CHAPTER 8

MACROECONOMICS
OBJECTIVES

IMU453 PRINCIPLES OF ECONOMICS

Macroeconomic Objectives

8.1 Full employment

8.2 Price Stability
8.3 Economic growth
8.4 Equitable income distribution
8.5 Better quality of life
 8.1 Macroeconomic Objectives from the
Conventional Perspective
1. To achieve full employment
i. Full employment does not mean that there is no unemployed or jobless people in the
economy.
ii. Full employment refers to the level of employment rate where there is no existence of
cyclical or involuntary unemployment.
iii. Thus, it is difficult to assume that full employment refers to 100% of the labour force being
employed. Some people are unemployed as they could be moving on to new jobs and chose to
resign (temporarily unemployed) or they could be looking for another job.
iv. The potential benefits of full employment in an economy are that available resources can be
optimized efficiently. If more resources are employed, more output can be produced. Higher
output produced can translate into an improved economic growth.
v. On the other hand, the flip side is unemployment. Theoretically, if full employment cannot be
achieved at 100% then it will be impossible for unemployment rate to reach 0%. The crucial
consequences of unemployment to the economy are wastage of available resources and
social problems.
Source: Department of Statistics, Malaysia (2021)
2. To achieve price stability
Phenomenon of inflation or an increase in the general price level is a challenge to
every nation.
A high degree of inflation rate that is associated with a sustained increase in the
general price level can be disastrous to an economy. Many quarters are affected by
the negative consequences of inflation. To the consumers, inflation directly
influences their purchasing power.
The quantity of goods and services purchased will be less if the inflation rate is high.
Pensioners and fixed income earners, are affected by inflation as it can deteriorate
their real income with persistent price increase.
Thus, maintaining price stability is really important to policymakers. Theoretically, it
refers to the efforts of ensuring that the inflation rate in the country is kept as low as
possible.
This involves certain macroeconomic policies such as fiscal and monetary policies.
Maintaining price stability is necessary to avoid uncertainty and disruptions in the
economy. It also means consumers and businesses can safely pursue long-term
consumption and production plans.
3. To achieve economic growth
Economic growth can be described as an expansion in national by calculating the
percentage increase in national income for the current period as compared to the
previous period.
A nation that has achieved economic growth will reflect a positive economic
performance.
This shows that the economic environment is productive not only in terms of output
and an increase in income, but also in labour productivity.
However, an economy will not always encounter an upward trend over time as
economies tend to experience short-term ups and downs in their performance. This is
called a business cycle. A business cycle portrays a series of cycles of economic
expansion and contraction, it is the periodic and irregular up-and-down movements in
an economic activity.
There are four phases in a business cycle: the trough, expansion, peak and recession.
Economic cycle
3. To achieve an equitable distribution of income
i. The economic success of a nation cannot rest solely on the degree of its economic
growth. It is necessary to ensure that the economic growth of a nation is shared
equally among the population.
ii. Income inequality is a major concern for policymakers to resolve, particularly in
multiracial countries, such as Malaysia, Singapore, Australia and the United States.
iii. Generally, policymakers try to ensure that there is no wide gap between the rich
and the poor. The policymakers will formulate a policy of income redistribution to
narrow the gap between the higher income and the lower income groups. This is to
ensure that the population enjoys an equal standard of living. Disparities of income
will create social friction and give rise to many problems.
iv. Taxes are imposed to reduce the income gap between the higher income group and
lower income group, in order to control inequality. The higher income group will
pay more taxes than the lower income group. Taxes received by the government
will be channelled to the less fortunate as welfare assistance. The objective is to
achieve equitable income distribution through these methods.
5. To achieve equilibrium in the foreign sector
i. Foreign sector means economic transactions or activities that take place beyond the
political boundaries/other countries.
ii. It includes transactions, such as imports and exports, investments in other countries
and inter-country tourism. A country will try to get an overall surplus of balance of
payments (BOP) that indicates greater inflow than outflow of money.
iii. If a country faces a BOP deficit, it means that the country will have to borrow from
other countries and this will lead to high debt problems, whereas a prolonged BOP
surplus will lead to inflation.
iv. Thus, it is important for a country to understand and determine the favourable scale
of their BOP.
 8.2 Macroeconomic Objectives from the Islamic
Perspective

1. Social justice
i. Social justice aims to achieve spiritual salvation to human happiness. It is based on the
principle that all existence in the universe belong to Allah. Man, God's vicegerent
(khalifah) on earth, has been granted the ownership of these bounties. He must
therefore use whatever is given to him as a trustee and not as an absolute owner.
ii. Since Islam considers mankind as one family, therefore all members in this family are
same in the eyes of God. There is no difference between the rich and the poor,
between the high and the low, or between the white and the black. There is to be no
discrimination due to race, colour or position. The only criterion of a man's worth is the
character, ability and service to humanity.
2. Equitable distribution of income
i. Islam insists on a powerful built-in income redistribution mechanism; nevertheless
some income inequality is allowed since it promotes individual initiative. Social
justice in Islam is rooted iman's faith. A man of faith automatically has a duty to do
justice.
ii. Income redistribution, voluntary or compulsory, is not only an economic necessity,
but also a means to spiritual salvation.
iii. The concept rests on its value of maximizing human happiness.
iv. In Islam, happiness is not derived from the possession of material goods, but from
contentment and gratitude.
v. In Islam we have, zakat, sadaqah, hibah, wakaf
3. Universal education
i. Acquisition of knowledge is obligatory (wajib) in Islam. Thus, every child
irrespective of his birth, must be given an equal opportunity to education.
ii. Man’s claim to superiority over all creations is based on this superior knowledge.
iii. In an Islamic economy, the government must subsidize or provide free education
to ensure that education is available to all, regardless of one's financial standing
and possession of properties.

4. Optimal rate of economic growth

iv. Growth in an Islamic economy is comprehensive and includes the moral, spiritual
and material aspects of a man's life. In terms of capital formation, it includes
human capital and material capital.
v. Man is central to all economic activities. This consideration should influence the
composition of investment because the expenditure on education is regarded as an
investment.
5. Maximization of employment generation
i. An Islamic economy must ensure that economic growth results in maximum
contribution to the creation of new employment opportunities.
ii. The objective is, however, not to attain full employment at the cost of economic
efficiency.
iii. Additional employment in the long run must be generated in a technically efficient
manner with suitable technology, in line with resource endowment. Ensuring
sufficient employment also includes the need to provide educational and training
opportunities in the specific fields
 Conventional Islam
Full employment Maximization of employment
generation

Price Stability Social justice

Economic growth Optimal rate of economic

growth

Equitable income distribution Equitable distribution of

income

Better quality of life Universal education

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