objectives of government macroeconomic policy

  The four major objectives are (i) full employment, (ii) price stability, (iii) a high, but sustainable, rate of economic growth, and (iv) keeping the Balance of Payments in equilibrium. First, we will look at the way in which these objectives are measured. Secondly, we shall discuss the relative importance of these objectives. Thirdly, we shall see 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.

  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  The claimant count is the older, more out of date measure of unemployment used in the UK.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 unemployment numbers.
  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, 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.

  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 later. 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 itself.
  Other less popular measures include the RPIY, which takes RPIX a stage further by also taking out the effects of indirect taxation (e.g. VAT), and the consumer price index, which is often used when making international comparisons.

  3. High (but sustainable) economic growth

  Economic growth tends to be measured in terms of the rate of change of real GDP (Gross Domestic Product). When the word real accompanies any statistic, it means that the effects of inflation have been removed. More on this later! GDP is a measure of the annual output (or income, or expenditure) of an economy. Much more on this later! Sometimes GNP (Gross National Product) is used, which is very similar to GDP. Growth figures are published quarterly, both in terms of the change quarter on quarter and as annual percentage changes.

  4. Balance of Payments in equilibrium

  Briefly, this records all flows of money into, and out of, the UK. It is split into two: the Current Account and the Capital and Financial Accounts (formerly the capital account).
  Probably the most important is the Current Account because this records how well the UK is doing in terms of its exports of goods and services relative to its imports. If the UK is to 'pay its way' in the world over the long term, then it needs to keep earning enough foreign currency from its exports to pay for its imports. If this is not the case, the account will be in deficit. Japan has the largest surplus in the world. Although a surplus sounds better then a deficit, both can be bad. Japan's surplus forces other countries in the world to have deficits. In fact, while Japan's surplus is the biggest in the world, the USA's deficit is the biggest in the world. This is not a coincidence! The UK tends to be in deficit, although the Current Account was in surplus a couple of years ago, mainly due our strength in the service sector.