EMAC – Macroeconomic goals – notes to the slides and questions.

Chapter 1

What are the most concerning macroeconomic problems facing SA? You probably thought of the
impact of Covid-19 on economic growth, income levels, poverty levels, and unemployment and
business failures.

Most countries in the world tries to achieve the following macroeconomic goals:

 economic growth
 price stability and low inflation
 low unemployment levels
 balance of payments stability
 economic development
 Distributional and equity goals.

Our objectives of this lecture is to define the macroeconomic goals, indicate how they are
measured, what is the latest data on these macroeconomic goals, and whether the goals are
complementary to each other or whether there is a trade-off between the goals. Not all the goals
can be achieved at the same time.

Economic growth – definition – is the total amount of goods and services produced within a country.
Economic growth is measured either by GDP (GROSS DOMESTIC PRODUCT) – all the goods and
services produced within the borders of SA), or the GNP (gross national product) – all goods and
services produced by the citizens of SA), or by GDP / capita – gross domestic product per citizen on
the country.

Price stability or low inflation – definition – the gradual increase in the price level of the country.

Price stability is measured by the inflation rate. The Consumer Price Index (CPI) or the Producer Price
Index (PPI) measures the inflation rate. We differentiate between inflation, deflation and stagflation.

Employment levels – definition – the number of workers of the total labour force who are currently
employed and unemployed. The rate of unemployment is either defined as the narrow or broad
definition of unemployment. The broad definition includes unemployed workers who have given up
hope and are not actively seeking employment.

You should also be able to recall the different types of unemployment: cyclical unemployment,
frictional, structural and seasonal unemployment.

The balance of payments stability refers to the 2 accounts which are used to reflect all transactions
with foreign countries namely: the current account (CA) and the financial account (FA). These 2
accounts can either indicate a surplus or deficit. The balance of payments account does not directly
affect the standard of living of a country. But, having continuous deficits or surpluses on the BoP
may eventually influence the wellbeing of a country (see chapter 4).

Economic development refers to a diverse number of indicators, indicating the well-being of a

country and may include: life expectancy, access to water, access to sanitation, access to electricity,
number of doctors for every 100 citizens, average level of education……………..

There are numerous indices measuring the level of economic development of a country.
Equity does not mean an equal share of income, wealth, assets…… Equity is about fair and justice in
opportunities, earning income, obtaining wealth and acquiring assets.

The Gini – coefficient, the Lorenz curve, and Palma - coefficient – see slides, measures equality or
inequality.

All see the Sustainable Development goals (SDGs) set by the UN for 2030 for the world.

Macroeconomic goals – do they complement each other or is there a tradeoff between them?

Higher economic growth means that we are producing more goods and services. To produce more
goods and services you have to employ more Capital and Labour (and materials, use Technology, by
the entrepreneurs). So theoretically higher economic growth should result in higher levels of
employment.

The relationship between and economic growth: Demand pull inflation – demand curve shifts to the
right – will result in higher prices (inflation) and an increase in output (Y) – complement each other.

Demand inflation
Cost push inflation – due to an increase in the cost of inputs (labour, energy cost, materials) – the
supply curve shifts to the left – higher prices (inflation), but a lower output (Y or GDP).

Cost – push inflation

Stagflation – see chapter 7 & 8.

Economic growth and economic development – economic development includes economic growth
as an indicator of wellbeing.

Economic growth and equity: the debate is whether a country should first concentrate on economic
growth and then distribute fairly or redistribute, or should you first redistribute and then a country’s
economy will grow.

Economic schools of thought:

In Economics, we distinguish broadly between 2 schools of thought namely Marxism and the Free
Market. Also referred to the Left and Right in Economics:
In Economics try to answer the following questions: What to produce? (Allocation problem) How to
produce it? (Production problem) To whom? (Distribution problem) – there are more……

The Right – Free Market (Adam Smith) – pure Capitalism would use the price mechanism to answer
these questions. With no government or state interference, the market (supply and demand) will
determine what, how, and to whom goods and services will be produced.

The Left – Marxism (Karl Marx) – pure Socialism will rely on the state or government to answer these
3 questions.

“The free market system, as Adam Smith theorized, will guide economic behavior by self-
interest, without interference from authorities and by ensuring private property rights. Like an
invisible hand, the interacting of markets, will allocate scarce resources, produce outcomes
the most effectively, and distribute goods and services. Individual freedom of choice will
decide what will be produced and how goods and services are produced. The left, or
socialism, represents conditions of public ownership, and a centrally planned economy, while
the state answers the questions of what must be produced, how and to whom.”

Questions

1. Discuss economic growth and the redistribution of income as objectives of

macroeconomic policy. In your discussion, clearly define (a) what is meant by each
objective, (b) indicate any complementaries and/or trade-offs between these two
objectives, and (c) provide the current (most recent) values of the indicators that are
used to measure these objectives.
2. Explain any two policy measures or initiatives that the government can use to address
inequality.
3. Discuss economic growth and price stability as objectives of macroeconomic policy.
In your discussion, clearly define what is meant by each objective, and indicate any
complementaries and/or trade-offs between these two objectives. Also provide the
most recent values of the indicators that are used to measure these objectives.
4. Explain the effect of a higher inflation rate on possible interest rate movements, lower
income groups and pensioners earning fixed interest income