The goals of macroeconomic policy, Macroeconomics

 

THE GOALS OF MACROECONOMIC POLICY 

Economic analysis attempts to explain why problems arise in the economy and how these problems can be dealt with. It is, therefore, indispensable for formulating and conducting economic policy. However, before studying macroeconomic theory and policy, one must know the macroeconomic goals of the economy. Because, without definite objectives there is no point in formulating a policy.Macroeconomic policy operates within a framework of goals and constraints. The most important goals of economic policy arei. Full employment - full utilization of human and non-human resourcesii. High living standardsiii. Price stabilityiv. Reduction of economic inequality and removal of povertyv. Rapid economic growthvi. External balance vs overall balance in economic relations with the rest of the world.As they stand, these objectives are rather vaguely worded. We need operational definitions to translate them into measurable targets. It must be mentioned that some of the objectives themselves and some of their operational counterparts are open to controversy. For instance, while almost everyone will agree that poverty removal is a desirable goal, many people might question the wisdom of trying to achieve near or total income equality. Again, economic growth as a target has come under attack in recent years from environmentalists, conservationists and others. Conventionally, living standards have been measured by a single index viz. 

per capita income but in recent years it has been cogently argued that this measure not only fails to capture several important dimensions of quality of life but that achievement of high per capita income may often conflict with some other desirable aspects of quality of life such as reducing pollution. As regards price stability, there is no agreement among economists as to the nature and magnitude of economic costs of inflation though most would agree that very high rates of inflation create serious distortions in the economy and can have adverse socio-political effects. Further, a variety of price indices can be employed to analyze price behavior and often, in the short run, they might move in different directions. The goal of full employment of labor might conflict with optimum choice of technology. Often it might also conflict with achievement of balance in international trade and with price stability. In summary we must remember that:Choice of goals for an economy is a controversial matter.Goals can be mutually incompatible.Universally acceptable operational definitions for all goals cannot be formulated.Subject to these caveats we will tentatively accept the following as policy objectives:i. High and rising per capita incomes.ii. Avoiding excessively high inflation.iii. Efficient use of human and non-human resources with minimum possible unemployment of labor.iv. Poverty removal and removal of extreme inequalities in income distribution.v. Avoidance of persistent imbalances in foreign trade and excessive resort to foreign capital.Notice that precision is still lacking. After all, we have not defined what is 'excessively high inflation' or 'extreme inequalities'. We will see later that this is inevitable. Also notice that we have not included 'rapid industrialization' or 'technological advancement' among the goals. In our view they are not primary goals; they could be prerequisites for achieving the primary goals and hence can become subsidiary targets.During the 1950s and 1960s, economists and policy makers were optimistic about the use of economic policy as an instrument to achieve these socio-economic objectives. But the events of 1970s (namely, supply shocks) shattered this optimism, and today much disagreement exists as to which policies will work best in achieving them. For this reason, we shall be concerned not only with the Keynesian ideas, but with the monetarist, rational expectations and supply-side economics as well. 

Posted Date: 9/11/2012 4:23:14 AM | Location : United States







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