microeconomics, where the focus is on individual economic actors, consumers, and producers, including their economic decisions.
Governments are trying to achieve several economic goals through their economic policies: demand-side, and supply-side policies. It is not just about maximizing national income through high economic growth. The most important macroeconomic goals involve how to achieve:
- High and sustainable economic growth
- Price stability
- Full employment
- Balance of payments equilibrium
- Fair income distribution
The macroeconomic goals above are difficult to achieve simultaneously. Often, choosing one goal comes at the expense of the other. For example, controlling inflation may require the economy to dampen aggregate demand, which means high unemployment and low economic growth.
High and sustainable economic growth
Economic growth is essential to increase people’s income and standard of living. It is usually seen as the most important macroeconomic goal.
When economic growth rises, output increases, and so does income. A growing economy shows an increase in economic output. Businesses increase production, recruit more labor and create more income for the household sector.
Thus, without economic growth, people will not be able to achieve a better standard of living. They cannot obtain a wide variety of goods and services in large quantities and higher incomes by working.
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Sustainable means not only an increase in real GDP but also potential GDP. An increase in the potential GDP shows you the production capacity of the economy increases over time. The economy can produce more output without creating inflationary pressures.
Sustainable growth is achieved by increasing productivity, more output per unit of input, such as labor. That is by improving the quality and quantity of production factors, including through technological advances. By increasing productivity, we get more goods and services without increasing production costs, resulting in lower prices.
Price stability is important because the purchasing power of money is maintained. To get the same number of items, you don’t have to spend more nominal money.
Price stability requires a low inflation rate. It is not the same as zero inflation.
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A stable low-moderate inflation rate is often considered ideal. Some economists said it was 2% inflation, as targeted in some countries such as the United States.
Full employment is when the economy uses its productive resources, including labor. That doesn’t mean everyone is working. Instead, those who are able and want to have a job can get one.
In full employment, the unemployment rate does not equal zero percent due to structural and frictional problems. Some people are unemployed because they do not have sufficient skills as the market demands.
Also, some people have not found a job even though they have been actively looking for work. They may be in the process of looking for job vacancies or following a company recruitment process. As long as they are not working, we will consider them unemployed.
Balance of payments equilibrium
Balance of payments equilibrium is reached when the foreign currency entering a country is the same as the foreign currency leaving. Foreign currency inflows and outflows originate from the current account and the capital account.
In other words, what we spend and invest abroad is nothing more than the spending and investment of foreigners into the domestic economy. Thus, our international reserves do not increase or decrease.
Fair income distribution
This goal is concerned with how to distribute income in the economy among the population. The distance between the rich and the poor should not differ significantly. It is usually more in the light of normative economics than positive economics.
To achieve this goal, the government has several instruments, including taxes and other social expenditures such as unemployment benefits and social assistance.
What to read next
- Inflation Rate: How to Calculate, Types, Effects of Economic Policy
- Unemployment Rate: Formula, Types, Causes, and Effects
- Balance of Payment: Meaning, Formula, Component, Importance
- Economic Growth: Factors, Importance, Impacts, How to Measure It
- Income Distribution: How to Measure and Overcome Inequality
- What are the 5 macroeconomic objectives
- Possible Conflicts Between Macroeconomic Objectives