Economic growth is the increase in goods & Services produced by improve literacy rate, eradication of poverty, balanced transport

an economy or nation, considered for a specific period of time. networks, increase in employment opportunities etc. Quality of
The rise in the country’s output of goods and services is steady and living standard is the major indicator of economic development.
constant and may be caused by an improvement in the quality of Therefore, an increase in economic development is more necessary
education, improvements in technology or in any way if there is a for an economy to achieve the status of a Developed Nation.
value addition in goods and services which is produced by every

sector of the economy. It can be measured by the Human Development Index, which
considers the literacy rates & life expectancy which affect
It can be measured as a percentage increase in real gross domestic productivity and could lead to Economic Growth.
product. Where a gross domestic product (GDP) is adjusted by
inflation. GDP is the market value of final goods & services which is Both Economic Growth vs Economic Development are popular

produced in an economy or nation. choices in the market; let us discuss some of the major Difference
Between Economic Growth and Economic Development:
Economic Development is the process focusing on both
qualitative and quantitative growth of the economy. It
measures all the aspects which include people in a country become
Economic Growth is the increase in the real output of the country
wealthier, healthier, better educated, and have greater access to
in a particular span of time. Whereas, Economic Development is
good quality housing. Economic Development can create more
the increase in the level of production in an economy along
opportunities in the sectors of education, healthcare, employment
enrichment of living standards and the advancement of
and the conservation of the environment. It indicates an increase in
technology.
the per capita income of every citizen. The standard of living
includes various things like safe drinking water, improve sanitation Economic growth does not consider the Income from the Informal

systems, medical facilities, the spread of primary education to Economy. The Informal economy is unrecorded economic activity.
Whereas, Economic Development takes consideration of all Unlike economic development, Economic growth is an automatic
activities, whether formal or informal and eases people with low process. Meanwhile, economic development is the outcome of
standards of living a suitable shelter and with proper employment. planned and result-oriented activities.

Economic Growth does not reflect the depletion of natural Economic Growth refers to the rise in the value of all the products
resources. Depletion of resources such as pollution, congestion & produced in the economy. It indicates the yearly increase in the
disease. Governments are under pressure due to the country’s GDP or GNP, in percentage terms. It alludes to a
environmental issues, majorly the problem is due to Global considerable rise in the per-capita national product, over a period,
warming. However, Economic Development is concerned with i.e. the growth rate of increase in total output should be greater
Sustainability, which means meeting the needs of the present than the population growth rate.
without compromising.
Economic growth is necessary but not enough to achieve
Economic growth is the subset of economic development. economic development.

Economic growth indicates the expansion of the Gross Domestic They both Economic Growth vs Economic Development have
Product (GDP) of the country and the concept of Economic Growth different indicators for their measurement. Economic Growth can
is basically related to the developed countries. Economic be measured through an increase in the GDP, per capita income,
Development is a broader concept than the Economic Growth. etc. However, Economic Development can be measured through
Economic Development refers to the increase of the Real National Improvement in the life expectancy rate, infant mortality rate,
Income of the economic and socio-economic structure of any literacy rate, and poverty rates.
country over a long period of time. Economic Development is
related to underdeveloped or developing countries of the world.
 Measures of economic development
In summary Measuring economic development is not as precise as
measuring GDP because it depends on what factors are included
 Economic growth means an increase in real national income / in the measure.
national output.
 Economic development means an improvement in the quality of There are several different measures of economic development,
life and living standards, e.g. measures of literacy, life- such as the Human development index (HDI)
expectancy and health care.
 Ceteris paribus, we would expect economic growth to enable Factors affecting economic growth in
more economic development. Higher real GDP enables more to
be spent on health care and education. developing countries
 However, the link is not guaranteed. The proceeds of economic
growth could be wasted or retained by a small wealthy elite.  Levels of infrastructure – e.g. transport and communication
 Levels of corruption, e.g what percentage of tax rates are
Economic growth measures an increase in Real GDP (real actually collected and spent on public services.
output). GDP is a measure of the national income / national  Educational standards and labour productivity. Basic levels of
output and national expenditure. It basically measures the total literacy and education can determine the productivity of the
volume of goods and services produced in an economy. workforce.
 Levels of inward investment. For example, China has invested in
Economic development many African countries to help export raw materials, that its
economy needs.
Development looks at a wider range of statistics than just GDP  Labour mobility. Is labour able to move from relatively
per capita. Development is concerned with how people are unproductive agriculture to more productive manufacturing?
actually affected. It looks at their actual living standards and the  The flow of foreign aid and investment. Targeted aid, can help
freedom they have to enjoy a good standard of living. improve infrastructure and living standards.
 Level of savings and investment. Higher savings can fund more
Measures of economic development will look at: investment, helping economic growth.

 Real income per head – GDP per capita

 Levels of literacy and education standards Economic growth without development
 Levels of healthcare e.g. number of doctors per 1000 population
It is possible to have economic growth without development
 Quality and availability of housing
 Levels of environmental standards . i.e. an increase in GDP, but most people don’t see any actual
 Life expectancy. improvements in living standards.
1. Economic growth may only benefit a small % of the population.
For example, if a country produces more oil, it will see an What Does Growth Mean
increase in GDP. However, it is possible, that this oil is only Growth typically refers to an increase in size or number. This increase
owned by one firm, and therefore, the average worker doesn’t is often measurable. For example, a tree can grow. Its growth can be
really benefit. measured from its height. Similarly, an organization can also grow
2. Corruption. A country may see higher GDP, but the benefits of by adding more staff or other organizations to it. Profit of a company
growth may be syphoned into the bank accounts of politicians can also grow. For more examples, look at the following sentences.
3. Environmental problems. Producing toxic chemicals will lead to
an increase in real GDP. However, without proper regulation, it
can also lead to environmental and health problems. This is an Everyone was amazed at the growth of the company.
example of where growth leads to a decline in living standards Jake had a growth spurt when he was 15 years old – he grew taller than
for many. all his older brothers.
4. Congestion. Economic growth can cause an increase in The growth of the plants and trees are affected by the weather.
congestion. This means people will spend longer in traffic jams. There is a 16% growth in this year’s profits.
GDP may increase but they have lower living standards because He looked like a ruffian, with several day’s growth of beard.
they spend more time in traffic jams. The fertility of the land and rainfall affect the growth of the crops.
5. Production not consumed. If a state-owned industry increases The finance minister refused to comment on the economic growth of the
output, this is reflected in an increase in GDP. However, if the country.
output is not used by anyone then it causes no actual increase in Development mainly refers to progress and improvement. It often
living standards. encompasses a growth as well as an improvement of circumstances.
6. Military spending. A country may increase GDP by spending Development is a qualitative measure. Thus, when something develops,
more on military goods. However, if this is at the expense of the quality of that thing also improves. If a tree develops, its changes
health care and education it can lead to lower living standards. will not only be the size – it will stay healthy, bear fruits and continue
growing. The same applies to a child or a company. Thus, development
refers to the overall changes and the progressive changes of a thing.

The following examples will help you to understand the meaning of this
noun more clearly.

Growth refers to the increase in size and number whereas development A balanced diet and exercise are imperative for the development of
refers to an improvement of circumstances. This is the main muscles.
difference between growth and development. The president was very interested in the economic development of the
country.
The illustrations in the book show the development of a baby inside a a resource only had one single use, then the
mother’s womb.
Personal development is the primary aim of education, not wealth or economic problem would probably not arise.
status. However, be it natural productive resources or man-
Brain drain is the greatest obstacle to the development of the country. made capital/consumer goods or money or time,
The economic development of this company astonished many financial
analysts. scarcity of resources is the central problem. This
The development of a child’s mind is fascinating to observe. central problem gives rise to four basic problems of
Difference Between Growth and an economy. In this article, we will look at these
Development basic problems in detail.

Meaning The Four Basic Problems of an Economy

Growth: Growth refers to the increase in size and number.
Development: Development refers to an improvement in
circumstances. As discussed in the paragraph above, the central
Measure economic problem of scarcity of resources is broken
down into four basic problems of an economy. Let’s
Growth: Growth has a quantitative measure.
Development: Development has a qualitative measure. look at each of them separately.
Interrelation
Basic Problems of an Economy – #1 – What to
Growth: Growth basically refers to the increase in size and number.
Development: Development encompasses overall changes including Produce?
growth and other progressive changes.
Basic Problems Of An Economy What does a society do when the resources are
limited? It decides which goods/service it wants to
If there is a central economic problem that is present produce. Further, it also determines the quantity
across all countries, without any exception, then it is required. For example, should we produce more guns
the problem of scarcity. This problem arises because or more butter? Do we opt for capital goods like
the resources of all types are limited and have machines, equipment, etc. or consumer goods like
alternative uses. If the resources were unlimited or if
cell phones, etc.? While it sounds elementary, society to decide on who gets what share of the total output
must decide the type and quantity of every single of goods and services produced. In other words,
good/service to be produced. society decides on the distribution of the goods and
services among the members of society.
Basic Problems of an Economy – #2 – How to
Produce? Basic Problems of an Economy – #4 – What provision
should be made for economic growth?
The production of a good is possible by various
methods. For example, you can produce cotton cloth Can a society use all its resources for current
using handlooms, power looms or automatic looms. consumption? Yes, it can. However, it is not likely to
While handlooms require more labour, automatic do so. The reason is simple. If a society uses all its
looms need higher power and capital investment. resources for current consumption, then its
production capacity would never increase.
Hence, society must choose between the techniques
to produce the commodity. Similarly, for all goods Therefore, the standard of living and the income of a
and/or services, similar decisions are necessary. member of the society will remain constant.
Further, the choice depends on the availability of Subsequently, in the future, the standard of living
different factors of production and their prices. will decline. Hence, society must decide on the part
Usually, a society opts for a technique that optimally of the resources that it wants to save for future
utilizes its available resources. progress.

Basic Problems of an Economy – #3 – For whom to The Basic Problem - Scarcity

Produce?
Scarcity, or limited resources, is one of the most basic economic problems we
face. We run into scarcity because while resources are limited, we are a society
Think about it – can a society satisfy each and with unlimited wants. Therefore, we have to choose. We have to make trade-offs.
every human wants? Certainly not. Therefore, it has
We have to efficiently allocate resources. We have to do those things because and then also export its products to the rest of the
resources are limited and cannot meet our own unlimited demands.
world.
Without scarcity, the science of economics would not exist. Economics is the
study of production, distribution, and consumption of goods and services. If
Real growth means the increase in the production of
society did not have to make choices about what to produce, distribute, and goods and services which is only possible when
consume, the study of those actions would be relatively boring. Society would existing resources are being allocated efficiently.
produce, distribute, and consume an infinite amount of everything to satisfy the
unlimited wants and needs of humans. Everyone would get everything they Those countries which could not achieve the
wanted, and it would all be free. But we all know that is not the case. The economic growth are because of two factors.
decisions and trade-offs society makes due to scarcity is what economists study.
Why are certain decisions made and what is the next best alternative that was 1. The resources might be used inefficiently, or
forgone? 2. Factors of production might be lying unemployed.
Each country has its own issues associated with 3. The factor which promotes economic growth
various factors that halt its development and includes the following;
growth. 4. Improvement in technology
Hence, countries tend to keep certain goals and 5. Increase in natural resources
target to achieve a particular level of growth within
6. Increase in the labor force
a year. Such goals are referred to as
Macroeconomics objectives. Following are the 7. Increase in human capital
economic goals of a country in general; The following graph shows the growth. When the
available resources are utilized wisely than the
1. Economic Growth output of machines increases as a result of which
Economic growth refers to general increase in real the combination for goods and services (P, Q, and
output. Every country utilizes its scarce resource R) on production possibility frontier (PPF) is shifted
effectively and efficiently to produce maximum towards the right (from PPF1 to PPF2) without any
goods and services in order to fulfill the needs of its opportunity cost which shows growth.
masses. It is the upmost priority of every country to
produce goods and services of such nature which 2. Full Employment:
meets the standards of quality. Full employment does not mean that no one is
Additionally, It is the biggest challenge for every jobless in a country; rather full employment refers
country to fulfill the needs of its growing population to the situation when there is no
voluntary unemployment in the country. There is
 always a certain level of unemployment in the Economic transactions refer to international trade
country due to economic instabilities and that includes the import and export of goods and
imperfections. Such level of unemployment is called services. Where imports increase the exports the
the natural rate of unemployment. But the balance of payment becomes unfavorable. If the
government tries its best to reduce the level of value of imports is greater than the value of exports,
unemployment in a country as much as it can. It is then the balance of payment is in deficit. On
one of the most important responsibilities of the contrary, if the value of export is greater than the
government of a country to create job opportunities value of imports than the balance of payment is in
for its people. surplus. A balance of payment deficit in
Read: disadvantageous to the country. It affects the
 Unemployment rate credibility, repute, and ranking of the country. In
 Types of unemployment order to keep the balance of payment favorable, the
government imposed duties on imports and
3. Price Stability or Controlling provides subsidies on exports.
Inflation: 5. Economic Security:
Inflation means a general increase in price level. Economic security refers to a feeling of freedom and
Increase in price level results in an unequal and safety. The people of a country feel themselves safe
unfavorable distribution of wealth in an economy. no matter wherever they are in their homeland. It is
Due to inflation the growth rate also decreases. It the responsibility of the government of a country to
reduces purchasing power and it also causes a provide security of life and belongings of their
deficit in the balance of payment which effects the people. That is why government establishes defense
international repute of the country. Therefore, the including police for the protection and security of
government of a country takes a serious and the natives.
effective step to overcome inflation and to keep the
prices of commodities stable. 6. Economic Freedom:
Economic freedom is a freedom for people to make
4. The balance of payment: choice and decisions without any kind of external
A balance of payment is the statistical record of pressures. People are free to buy, sell and own.
economic transactions with the rest of the world. People are free to own property and make profits
from them. People have the freedom to do business equity there should be fair and just distribution of
and expand or contract it. Economics freedom is income. The wealth should be accumulated or
provided to people to promote economic activities concentrated in certain hands. Every sector of an
in an economy to make economic condition better economy must be audited on regular basis so that
day by day. cash flows could be regulated. Economic equity is
7. Economic Efficiency: very integral part because it helps the business
Efficiency is measured with respect to a time frame. chains to keep functioning smoothly.
One is efficient if he does maximum work in less 9. Economic Stability:
time. Economic efficiency is the best utilization and Every country is required to pay maximum attention
allocation of available resources. An economy is towards keeping the prices of goods and services
economically efficient when there is maximum stable. The government should formulate such
benefits are available for the people. Economic policies which prevent price fluctuations and they
efficiency is achieved when available resources are the markets in balance and consistency. Economic
used wisely in such a way maximum goods and stability also includes full employment level in the
services are being produced. An economically country, which no one is jobless unless he himself
efficient country is more favorable internationally. does not want to be employed. An economically
Other countries rely on such country’s quality stable country is the one which is heading towards
productions and services. growth and prosperity, slowly and steadily.
8. Economic Equity: 1. 3. Economic Freedom • This goal is about the amount of choice
people have in where they work and live, the type of career they
Economic equity is one of the economic goals of a have, what they do with their income and what they buy or sell.
country to treat everyone equally and fairly and do Economic freedom is restricted in some cases to protect the rights
of others, for example there are laws prohibiting the production,
justice. It is the duty of government to keep balance sale and purchase of illegal drugs.
and equity among different classes of society. The 2. 4. Economic Equity • This goal centers on fairness. People's
beliefs around what is right or wrong determine how this goal is
government should form and establish such achieved. • Issues that involve Economic Equity certainly deal with
economic policies which help them in minimizing redistribution of income.
3. 5. Economic Efficiency • An economic principle holding that
the class discrimination in the society. The country businesses and individuals should fulfill as many of society’s
with less discrimination flourishes with better needs as possible while maximizing the provided resources. •
speed. In order to achieve the goal of economic When a society achieves economic efficiency, goods and services
 are produced without a lot of waste and those goods and services out by height, weight, religion, age, gender race, looks, strength, health or
are what the consumers want and or need the most. wealth? How should the goods and services be distributed among the
4. 6. Economic Security • Keeping people safe from economic risk is people? Economic Goals and Societal Values Societies or communities
the basis of this goal. United States Government programs such answer the economic questions in different ways. Societies look at economic
as welfare, Social Security and food stamps are all examples of
goals and make decisions based on what is most valued. Some economic
ways America tries to achieve this goal. Producers and consumers
desire to be protected from risks over which they have little or no goals that are considered are: 2 Economic Efficiency Making the most of
control such as illness, bank failures and man-made or natural resources without waste is an economic goal. Economic Freedom Being able
disasters. to make choices about which goods and services to produce and distribute
5. 7. Economic Stability • This goal involves three aspects: sustained without government interference or intervention is an economic goal. This
growth without large swings in output or consumption; stable rate freedom allows entrepreneurs to take risks and make choices to start various
of employment; and a stable level of prices without dramatic businesses. Economic security Knowing that goods and services will be
inflation or deflation. Most nations with economic freedom allow for available when needed. Having a safety net that protects individuals in a time
some unemployment and inflation. of economic disaster. Economic Equity A fair distribution of wealth. Economic
6. 8. Economic Growth • Economic growth is the sustained increase
Growth and innovation Using new ideas and ways of creating goods and
in the production of goods and services. It is measured by Gross
Domestic Product (the total value of all final goods and services services leads to growth and a higher standard of living or way of life for all.
produced in a nation in a year). A nation's standard of living can Economic Systems An economic system is the method used by a society to
only improve if GDP increases. To achieve economic growth a produce and distribute goods and services. Several fundamental types of
country must invest in education, technology and capital goods. economic systems exist to answer the three questions of what, how, and for
This goal is closely related to a country's long term ability to use whom to produce: traditional, command, market, and mixed. Traditional
resources to achieve the other goals. Economies: In a traditional economy, economic decisions are based on
custom and historical precedent. For example, in tribal cultures or in cultures
The Basic Economic Problem The existence of scarcity creates the basic characterized by a caste system, people in particular social strata or holding
economic problem faced by every society, rich or poor: how to make the best certain positions often perform the same type of work as their parents and
use of limited productive resources to satisfy human needs and wants. To grandparents, regardless of ability or potential. Command Economies: In a
solve this basic problem, every society must answer these three basic command economy, governmental planning groups make the basic economic
questions: 1. What goods and services will be produced? For example, an decisions. They determine such things as which goods and services to
economy must decide whether they should produce kitchen appliances or produce, their prices, and wage rates. Cuba and North Korea are examples of
weapons, build and fix roads or buy textbooks for schools. 2. How will goods command economies. 3 Market Economies: In a market economy, economic
and services be produced? For example, should we use copper or plastic to decisions are guided by the changes in prices that occur as individual buyers
make pipes? Should machines be used to make clothing or should workers and sellers interact in the market place. As such, this type of economy is
make it by hand? Should the power plant be built close to the ocean or often referred to as a price system. Other names for the market system are
inland? Which fertilizer is best for growing strawberries? There are millions of free enterprise, capitalism, and laissez-faire. The economies of the United
decisions that need to be made to figure out how to produce goods and States, Singapore, and Japan are identified as market economies since prices
services. 3. Who will consume the goods and services? Once the goods and play a significant role in guiding economic activity. Mixed Economies: There
services are produced, who will get to consume them? Will people consume are no pure command or market economies. To some degree, all modern
them on a first-come, first-served basis? Should goods be allocated or given economies exhibit characteristics of both systems and are, therefore, often
referred to as mixed economies. For example, in the United States the the unemployment rate, and the growth rate of production. If these
government makes many important economic decisions, even though the remain unchanged, then stability is at hand. Maintaining stability is
price system is still predominant. Even in strict command economies, private beneficial because it means uncertainty and disruptions in the
individuals frequently engage in market activities, particularly in small towns economy are avoided. It means consumers and businesses can
and villages. The key point to remember is that every individual and every safely pursue long-term consumption and production plans. Policies
society must contend with the problem of scarcity. Every society, regardless makers are usually most concerned with price stability and the
of its political structure, must develop an economic system to determine how inflation rate.
to use its limited productive resources to answer the three basic economic
questions of what, how, and for whom to produce. Economic Growth

Macroeconomic goals are three of the five economic goals of Economic growth is achieved by increasing the economy's ability to
a mixed economy that are most important to the study produce goods and services. This goal is best indicated by
of macroeconomics. They are full employment, stability, measuring the growth rate of production. If the economy produces
and economic growth. more goods this year than last, then it is growing. Economic growth
is also indicated by increases in the quantities of the resources--
Full Employment labor, capital, land, and entrepreneurship--used to produce goods.
With economic growth, society gets more goods that can be used to
Full employment is achieved when all satisfy more wants and needs--people are better off; living
available resources (labor, capital, land, and entrepreneurship) are standards rise; and scarcity is less of a problem.
used to produce goods and services. This goal is commonly
indicated by the employment of labor resources (measured by Tradeoffs
the unemployment rate). However, all resources in the economy--
labor, capital, land, and entrepreneurship--are important to this The three macroeconomic goals of full employment, stability, and
goal. The economy benefits from full employment because economic growth are widely considered to be beneficial and worth
resources produce the goods that satisfy the wants and needs that pursuing. Each goal, achieved by itself, improves the overall well-
lessens the scarcity problem. If the resources are not employed, being of society. Greater employment is typically better than less.
then they are not producing and satisfaction is not achieved. Stable prices are better than inflation. Economic growth is better
than stagnation.
Stability
However, the pursuit of one goal often restricts attainment of
Stability is achieved by avoiding or limiting fluctuations others. For example, policies that promote economic growth might
in production, employment, and prices. Stability seeks to avoid create unemployment or policies that improve stability might limit
the recessionary declines and inflationary expansions of business economic growth. Macroeconomic goals are also often in conflict
cycles. This goal is indicated by month-to-month and year-to-year with the microeconomic goals of efficiency and equity.
changes in various economic measures, such as the inflation rate,
Consider a few hypothetical situations, depicted by the hypothetical fraught with exceptions. However, with that caution in mind, note
Republic of Northwest Queoldiolia, in which the pursuit of one goal that each of the two political views have historically placed greater
limits achieving another goal. emphasis on the attainment of some goals over others.

 Full Employment and Stability: The Central Bank of Liberals have tended to seek full employment over stability and
Northwest Queoldiolia seeks to promote lower rates of economic growth. Conservatives, in contrast, have sought economic
unemployment through expansionary monetary policy. The growth and stability, especially price stability, more so than full
economy expands, unemployment falls, and full employment employment.
is achieved, but inflation emerges from the over stimulated
economy.
Main Macro Economic Objectives

1. Maintain positive economic growth (e.g. target growth of around 2.5% which
is UK’s long run trend rate)
 Economic Growth and Full Employment: Seeking to keep
2. Maintain low inflation (UK’s target is CPI 2% +/-1)
pace with economic growth in neighboring Southeast
3. Maintain full employment
Queoldiolia, the President of Northwest Queoldiolia enacts an
4. Maintain satisfactory balance of payments (e.g. limit deficit on current
intense program of scientific research and development. The
program bears ample fruit, creating scores of new
account balance of payment)
technological innovations that lead to high rates of economic
5. Maintain stable exchange rate
growth, but implementation of the innovations disrupts the 6. Keep government borrowing low.
economy throwing millions of people who lack the necessary
skills or training needed by the new technologies out of work. Other possible targets

Policies and Politics  Reduce inequality

 protect environment
The pursuit of these three macroeconomic goals is inherently an act
of normative economics. In fact, the "norm" part of term normative In the post war period, I think it was fair to say, the primary goal was
economics is synonymous with the word "goal." Normative full employment. From the backdrop of the Great Depression, policy
economics is essential to the pursuit of economic goals. makers wished to avoid the blight of very high unemployment levels.
Broadly speaking, western governments used demand side policies to
In a mixed economy, the pursuit of these goals is largely directed try to attain full employment, even if this led to higher inflation.
by governments. This, of course, brings into play the wonderful Between 1940 and the mid 1970s, governments were generally
world of politics and never-ending debates over which of these three successful in keeping inflation low.
macroeconomic goals is most worth pursuing with economic
policies. Unemployment v Inflation 1949-2010
As the discussion turns to politics and policies, two viewpoints tend
to emerge--liberal and conservative. Generalities are, of course,
 failure as the UK was forced to ignominiously withdraw. It was after
1992, that the UK government set a direct inflation target. In 1997, the
Bank of England was given independence to set interest rates and target
the inflation rate of 2%.

 Targeting low inflation

 Keynesian vs Monetarist Theories

However, bear in mind, the Bank of England’s remit isn’t just about
inflation. They also have to consider wider macroeconomic objectives
such as growth. Hence why they cut interest rates even with inflation of
5%

Macroeconomic policy[edit]
Macroeconomic policy is usually implemented through two sets of
tools: fiscal and monetary policy. Both forms of policy are used
to stabilize the economy, which can mean boosting the economy to the
level of GDP consistent with full employment.[23] Macroeconomic policy
focuses on limiting the effects of the business cycle to achieve the
economic goals of price stability, full employment, and growth.[24]
% annual change in growth and inflation Monetary policy[edit]
Further information: Monetary policy
In the 1970s, cost push inflation factors, made it harder to keep
unemployment low without causing high rates of inflation. The old Central banks implement monetary policy by controlling the money
Phillips curve trade-offs seemed to be giving a worse trade-off. supply through several mechanisms. Typically, central banks take
action by issuing money to buy bonds (or other assets), which boosts
In the early 80s, both UK and US government’s gave greater the supply of money and lowers interest rates, or, in the case of
importance to inflation. In fact the UK tried to keep inflation low contractionary monetary policy, banks sell bonds and take money out
through targeting the Money Supply. By seeking to control money of circulation. Usually policy is not implemented by directly targeting the
supply and inflation, unemployment rose to 3 million. Many supply of money.
economists criticised the excess importance of controlling inflation, Central banks continuously shift the money supply to maintain a
when unemployment was so high. targeted fixed interest rate. Some of them allow the interest rate to
fluctuate and focus on targeting inflation rates instead. Central banks
In 1990, the UK temporarily joined the ERM and sought to target the generally try to achieve high output without letting loose monetary
exchange rate as a way of controlling inflation. This was seen as a policy that create large amounts of inflation.
Conventional monetary policy can be ineffective in situations such as Fiscal policy is the use of government's revenue and expenditure as
a liquidity trap. When interest rates and inflation are near zero, the instruments to influence the economy. Examples of such tools
central bank cannot loosen monetary policy through conventional are expenditure, taxes, debt.
means.
For example, if the economy is producing less than potential output,
government spending can be used to employ idle resources and boost
output. Government spending does not have to make up for the entire
output gap. There is a multiplier effect that boosts the impact of
government spending. For instance, when the government pays for a
bridge, the project not only adds the value of the bridge to output, but
also allows the bridge workers to increase their consumption and
investment, which helps to close the output gap.
The effects of fiscal policy can be limited by crowding out. When the
government takes on spending projects, it limits the amount of
resources available for the private sector to use. Crowding out occurs
when government spending simply replaces private sector output
instead of adding additional output to the economy. Crowding out also
occurs when government spending raises interest rates, which limits
investment. Defenders of fiscal stimulus argue that crowding out is not
a concern when the economy is depressed, plenty of resources are left
idle, and interest rates are low.[25][26]
An example of intervention strategy under different conditions Fiscal policy can be implemented through automatic stabilizers.
Automatic stabilizers do not suffer from the policy lags of discretionary
Central banks can use unconventional monetary policy such fiscal policy. Automatic stabilizers use conventional fiscal mechanisms
as quantitative easing to help increase output. Instead of buying but take effect as soon as the economy takes a downturn: spending on
government bonds, central banks can implement quantitative easing by unemployment benefits automatically increases when unemployment
buying not only government bonds, but also other assets such as rises and, in a progressive income tax system, the effective tax rate
corporate bonds, stocks, and other securities. This allows lower automatically falls when incomes decline.
interest rates for a broader class of assets beyond government bonds.
In another example of unconventional monetary policy, the United Comparison[edit]
States Federal Reserve recently made an attempt at such a policy
Economists usually favor monetary over fiscal policy because it has
with Operation Twist. Unable to lower current interest rates, the
two major advantages. First, monetary policy is generally implemented
Federal Reserve lowered long-term interest rates by buying long-term
by independent central banks instead of the political institutions that
bonds and selling short-term bonds to create a flat yield curve.
control fiscal policy. Independent central banks are less likely to make
Fiscal policy[edit] decisions based on political motives.[23] Second, monetary policy
Further information: Fiscal policy suffers shorter inside lags and outside lags than fiscal policy. Central
banks can quickly make and implement decisions while discretionary
fiscal policy may take time to pass and even longer to carry out.[23]
The three main types of government government will have to borrow to finance some of
macroeconomic policies are fiscal policy, monetary its expenditure.
policy and supply-side policies. Other government
In contrast, a budget surplus occurs when
policies including industrial, competition and
government revenue is greater than government
environmental policies. Price controls, exercised by
expenditure. A balanced budget, which occurs less
government, also affect private sector producers.
frequently, is when government expenditure and
1. Fiscal Policy: revenue are equal. A government may deliberately
Fiscal policy refers to changes in government alter its expenditure or tax revenue to influence
expenditure and taxation. Government expenditure, economic activity.
also called public expenditure, and taxation occur at
two main levels – national and local. Governments If a government wants to raise aggregate demand in
spend money on a variety of items including order to increase economic growth and
benefits (for the retired, unemployed and disabled), employment, it will increase its expenditure and/or
education, health care, transport, defense and cut taxation by lowering tax rates, reducing the
interest on national debt. items taxed or raising tax thresholds. For example, a
government may cut income tax rates.
A government sets out the amount it plans to spend
and raise in tax revenue in a budget statement. A This will raise people’s disposable income, which
budget deficit is when the government’s expenditure will enable them to spend more. Higher
is higher than its revenue. In this case, the consumption is also likely to raise investment. Fig. 1
shows the effect of a reflationary fiscal policy (also and investment. Households will spend less due to
called an expansionary fiscal policy). availability of less discretionary income, expensive
borrowing and greater incentive to save.
A government may implement a deflationary fiscal
policy (also called a contractionary fiscal policy) to Firms will invest less as they will expect
reduce inflationary pressure. A cut in government consumption to be lower. Also the opportunity cost
expenditure on, for instance, education would of investment will have risen and borrowing will
reduce aggregate demand. Such a reduction may have become expensive. A higher interest rate may
lower the rise in the general price level. also reduce aggregate demand by lowering net
exports.
2. Monetary Policy:
Monetary policy includes changes in the money Changes in the money supply, as with changes in
supply, the rate of interest and the exchange rate, interest rates, are implemented by Central Banks on
although some economists treat changes in the behalf of governments. If the money supply is
exchange rate as a separate policy. The main increased by the Bank printing more money, buying
monetary policy measure, currently used in most back government bonds or encouraging commercial
countries, is changes in the rate of interest. banks to lend more, the aggregate demand
increases. On the other hand, a decrease in the
A rise in the rate of interest helps implement a
money supply reduces aggregate demand.
deflationary monetary policy. It will be likely to
reduce aggregate demand by lowering consumption 3. Supply-side Policies:
Supply-side policies are policies designed to private sector firms invest more and work more
increase aggregate supply and hence increase efficiently than state owned enterprises.
productive potential. Such policies seek to increase MACROECONOMIC GOALS
the quantity and quality of resources and raise the
efficiency of markets. These include improving
education and training, cutting direct taxes and Five Macroeconomic Goals
benefits, reforming trade unions and privatization.
Improving education and training is designed to 1. Non-Inflationary Growth
In other words, this is stable and sustainable economic growth and
raise labour productivity. development that is “real” (non-inflationary) over the long-term.
Economic growth in an economy is an outward shift in its Production
Possibility Curve (PPC). Another way to define growth is the increase in a
The intention behind cutting direct taxes and country’s total output or Gross Domestic Product (GDP). The objective of
benefits is to make work more attractive, relative to the central bank and government would be an increase in economic growth
without a rise in the rate of inflation.
living on benefits. If successful, this will make the
unemployed search for work more actively and will 2. Low Inflation
raise the labour force by encouraging more people Inflation is the sustained increase in the price level. The rate of inflation is
the change in inflation over a period. Central banks would like to keep the
(including for instance married women and the growth of the rate at which prices increase at low rates. As inflation rises,
every dollar you own buys a smaller percentage of a good or service. For
disabled) to seek employment. Reforming trade example, the U.S. Federal Reserve targets the inflation rate at roughly 2%.

unions may make labour more productive and

3. Low Unemployment or Full Employment
privatization may increase productive capacity, if
Full employment occurs when the labor force (this counts as people who
are actively seeking jobs or are already employed) is fully employed in
productive work. A person is considered to be unemployed if he doesn’t
 currently doesn’t have a job and is actively searching for one. Having a  Reduce inequality
lower rate of unemployment means that the economy is more productive.  protect environment
This objective means that as many people who want to be employed are
employed, so the economy is running at or near full productivity. In the post war period, I think it was fair to say, the primary goal was
full employment. From the backdrop of the Great Depression, policy
makers wished to avoid the blight of very high unemployment levels.
4. Equilibrium in Balance of Payments Broadly speaking, western governments used demand side policies to
Equilibrium in Balance of Payments means that a country’s exports or try to attain full employment, even if this led to higher inflation.
imports should not be much larger than its imports or exports. Having a Between 1940 and the mid 1970s, governments were generally
large balance of payments deficit or surplus is not beneficial for the successful in keeping inflation low.
economy.
In the 1970s, cost push inflation factors, made it harder to keep
unemployment low without causing high rates of inflation. The old
5. Fair Distribution of Income Phillips curve trade-offs seemed to be giving a worse trade-off.
A fair or equitable distribution of income means that the gap between the In the early 80s, both UK and US government’s gave greater
rich and the poor is not too large. Fair or equitable doesn’t mean equal, but
importance to inflation. In fact the UK tried to keep inflation low
fair is a relative concept. What could be fair to one person, may not be fair
through targeting the Money Supply. By seeking to control money
to another. The government doesn’t want all the wealth concentrated with
a small group of people.
supply and inflation, unemployment rose to 3 million. Many
economists criticised the excess importance of controlling inflation,
Macro Economic Targets when unemployment was so high.

In 1990, the UK temporarily joined the ERM and sought to target the
Main Macro Economic Objectives exchange rate as a way of controlling inflation. This was seen as a
failure as the UK was forced to ignominiously withdraw. It was after
1. Maintain positive economic growth (e.g. target growth of around 2.5% which 1992, that the UK government set a direct inflation target. In 1997, the
is UK’s long run trend rate) Bank of England was given independence to set interest rates and target
2. Maintain low inflation (UK’s target is CPI 2% +/-1) the inflation rate of 2%.
3. Maintain full employment
4. Maintain satisfactory balance of payments (e.g. limit deficit on current  Targeting low inflation
account balance of payment)  Keynesian vs Monetarist Theories
5. Maintain stable exchange rate
6. Keep government borrowing low.
However, bear in mind, the Bank of England’s remit isn’t just about
inflation. They also have to consider wider macroeconomic objectives
Other possible targets
such as growth. Hence why they cut interest rates even with inflation of
5%
Exchange rate policy

Exchange rate policy is concerned with how the value of the domestic
currency, relative to other currencies, is determined. Australia has had a
floating exchange rate since December 1983. The value of the Australian
dollar is determined by market forces.

In response to the mining boom, the Australian dollar appreciated, which

helped moderate inflationary pressures and ensure the economy received
the price signals needed to facilitate the flow of resources to the mining
sector. The appreciation of the dollar also helped spread the benefits of the
mining boom by increasing the purchasing power of Australian
households. However, the high exchange rate had a contractionary effect
on a number of sectors of the economy (such as manufacturing).

The Australian dollar has recently depreciated. This should improve the
international competitiveness of Australia’s export and import-competing
industries.