Macroeconomic Policy and Trade Offs

Macroeconomic Policy and Trade offs

Objectives of Macroeconomic Policy

The major macroeconomic policies are as follows:

Reasonably Steady economic growth

Low inflation

An average increase in living standards

External balance or manageable balance of payment

High levels of employment

Issues of Macroeconomic Policy trade offs

Trade-offs means making different choices between different objectives or targets of government policy.

The aim of government policy is to increase the economic welfare of the whole country.

Trade-offs means difficult decisions have to be made regarding the timing of economic policy instrument to meet a particular economic objective.

In addition trade-offs means the government must make priorities between the different macroeconomic objectives. For example they have to ask questions whether it has to have as a major aim to control inflation and to ask what is the impact of controlling inflation on the unemployment in the short-term. As well, they must also ask question whether economic growth maintained, eventually causing inflation at least in the short-run. Trade-off also pose a question whether the government policies can change the nature of these trade-off itself. In structural terms, trade-offs also impose a question on government policy whether structural changes to economy and its impact on the nature of economic cycles.

Economic Growth and Inflation

Fast economic growth leads to acceleration in inflation due to use of scarce resources and the formation of skilled labor shortages and bottle-necks in the economy. This produces the aggregate supply to become inelastic closer to long-run aggregate supply. This causes the inflation to accelerate. That increase in aggregate demand leads to higher prices than output and employment.

However, if government can move the long-run aggregate supply of the economy by fiscal, micro economic reform, competition in the product market and labor market, increasing the innovative and technological progress to improve productivity and labor mobility then it can have a non-inflationary economic growth.

Trade off between unemployment and inflation

When unemployment is very low, there is a risk the wage and price inflation strat to rise due to demand-pull inflation if short-run aggregate supply is inelastic as well the wage earners have high bargaining power when the unemployment is low compared to when it is high. That is it may also cause cost push inflation.

However, supply-side labor market reform and other labor market programs and labor supply issue can alleviate the elasticity of labor supply and aggregate supply elasticity. This can help to lessen the trade off or completely the trade off is broken. However, the trade-off in reality do not completely broken by supply-side policies because of practical social barriers.

Trade offs between economic growth and trade balance.

The degree of trade offs depends on the structural nature of the economy, its export sector competitiveness in the world market in price and non-price competitiveness, exchange rate stability,. If the economy has a volatile exchange rate and the economic growth of domestic

economy is higher than the world market and the economic price and non-price competition is weak,then the increase in aggregate demand must be met my imports and the exports will not be sufficient depending on the elasticities of goods and services exports compared to imports.

That is if government can assist more dynamic export economy and they are competitive in a dynamic sense and they can export sufficient quantities at a good price then, the trade-off between economic growth and trade balance can be minimized. However, it can arise even they have structural changes due to uncontrolled risks post by the world market and exchange rate problems and shocks.

Conclusion

As discussed above, it is obvious that macroeconomic objectives are not easy to achieve at the same time. However, if government can use wisely the monetary, fiscal and mcro economic reforms continually and have a steady economic growth, improve productivity and dynamic efficiency of the economy as whole by technological innovation, effective market competitive structure, sound fiscal balance and finances it can change the nature of economic cycle and the nature of trade offs to a greater degree by their prudent policy mix depending on their unique, economic, political social factors in to consideration.