MACROECONOMIC POLICY

Macroeconomic Policy

Macroeconomic Policy

Major Objectives Of Macroeconomic Policy

Macroeconomics is concerned with issues, objectives and policies that affect the whole economy. All economic analysis that refers to aggregates is macro. The UK unemployment rate, the UK inflation rate, the rate of economic growth in the UK; these are all UK aggregates and therefore macro issues. The four major objectives are:

1. Full employment

2. Price stability

3. A high, but sustainable, rate of economic growth

4. Keeping the balance of payments in equilibrium.

In this Learn-It, we will look at the way in which these objectives are measured. In the next, we shall look at why these objectives are important, their relative importance and how successful recent governments have been in achieving these goals. Finally we will look at the difficulties that governments have in trying to achieve all the objectives at once.

How are these objectives measured?

1. Full employment, or low unemployment.

The claimant count is the older, more out-of-date, measure of unemployment used in the UK. Those counted must be out of work, physically able to work and looking for it, and actually claiming benefit.

For a more realistic count, and for international comparisons, the ILO (International Labour Organisation) measure is used. This includes the young unemployed who are not always eligible to claim, married women who can't claim if their husband is earning enough, and those who claim sickness and invalidity benefits. Many only slightly inconvenienced unemployed workers are paid these benefits rather than swell the claimant count of unemployment.

Note the issue of active and inactive members of the population of working age. Only those who are active are included in the working population (or labour force), which is defined as all those who are employed or registered unemployed. But some of the inactive are in this category by choice, for instance, students and those who retire early.

At the moment in the UK, the level of employment is the highest ever (nearly 28 million workers). But one should note the significant difference in the numbers employed in manufacturing compared with the services (approximately 4 million against nearly 18 million).

2. Price stability

Inflation is usually defined as a sustained rise in the general level of prices. Technically, it is measured as the annual rate of change of the Retail Price Index (RPI), often referred to as the headline rate of inflation. For prices to be stable, therefore, the inflation rate should be zero. Generally, governments are happy if they can keep the inflation rate down to a low percentage. For an explanation of how the RPI is formulated, see the topic called 'Unemployment and inflation'. The UK government prefers to target the underlying rate of inflation, or the annual percentage change in the RPIX. This is the same as the RPI except housing costs are removed in the shape of mortgage interest payments. It makes sense for the government to use this measure because the weapon they use to control inflation, interest rates, directly affects the RPI ...