MEDITERRANEAN SCHOOL OF BUSINESS COURSE: ECO 511 BUSINESS ECONOMICS 1 11/15/18 SOUTH MEDITERRANEAN UNIVERSITY PROFESSOR: Alec Hansen, Ph.D. DATE: October 2018
SESSION 8 MACROECONOMICS 2
Growth, thus full employment Macroeconomic policy’s fundamental objective is growth More income helps us satisfy our ambition of better lives A minimum amount of growth is necessary to prevent or reduce unemployment. Indeed, technological progress means that today we can produce yesterday’s output with fewer workers. So, to actually reduce unemployment, an economy must grow at a significantly positive rate.
Smooth Growth More specifically, macro policy’s fundamental objective is smooth growth: it is better to have a steady growth rate of 2% than business cycles with a growth rate that alternates between 1% and 3%. a low growth rate is costly because of rising unemployment a high growth rate is costly because of inflationary pressures when the economy reaches full employment a cycle of layoffs and hiring increases search and hiring costs
Price Stability While pursuing smooth, positive growth, policymakers must keep an eye on price stability, i.e., a low rate of inflation Indeed, in an economy at full capacity, labor and capital prices are driven up as firms compete fiercely for scarce resources. While higher prices and the decreased (marginal) productivity of inputs should help cool down the economy, this self-correction mechanism can be sudden. Thus the temptation by governments to anticipate and prevent “overheating” in the first place.
A balanced budget The policymakers’ other two major objectives are, at least in the long run, a balanced budget and balanced trade. A - Balanced Public Budget: governments provide goods and services such as national defense (which is neither rival nor excludable) or schools (which are private goods but have strong positive externalities) or farm subsidies (because farm lobbies are able to twist arms) or postal service (public enterprises). This government spending ( G ) is financed by tax revenue ( T ). With the power to tax comes the responsibility to not systematically spend more than that revenue.
Balanced trade B - Trade Balance: an economy should strive to maintain balanced trade with other countries. Indeed, in a particular year, there is no strong reason why the value of exports should exactly match the value of imports. In the long run, however, large debts to other nations can be a source of political conflict or strategic geopolitical disadvantage. This is X – M
Macro objectives In summary, macro policy is about 1. Smooth income growth 2. Employment (low unemployment) 3. Stable price level, i.e., low inflation 4. Balanced fiscal budget 5. Balanced trade
Measures of wealth Gross Domestic Product (GDP) GDP only provides a partial picture of a nation’s well-being. It does not explicitly take into account income distribution, health, life expectancy, good governance, liberty, changes to the environment, crime rates, and so forth GDP It does, however, have the virtue of being objectively measurable.
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