Q10 – what are the four macroeconomic goals for any country?

Is there a conflict between

achieving all of them at the same time?

The four Macroeconomic goals of a country are:

1. Economic growth
It is the growth in the size of the overall economy of a country. The measuring scale of a
country’s development is its growth and size of its economy. The ultimate aim of any
country in the world is to strive and create maximum wealth by using minimum resources.
If the growth in real output of a country is more than the growth of its population, the
standard of living becomes higher.

2. Maximum employment for its citizens

The fundamental motto of an economic system is to empower the citizens of a country to
earn and create wealth. Only employment to all the citizens gives the power to do this. If
the overall employment of citizens is high, it will result in a greater amount of goods and
services available for the population as a whole. Greater employment results in greater
money flow and transactions thereby resulting in even greater employment.

3. Price stability (controlling inflation)

Inflation is basically the price rise of the products and services available in a country.
Increasing inflation pushes the buying power of money downwards. This results in the
population spending more and more of their hard-earned money for the same products
and services available. Inflation has a detrimental effect on the economy because it
increases uncertainty on returns and costs which results in decreasing investments.

4. External Balance
Exports, Imports and other various capital outflows and inflows must be in balance
between the country and the rest of the world

Yes, there is a conflict between achieving all of them at the same time. Economic growth
is the prime motto of all nations of the world. But the various efforts taken to boost the
growth of the economy will affect the inflation and unemployment. If not controlled
properly, higher economic growth will lead to higher inflation. In the long run, higher
inflation does not promote employment or economic growth. Price stability (low inflation
or inflation under control) promotes financial stability and economic growth. A negative
external balance will destabilize the overall economy of the country in the years to come.
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Q1 - b

Which is worse, higher inflation or higher unemployment and explain why?

Both the issues of higher inflation and higher unemployment will prove unfavourable for a
country’s economy in the longer term. But a higher inflation is worse than a higher
unemployment in the longer term. The reasons are:

Unemployment gives rise to only two major issues. The first one is individual hardship that is
financial and psychological. This issue is alleviated partially by unemployment insurance
benefits. The second one is that the aggregate economic output is less than the potential GDP
level due to the production loss from those who are unemployed.

On the other hand, Inflation, if it increases over time, the citizens of a country must have to
pay progressively higher for exploiting the same products and services. The reason here is
that most of the time, the income never increases correspondingly with the rise in inflation.
The impact of these factors is that there is an inconsistent increase in the prices of products in
services. As a result, difficulties increase while doing financial planning. The buying power of
money keeps going down.

Q1 - c

Give examples of each of the 4 types of aggregate expenditure. Which of the 4 represent
the largest share of GDP in Australia? Can an expenditure component be negative? Explain.

1. Consumption – Example - buying mobile phone, paying the doctor for treating flu
2. Investment - Example - investing money to make cars, capital investment for building
a skyscraper
3. Government Spending- Example - spending money on building roads, investing in
public health
4. Net Exports - Example - Total exports of goods and services to other countries minus
the total amount of goods and services bought from other countries

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Among the four, Consumption represents the largest share of GDP in Australia. It occupies
about 60% of Australia’s GDP. Yes, the expenditure component that can be negative is Net
Exports.

Q10 - d

Explain and illustrate with a suitable diagram the four phases of an economic trade cycle.
Identify where you think the Australian economy might be on a trade cycle diagram.

The four phases of economic growth are:

1. Expansion (or boom) Phase - Rapid growth in the economy. Increase in inflation rate
and decrease in unemployment.
2. Peak Phase - The end of the economic peak growth. Economy transforms from an
expansion to a contraction phase. Unemployment at the lowest levels.
3. Recession Phase - A period of little economic activity. Real GDP decreases and
inflation mostly is very less or nil. Unemployment rate increases.
4. Recovery Phase - The initial expansion phase of the economy right after a recession
has ended and just before a full expansion. Mild decrease in unemployment.

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