Macroeconomic Policies: Key Factors for Economic Growth Assignment Sample

Macroeconomic Policies: Key Factors for Economic Growth

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Macroeconomic Policies for Economic Growth

1. Objectives behind government macroeconomic policy

Full employment-

The performance of the government is evaluated based on attaining the goal of full employment and stability in prices. These two factors are indicators of economic health.

Unemployment- 

refers to the idleness of the labor force of a country. As these rates go up there is more divergence in the country's GNP so attaining full employment is one of the macroeconomic policies.

Price stability-

apart from the full employment policy attainment of price stability is another important macroeconomic policy. It's not that it is expected to have unchanged prices over time price rise within a certain limit is acceptable but uncontrollable and higher degrees of price rise are not welcome therefore price stability is one of the macroeconomic policies which if checked will ensure a steady growth in the economy.

Economic growth-

in the market growth of an economy is never steady there always prevails ups and downs. One of the most important parameters to evaluate the performance of an economy is the rate of increase in its GDP over a given period. There are some sources of economic growth namely the growth in the labor force, formation of capital, and thirdly technological advancements. A country always desires to attain more economic growth over a longer time frame so that the living standards or the quality of life of its citizens improve.

Exchange rate and BOP stability-

over a given point of time all nations aim to have a balanced flow of services and goods in and out of their boundaries. Whenever this takes place the total international monetary reserves are seen to be stable. If a country's net exports rise it then sees a BOP surplus. Also, the country should maintain stable foreign exchange rates as much as possible. The commodity basket includes for example telecommunication, rentals, electricity, clothing, etc. In the year 2020 the inflation rate in UK was 0.85% whereas in India it was 6% (statista, 2021).

Protection of the environment-

Apart from all the economic aspects one cannot forget the environment. Heavily polluted air and water cannot support the healthy lifestyle of the citizens. Clearing of forest covers and reckless utilization of natural resources are very harmful to sustainable development. Government policies should aim at preserving its valuable natural resources and preserving the natural diversities and its denizens.

 Expected inflation rate in 2024 is assumed to be 2% for a particular commodity basket on which average consumers of UK spends throughout the year (Statista, 2021). Policies should also aim at reducing pollution for a healthy lifestyle and they should put a check on industries as regards their emissions in the air and discharging wastes into the water bodies. Clean air and water imply a healthy lifestyle and in turn, lead to economic development.

Changes in technology-

changes in technology cannot be ruled out as regards the operation of a market economy also to prevent environmental damage. Advancements in technologies can change customers' tastes and preferences and behavior. So for successful operations firms must stay technologically updated.

Ecological factors namely water and air pollution have been a point of concern for decades and also affect business operations so all the business firms need to adjust to these issues accordingly (Uktamov, 2021). Development in technology is focused to mitigate these issues as it lowers the growth in GDP.

Low government borrowing-

the more the government borrows the more it gets trapped by the liability to repay and there is a persistent deficit in the budget. Now, this is not at all desirable for the development of a country. Policies should aim at reducing the need to borrow. Government should aim at attaining a budget surplus with which it can spend further for the development of the nation.

Social objectives-

the list of policies mentioned above is an in exhaustive one. One can add any number of points to it. But certain social objectives need to be kept in mind. One of them is that income distribution should be fair and justified ( Bodzási, 2019).

The market economy is an economic system where prices and production of goods and services are entirely decided by the invisible hands of demand and supply. Market economies are not controlled by the government, instead, they are based on voluntary exchanges. For Examples of the market economy include the USA, England, and Japan (Pham,2019).

Various factors affecting its successful operation:-

Inflation-

reduces the purchasing power of people in the market. This rate implies the rate at which price levels of commodities increases. The more the inflation rate decreases the purchasing power. The tax rate on capital also increases. So the marketers have to work very hard to persuade their customers to buy their products even though they don't have extra income to spare for it.

Changes in disposable income affect public spending

if the unemployment rate increases demand will fall as people's purchasing power falls. The same thing happens when the tax rate goes up it then reduces purchasing power and income. Marketers face problems as they suffer a fall in their revenue due to the loss of customers.

Recession

A recession is considered to be a slowdown phase in economic activity, which persists for more than 6 months. It has its impact on income, employment rates, and real GDP, leading to a fall in demand.

2. Possibility of the economy can attain low inflation and full employment

In simple words, a low inflation rate and full employment are mutually exclusive. In a period of growth, jobs are created, causing the rate of unemployment to fall. But, as it falls, it may put pressure on wages to increase, which leads to inflation. These phenomena are explained by Philipp's curve.

Phillips curve depicts a relationship between the unemployment rate and inflation and provides a deep insight on relationship and factors between them. In figure 1 it reflects the unemployment rate where as the Y axis clearly reflects the inflation rate of a country. And the Phillips curve is sloping downward and the curve reflects an inverse relationship in terms of unemployment rate and the inflation rate (Bhattarai, 2021). When the rate of unemployment is lower supposing at point B inflation rate rises due to higher wage rates similarly if the inflation rate falls due to higher growth and a cut in interest rates unemployment rate rises to point A. So we can see that low inflation and full unemployment are never possible.

Inflation has impact on interest rate which are highly priced goods for example luxury items like cars, jewelry, etc are often bought on credit. Now if the interest rate goes up these products become more expensive and it becomes more difficult for customers to buy. Also, a higher interest rate means it is difficult to obtain credit which therefore stops people from getting loans.

References

Pham, T.H., Nguyen, T.N., Phan, T.T.H. and Nguyen, N.T., 2019. Evaluating the purchase behaviour of organic food by young consumers in an emerging market economy. Journal of Strategic Marketing, 27(6), pp.540-556.

Bhattarai, S., Chatterjee, A. and Park, W.Y., 2021. Effects of US quantitative easing on emerging market economies. Journal of Economic Dynamics and Control, 122, p.104031.

Alarussi, A.S. and Alhaderi, S.M., 2018. Factors affecting profitability in Malaysia. Journal of Economic Studies.

Mundia, C.W., Secchi, S., Akamani, K. and Wang, G., 2019. A regional comparison of factors affecting global sorghum production: the case of North America, Asia and Africa’s Sahel. Sustainability, 11(7), p.2135.

Uktamov, K.F., 2021, July. FACTORS AFFECTING THE SUSTAINABILITY OF" UZKIMYOSANOAT" IN UZBEKISTAN. In E-Conference Globe (pp. 281-282).

Lin, B. and Jia, Z., 2019. What are the main factors affecting carbon price in Emission Trading Scheme? A case study in China. Science of the Total Environment, 654, pp.525-534.

Chavas, J.P. and Nauges, C., 2020. Uncertainty, learning, and technology adoption in agriculture. Applied Economic Perspectives and Policy, 42(1), pp.42-53.

Ahmed, S., Coulibaly, B. and Zlate, A., 2017. International financial spillovers to emerging market economies: How important are economic fundamentals?. Journal of International Money and Finance, 76, pp.133-152.

Bodzási, B., 2017. Development of the Regulation of Lien in Hungary, and the Factors Affecting Regulation. ELTE LJ, p.159.

Rusu, V.D. and Roman, A., 2018. An empirical analysis of factors affecting competitiveness of CEE countries. Economic Research-Ekonomska Istraživanja, 31(1), pp.2044-2059.

statista, 2021. United Kingdom: Inflation rate from 1986 to 2026. Available at: https://www.statista.com/statistics/270384/inflation-rate-in-the-united-kingdom/ [Accessed on 7th June 2022]