The Economics of the Government

Topics: Inflation, Economics, Unemployment Pages: 6 (2140 words) Published: May 17, 2015

The Economics of the Government

With regards to macro-economics, the government has four major objectives: Low unemployment, price stability, economic growth that is both and strong and sustainable, and a solid equilibrium. These objectives are evident across recent economically successful nations. We will look into how these objectives affect the economy as a whole. We will also look at limitations that arise when governments attempt to simultaneously achieve in these objectives.

How do these objectives of Macro-economic policy affect the economy?

Low Unemployment:

High employment levels of a country are a general indicator of how well they are off when it comes to economic success. If there are fewer people with jobs, then they have less disposable income to spend on investments. Economists call unemployment a lagging indicator of the economy, as the economy usually improves before the unemployment rate starts to rise again. However, unemployment causes a sort of ripple effect across the economy (Hudson, 2013)

Price Stability:

The phenomenon known as inflation is generally regarded as a gradual and sustained rise of the average level of prices. It is measured on an annual rate by the Retail Price Index. Governments will tend to try to keep the inflation rate percentage low. A popular methodology to controlling inflation is interest rates. Like inflation, interest rates also affect the RPI directly. Inflation has been known to heavily affect approval rates of presidency and other government figureheads, as well as affect the outcomes of elections. Indeed, the general public has a great distaste for inflation too. A look at public opinion polls reveals that inflation at times can be viewed as the most important national problem (Shiller, 1996).

Strong and Sustained Economic Growth:

Gross Domestic Product (GDP) is the general measure of economic growth. Growth changes are marked quarterly, as a comparison to the past change and as an annual percentage as whole. Statistics that are marked as 'Real' mean that the effect of inflation has been nullified from the equation of growth. The value of goods and services produced by an economy is, as always, affected primarily by two factors – supply side factors, and demand side factors (Pettinger, 2011).

Solid Equilibrium:

This records all streams of finance that enter and exit a country and its economy. The record is split into the Current Account and the Capital Account. Arguably the more important of the two is the Current Account. This is because it records how well a particular country is faring in terms of its imports versus exports. A solid equilibrium provides a stable environment for the both the buyer and seller - supply and demand side.

The Most Crucial Objective

A stable equilibrium used to be an important objective for a government to achieve; in the 1960s, it was frowned upon if an economic deficit plagued any particular nation. However, as time went on and currencies, particular the floatation of the pound, were introduced and shook up the whole economic scene. Massive capital flows globally reset the view on surpluses and deficits, to point of a carefree attitude to deficits that ran rampant in the 90s.

Post World War 2, unemployment was a huge problem – so to governments, particularly of the socialist structure, encouraged a full employment platter that was served for the next thirty years by members of politics. In the modern day world, unemployment has become less of a large figure than at times in the previous century, and less prominent on government's minds (though it is largely desired from most systems of government, regardless).

By contrast, inflation has always been an issue across the years of the evolving economic sphere. Living standards will, by and large, suffer on a large scale when a high inflation bubble exists. The same is applicable to growth, except an absence of growth will cause living...
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