Chapter 24, Government Economic Objectives and Policies
Learning Objective: To understand the most common objectives governments have for their economies
Just like businesses do, governments also set their economic objectives. Most commonly, there are four different economic objectives governments might have:
To have a positive balance of payments (BOP)
To have a controlled (low) inflation rate
To have a low unemployment rate
To experience economic growth (GDP)
Starting from the balance of payments (BOP), an accounting of all transactions made between a country's entities and its international partners:
A BOP can either be positive (surplus): when a country exports more than it imports;
Or it can be negative (deficit): a country that imports more than it exports.
When a country's entities import goods money leaves the country (leading to a deficit).
On the other hand, when these entities export goods and services - money enters the country's economy (leading to a surplus)
- Therefore leading to a negative or positive balance.
A deficit on the BOP is not desirable as it would mean the country will be low on foreign currency. This leads to loans from other countries and international organizations (e.g. IMF and World Bank) which carry heavy interests.
Governments also aim to have a controlled (low) inflation rate:
Inflation is the price increase of goods and services overtime.
A controlled (low) inflation makes it possible for consumers to afford more goods and services leveraging business activity and consequentially increasing economic growth.
High inflation mean prices are increasing significantly and quickly which leads to:
Lower purchase power from consumers;
Lower demand for goods and services;
Lower business activity because demand is low;
Possibly higher unemployment;
Reduced country's economic growth.
It is also common for government to be striving for a low unemployment rate:
The more people with jobs:
Better standard of living for the population;
Higher tax revenue (investments in education, infrastructure, health, etc.);
Less need for government unemployment aid (higher investment in other areas);
Higher demand for goods and services, increased business activity, and economic growth.
Finally, economic growth: increase in the Gross Domestic Product (GDP) - which is the value of all goods and services produced in a country in a year:
A growing economy represents more business opportunities for growth, higher employment rates and better standard of living for the population.
On the other hand, a contracting economy has a shrinking GDP (output), higher unemployment rates, and therefore a lower standard of living.
GDP is, therefore, a good comparison to year-on-year analysis of economic growth.
Activity 24.1
Now that we understand the 4 basic government objectives, let's look at what's called the Business Cycle: the changes in the economy over time which impact government economic policies.
The Business Cycle is made of four stages:
Growth;
Boom;
Recession;
Slump.
The growth stage is represented by an economical recovery or simply increased business activity:
- Growth and profitability for existing businesses and opportunity for new ones;
- Growth in GDP;
- Falling unemployment rates;
- Raising living standards for the population.
The boom stage happens when the economy is at its highest rate:
- Investments and profits at their highest;
- Most sectors of the economy are performing well;
- Low unemployment rates;
- High wages (increasing business costs);
- Unavailability of skilled workforce;
- High demand for goods and services causing prices to increase (inflation).
Recessions happen when the economy is shrinking in size instead of growing:
- Declines on economic activity;
- Decrease in demand and profits;
- Less business confidence (less investments);
- Higher unemployment as businesses cut costs or even shut down.
Slump is the worst stage of an economic recession:
- Little to no investments in existing or new businesses;
- Low demand for goods and services;
- Low production (output) of good/services;
- High unemployment rates due to little business activity.
To-Do-List:
Case Study (p. 303)
Chapter 24, Government Economic Objectives and Policies
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