Objectives of Government Economic Policy
- Governments want to achieve economic growth, due to the benefits it brings (increased living standards)
- However, the growth has to be sustainable, so as to avoid harmful fluctuations in the economy.
- Sustainable economic growth is economic growth that can continue over time and does not endanger future generations’ ability to expand productive capacity.
- The first type of sustainable economic growth is achieved if increases in AS match increases in AD
- Governments try and make economic growth match trend growth
- Trend growth is the expected increase in potential output over time – it is a measure of how fast the economy can growth without generating inflation
- Trend growth avoids the costs associated with output gaps, such as unemployment (negative output gap) and inflation (positive output gap)
- To ensure that growth is sustainable, an economy must not rely on using methods that harm future generations’ ability to grow to increase output.
- Examples of this would be depleting non-renewable resources and damaging the environment
Employment and Unemployment
- Governments will want to achieve ‘full employment’
- Full employment is a situation where those wanting and able to work can find employment at the going wage rate
- Governments will also try to encourage more people of working age to enter the labour force, as this increase the productive potential of the economy, and also reduces the cost of state benefits.
- Governments will want to achieve a low and stable inflation rate
- Zero inflation is not aimed for, because a low level of inflation can bring advantages
- g. a firm can reduce their costs by not raising wages in line with inflation, rather than making them redundant.
Balance of Payments
- If import expenditure exceeds export revenue in the short run, the deficit will likely be self-correcting
- g. if a country imports raw materials, which are then turned into finished products which are then exported.
- Economic stability is important, as an economy that encounters ‘boom and bust’ faces periods of inflation and unemployment, and will underperform in terms of economic growth.
- This may be done to ensure an equitable society, and to ensure everyone has access to basic necessities
- However, a balance needs to be achieved when redistributing money via taxation
- The government would not want to tax workers and firms much as they don’t want to discourage the incentive to work and enterprise