MACROECONOMICS OBJECTIVE OF

DEVELOPING COUNTRIES
Submitted by Supervised by

AMAN KUMAR Dr. SHIVANI MOHAN

Roll No: 2309 Assist. Professor of Economics

4th Semester, B.A.LL.B (Hons.)

This final draft is submitted on partial fulfillment of the B.A LL.B course in
Macro Economics, during the academic session 2021-2022, Semester- 4.

CHANAKYA NATIONAL LAW UNIVERSITY

NYAYA NAGAR, MITHAPUR
PATNA-800001
APRIL- 2022
 DECLARATION BY THE CANDIDATE

I, Aman Kumar, hereby declare that the work reported in B.A.LL.B (Hons.) project report
titled “Macroeconomics objective of developing countries” submitted at Chanakya
National Law University, Patna is an authentic record of my work carried out under the
supervision of Dr. Shivani Mohan. I have not submitted this work from elsewhere and I am
fully responsible for the contents of my project report.

NAME: AMAN KUMAR

COURSE: B.A.LL.B (Hons.)

ROLL NO: 2309

SEMESTER: 4th

SESSION: 2020-2025

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 ACKNOWLEDGEMENT

I would like to thank my faculty Dr. Shivani Mohan whose guidance helped me a lot with
structuring of my project. I take this opportunity to express my deep sense of gratitude for his
guidance and encouragement which sustained my efforts on all stages of this project.

I owe the present accomplishment of my project to my friends, who helped me immensely

with materials throughout the project and without whom I couldn’t have completed it in the
present way.

I would also like to extend my gratitude to my parents and all those unseen hands that helped
me out at every stage of my project.

THANK YOU

NAME: AMAN KUMAR

COURSE: B.A.LL.B (Hons.)

ROLL NO: 2309

SEMESTER: 4th

SESSION: 2020-2025

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 TABLE OF CONTENTS

1. INTRODUCTION……………………………………………………….. 5

• AIMS AND OBJECTIVE……………………………………………….. 6

• HYPOTHESIS…………………………………………………………… 6

• RESEARCH METHODOLOGY………………………………………… 6

• SOURCES OF DATA……………………………………………………. 6

2. THE PROBLEM WITH DEVELOPING COUNTRIES……………… 07-08

3. THE OBJECTIVES OF DEVELOPING COUNTRIES………………. 09-11

4. TRADE-OFFS………………………………………………………… 12-14

5. CONCLUSION……………………………..…………………………. 15

BIBLIOGRAPHY………………………………………………………. 16

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 1. INTRODUCTION

The Macroeconomics of Developing Countries provides a comprehensive discussion of the

exogenous factors and macroeconomic policies that affect the business cycle, long term
growth, and distribution of income in developing countries. It examines countries dependent
on natural resources and affected by supply rigidities in agriculture. They also feature
dualistic markets, a large informal sector, rapid population growth, a vulnerable export sector,
and chronic dependence on a volatile global finance.1 The Macroeconomics of Developing
Countries uses these examples to analyse the impact of stablization and adjustment politices
on growth, inequality, and poverty.

Despite the launch of the Sustainable Development Goals there is little consensus on how
macroeconomic policies can be consistent with these objectives. The Macroeconomics of
Developing Countries demonstrates that a critical application of standard models to
developing countries can generate erroneous results and induce the adoption of incorrect
policy. In order to address this, it discusses the key structural differences between advanced
and developing countries in order to justify the construction of alternative models.

Macroeconomic problems arise when the macroeconomy does not satisfactorily achieve the
goals of full employment, stability, and economic growth.2 Unemployment results when the
goal of full employment is not achieved. Inflation exists when the economy falls short of the
stability goal3. These problems are caused by too little or too much demand for gross
production. Unemployment results from too little demand and inflation emerges with too
much demand. Stagnant growth means the economy is not adequately attaining the economic
growth goal. Each of these situations is problematic because society is less well off than it
would be by reaching the goals.

1 Cornia. (2020). The macroeconomics of developing countries : an intermediate textbook / Giovanni Andrea
Cornia. (First edition.). Oxford University Press.
2 AmosWEB is Economics: Encyclonomic WEB*pedia

3 Macroeconomic Challenges Faced by Indian Economy by Prof Dr Preeti Sharma :: SSRN

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AIMS AND OBJECTIVE
➢ The researcher prime aim is to present detailed study of Macroeconomic objective of
the developing countries.

➢ To analyses the factors which helps to determine the macroeconomics objective of a

developing countries.

HYPOTHESIS
➢ The macroeconomics objective helps developing countries to reach the highest state
of economic growth and also helps to sustain it.
➢ The macroeconomic objective of the developing countries is different from that of
developed countries.

RESEARCH METHODOLOGY
➢ The researcher will be relying on Doctrinal method of research to complete the
project. These involve various primary and secondary sources of literature and
insights.

SOURCES OF DATA
➢ The researcher will be relying on both primary and secondary sources to complete the
project. The data collected is mostly from primary sources like survey and secondary
sources like books, journals, newspaper, annual reports, previous research work.

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 2. THE PROBLEM WITH DEVELOPING COUNTRIES

Before knowing the objectives of developing countries we must be aware about the problems
which were faced by the developing countries. The economic condition of developing
countries is different from that of developed countries. There are important differences in the
structural characteristics of developing economies as compared with industrialized
economies.4

1) Underutilisation of Labour Force: The crucial problem of developing countries is

underutilization of population. Even if its productive capacity or capital equipment is
fully utilized, it cannot absorb the existing labour force in gainful employment. The
problem then is the deficiency of productive capacity and not the anomaly of its
underutilization. The main constraint in development of developing countries is the
limited capital and unlimited Iabour.

2) Degree of Price flexibility: In both industrialized economies and developing

countries, these may vary across sectors and change over time. In the institutional
context of industrialized countries, macroeconomics sought to focus on the
implications of wage-rigidities. But in developing countries, where formal sector
employment is a small proportion of employment in the economy as a whole, the
rigidity of money wages, or real wages, is a less critical policy problem. Price
flexibility is destabilizing when demand shocks are perturbing the economy. 5 The
higher price flexibility can trigger unstable inflation expectations if monetary policy
does not act aggressively to counteract this by raising/ cutting interest rates. Higher
price flexibility will destabilize the real interest rate – the difference between the short
term nominal interest rate (the policy rate) and expected inflation. Since aggregate
demand depends upon the real interest rate, this destabilizes output as well.

4 Initiative for Policy Dialogue Task Force on Macroeconomic Policy. Why is Macroeconomics Different in
Developing Countries? - PDF Free Download (financedocbox.com)
5 https://www.nber.org/system/files/working_papers/w19886/w19886.pdf

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 3) Depth of Financial Market: There are pronounced differences in financial markets.
In the industrialized countries, financial markets, institutions and instruments are far
more developed than in the developing countries. And there are significant differences
in the degree of monetization. Consequently, in developing countries, firms rely more
on self-financing than their counterparts in industrialized economies, in part because
equity markets are underdeveloped as a source of finance for new investments.
Borrowing from informal money markets is common; and debt-equity ratios are, as a
rule, higher. In industrialized countries, increasingly, there has been a move away
from bank lending towards securitization 6. These differences are, in important part,
attributable to the absence or presence of institutions, as also to the depth of financial
markets. However, even the form and availability of financial instruments can make a
difference. An important function of financial markets is to transfer and absorb risk.
Underdeveloped financial markets in developing countries mean that they are less
able to absorb shocks than industrialized economies.

4) Deficit Financing: Governments in industrialized countries have little trouble in

financing their deficits, whereas governments in developing countries typically face
greater financial constraints. In fact, experience suggests that few developing
countries can sustain a government deficit that is 5% of GDP, or more, for long. Of
course, borrowing from the central bank is an option. But it cannot be stretched
beyond limits for that could be dangerous. Indeed, such excessive deficit financing
was an important source of hyperinflation in several Latin American economies.
Consequently, most governments in developing countries run pro-cyclical fiscal
policies. The financial constraints facing governments exacerbate problems that arise
in the private sector. In such a context, underdeveloped financial markets, or
inadequately developed financial sectors, impede the ability of developing countries
to absorb shocks.

6 Impacts of IMF Policies on National Education Budgets and Teachers by Education International - Issuu

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 3. THE OBJECTIVES OF DEVELOPING COUNTRIES
The overarching goals of macroeconomics are to maximize the standard of living and achieve
stable economic growth 7. The goals are supported by objectives such as minimizing
unemployment, increasing productivity, controlling inflation, and more. The macroeconomy
of a country is affected by many forces, and as such, economic indicators are invaluable to
assessing different aspects of performance.

1) Full Employment: Full employment is when the economy uses its productive
resources, including labor.8 That doesn’t mean everyone is working. Instead, those who
are able and want to have a job can get one. In full employment, the unemployment rate
does not equal zero percent due to structural and frictional problems.9 Some people are
unemployed because they do not have sufficient skills as the market demands. Also,
some people have not found a job even though they have been actively looking for
work. They may be in the process of looking for job vacancies or following a company
recruitment process. As long as they are not working, we will consider them
unemployed.

2) Price Stability: No longer the attainment of full employment is considered as a

macroeconomic goal. The emphasis has shifted to price stability. By price stability we
must not mean an unchanging price level over time. Not necessarily, price increase is
unwelcome, particularly if it is restricted within a reasonable limit. In other words,
price fluctuations of a larger degree are always unwelcome. However, it is difficult
again to define the permissible rate of inflation. But sustained increase in price level
as well as a falling price level produce destabilising effects on the economy.
Therefore, one of the objectives of macroeconomic policy is to ensure (relative) price
level stability. This goal prevents not only economic fluctuations but also helps in the
attainment of a steady growth of an economy.

7 Macroeconomics - Overview, Goals, Economic Indicators (corporatefinanceinstitute.com)

8 What are the 5 macroeconomic objectives - Penpoin
9 Lesson summary: Unemployment (article) | Khan Academy

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 3) Economic Growth: Economic growth is essential to increase people’s income and
standard of living. It is usually seen as the most important macroeconomic goal. When
economic growth rises, output increases, and so does income. A growing economy
shows an increase in economic output. Businesses increase production, recruit more
labor and create more income for the household sector. Thus, without economic growth,
people will not be able to achieve a better standard of living. They cannot obtain a wide
variety of goods and services in large quantities and higher incomes by working.
Sustainable means not only an increase in real GDP but also potential GDP. An
increase in the potential GDP shows you the production capacity of the economy
increases over time.10 The economy can produce more output without creating
inflationary pressures. Sustainable growth is achieved by increasing productivity, more
output per unit of input, such as labor. That is by improving the quality and quantity of
production factors, including through technological advances. By increasing
productivity, we get more goods and services without increasing production costs,
resulting in lower prices.

4) Balance of payments equilibrium and exchange rate stability: Balance of

payments equilibrium is reached when the foreign currency entering a country is the
same as the foreign currency leaving.11 Foreign currency inflows and outflows originate
from the current account and the capital account. In other words, what we spend and
invest abroad is nothing more than the spending and investment of foreigners into the
domestic economy. Thus, our international reserves do not increase or decrease. From a
macro- economic point of view, one can show that an international transaction differs
from domestic transaction in terms of (foreign) currency exchange. Over a period of
time, all countries aim at balanced flow of goods, services and assets into and out of
the country. Whenever this happens, total international monetary reserves are viewed
as stable.

10 What is potential GDP, and why is it so controversial right now? (brookings.edu)

11 What are the 5 macroeconomic objectives - Penpoin

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 5) Fair Income Distribution: This goal is concerned with how to distribute income in the
economy among the population. The distance between the rich and the poor should not
differ significantly. It is usually more in the light of normative economics than positive
economics. To achieve this goal, the government has several instruments, including
taxes and other social expenditures such as unemployment benefits and social
assistance.12

12 Fiscal Policy: Taking and Giving Away - Back to Basics: Finance & Development; what is fiscal policy? (imf.org)

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 4. TRADE-OFFS
There are important trade-offs in macroeconomics, particularly in the sphere of
macroeconomic policies, which must be recognized. However, the significance of such trade-
offs depends on the context. The trade-off between inflation and unemployment is much
more important in the industrialized economies than it is in the developing countries13. The
trade-off between short-term macro-management and long-term objectives is much more
important in the developing countries than it is in the industrialized countries.

❖ Inflation-Unemployment
The conventional trade-off between inflation and unemployment is epitomized in the
Phillips curve. Accordingly, the Phillip curve analysis, which explains the nature of
the relationship between unemployment and inflation, was analyzed in detail by
comparing interpretations of different economic approaches. In the case of inflation,
the demand-side policies will have an effect on these variables 14. In contrast,
according to the Monetarist and New Classical approach, demand-side policies are
ineffective and therefore unnecessary. In more accurate terms, the relationship
between unemployment and inflation is temporary in the short-term because both
variables may change in the same direction in the long term.

❖ Growth Rate- Unemployment

One of the highlights of the analysis on unemployment is the relationship between
growth and unemployment. The main expectation of given the main determinants of
economic growth is the unemployment rate decreasing in an economy where the
growth is occurring or at the least the current unemployment rate does not increase.

13 The Trade-Off Between Inflation and Unemployment: A Survey of the Econometric Evidence for Selected
Countries in: IMF Staff Papers Volume 1972 Issue 003 (1972)
14 Phillips Curve - Economics Help

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 The view that economic growth will lead to increased employment and reduce
unemployment is known as Okun’s law in the literature. Arthur Okun examined the
relationship between the unemployment rate and economic growth in the United
States by regression analysis using quarterly data for the period 1947–196015.
According to the developed regression equation, the difference between current
income and full employment income varies in the opposite direction with the
unemployment rate.

The Okun’s law has indeed evolved over time to fit the current economic climate and
employment trends. One version of Okun’s law has stated very simply that when
unemployment falls by 1%, gross national product (GNP) rises by 3%. And another
version of Okun’s law focuses on a relationship between unemployment and GDP,
whereby a percentage increase in unemployment causes a 2% fall in GDP.

❖ Growth- Current Account Balance

The current account consists of two main items: the first is the foreign trade account
showing the export and import of goods, and the second is the export and import of
services, called “invisible trade” 16. The current account deficit is less than the amount
paid for goods produced and sold abroad to be consumed domestically, indicating that
a country is making negative savings. The relationship between the current account
deficit and growth can be two-way relationship. Firstly the country with insufficient
savings ratio or negative savings, the current account deficit can affect growth as
investment spending is financed through the use of external savings 17. Second, as if
income growth will increase demand for imported goods, the growth current account
deficit may affect growth or may occur as a result of the growth rate itself.

15 https://www.investopedia.com/articles/economics/12/okuns-law.asp

16 Rose, K. und K Sauernheimer (1995). Theorie der Aussenwirtschaft, 12. überarbeitete Auflage, Verlag Franz
Vahlen, München
17 Duman, Y. K. (2017). Türkiye’de Cari İşlemler Dengesi ve Ekonomik Büyüme Arasındaki İlişki, Sakarya İktisat

Dergisi, Cilt 6, Sayı 4, ss. 12-28.

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 ❖ Balance of Payments- Price Stability
Price stability and balance of payments although seems to share a cordial relationship
but there exist a tradeoff which adversely affects the economy.
For example: Fiscal and Monetary measures if aims at controlling inflation then it
discourages imports and encourages exports bringing disequilibrium in balance of
payments.
However, if the government tries to remove unemployment and allows some inflation
then the rise in price will discourage export and will encourage imports causing
disequilibrium.

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 5. CONCLUSION

For developing economies, further development is often the primary goal, and can be
summarised as the desire to increase the longevity of the population, increase access to
education, and attain a decent standard of living.

The Macroeconomics of Developing Countries provides a comprehensive discussion of the

exogenous factors and macroeconomic policies that affect the business cycle, long term
growth, and distribution of income in developing countries. It examines countries dependent
on natural resources and affected by supply rigidities in agriculture. Broadly, the objective of
macroeconomic policies is to maximize the level of national income, providing economic
growth to raise the utility and standard of living of participants in the economy. There are
also a number of secondary objectives which are held to lead to the maximization of income
over the long run.

To accelerate sustainable economic growth and inclusion, developing countries must tackle a
variety of related underlying challenges. These include low levels of productivity and
international competitiveness, inefficient public spending, inadequate domestic resource
mobilization, price distortions from the fiscal system that discourage sustainability, lack of
economic resilience, rising debt levels, an uncertain trade environment, and the rising danger
of climate change.18

18 https://www.worldbank.org/en/topic/macroeconomics/overview#1

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 BIBLIOGRAPHY

BOOKS:

• H.L. Ahuja, Macroeconomics

• Gregory Mankiw, Principles of Macroeconomics

Websites:

• https://www.worldbank.org/en/topic/macroeconomics/overview#1
• AmosWEB is Economics: Encyclonomic WEB*pedia
• https://www.nber.org/system/files/working_papers/w19886/w19886.pdf
• Fiscal Policy: Taking and Giving Away - Back to Basics: Finance & Development;
what is fiscal policy? (imf.org)
• https://www.investopedia.com/articles/economics/12/okuns-law.asp
• The Trade-Off Between Inflation and Unemployment: A Survey of the Econometric
Evidence for Selected Countries in: IMF Staff Papers Volume 1972 Issue 003 (1972)

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