is concerned with issues, objectives and policies that affect the whole
economy. All economic analysis that refers to aggregates is macro. The UK
unemployment rate, the UK inflation rate, the rate of economic growth in the
UK; these are all UK aggregates and therefore macro issues.
The Major Objectives Of Macroeconomic Policy?
major objectives are (i) full employment, (ii) price stability, (iii) a high,
but sustainable, rate of economic growth, and (iv) keeping the Balance of
Payments in equilibrium. First, we will look at the way in which these
objectives are measured. Secondly, we shall discuss the relative importance
of these objectives. Thirdly, we shall see how successful recent governments
have been in achieving these goals. Finally, we will look at the difficulties
that governments have in trying to achieve all the objectives at once.
Which Objective Is The Most
1960s, the Balance of Payments was considered very important. A
deficit was considered highly embarrassing in the days when many still
believed, mistakenly, that Britain was a world power. The long term
sustainability of a deficit was a big problem in the days before global free
movements of capital, and so sterling would be affected which was
unacceptable within the 'Bretton Woods' fixed exchange rate system. Nowadays,
with a floating pound and huge global capital flows, many economists believe
that balance of payments deficits or surpluses simply do not matter. This was
reflected in the fact that nobody seemed to bat an eyelid at the continual
deficits of the 90s.
employment was considered very important after the Second World War. It was
probably the number one objective of the socialist government of the late 40s
and continued to be at the front of politicians' minds for the next three
decades. Unemployment exploded under Thatcher in the 80s, but it was seen as
an inevitable consequence of the steps taken to make industry more efficient.
It was painful at the time but the lower levels of unemployment today are
due, in part, to the structural changes made in the 80s. The fact that de-industrialisation
was occurring throughout the western world also made higher unemployment feel
inevitable, and so this objective became much less important than it had
and low inflation have always been important. Without growth peoples'
standard of living will not increase, and if inflation is too high then the
value of money falls negating any increase in living standards. Nowadays
these are definitely the two most important objectives of UK macroeconomic
policy. The Chancellor is always going on about 'sustainable growth', meaning
growth without inflation. Probably the biggest piece of economic news each
month is the decision taken by the Monetary Policy Committee (MPC) over
interest rates, their sole objective being the 2.5% target for the growth in
RPIX (plus or minus 1%). It is probably worth noting at this stage: do not
confuse objectives of macroeconomic policy with the instruments used to
achieve these aims. Low inflation is an objective, the rate of interest is an
instrument used to control inflation, not an objective in itself.
one had to pick the most important objective today, it would have to be
inflation. Although it should be growth, all government's efforts are
devoted to the control of inflation. If this goal is missed, it is felt, then
the goal of higher growth will not be attainable either.
Successful Have Recent Governments Been In Achieving These Goals?
there tends to be periods of strength (booms) followed by periods of weak or
even negative growth (recessions). This is known as the economic cycle. All governments have a goal of eliminating this
cycle. In other words, they want continual, reasonable growth that never
ignites inflation, perhaps 2½% - 3% per annum. Recent governments have moved
closer to this 'Goldilocks' scenario (not too hot and not too cold). Notice
that the growth rate has been over 2% without getting out of hand for six
years. Following the bust/boom/bust of the early 80s/late 80s/early 90s, this
is quite an achievement.
has also been remarkably subdued by historical standards. Following the
horribly inflationary 70s (peaked at 25%) and the near 10% figure ten years
ago, RPIX has been growing at 3% pa or less for six years.
The goal of
full employment has effectively
been consigned to the history books. Unemployment reached one million in the
80s for the first time since the 30s, and then proceeded to reach 3 million
(or 4 million, depending on the definition) within three years. Having said
that, 'full employment' does not mean that everyone has a job. Even in the
'full employment' era of the 50s there were still 300,000 unemployed. Today's
figure is falling towards one million which some consider to be fairly close
to full employment given the increased flexibility of the UK labour .
It is a sad
fact of economic life that UK consumers prefer imported goods to those made
in Britain. The extent of the current account deficit mainly depends,
therefore, on how well we export our services. Unfortunately, services are
not quite as exportable as goods, so the UK is always fighting a losing
battle. Hopefully the changes in technology, and our abilities to exploit
them, will allow us to increase our exports of services by enough in the
future to allow for the deficit in goods. Some economists believe that there
is no problem, because in a world of perfectly mobile capital, the UK no
longer relies entirely on their own pool of foreign reserves to pay for its
imports. Nowadays, if you want something from abroad but you do not have the
foreign currency, then just buy it on the Foreign Exchange Markets.