Economic growth is the increase in a country national income. A growing economy means there will be more goods and services available for consumption. Governments therefore would like not only to achieve high long run rates of growth, but also achieve stable growth and avoid recession. Economic growth is usually brought about by technological innovation and positive external forces. There are two main ways of measuring economic growth. The first way is GDP and the second is GNI. In the short term, economic growth is caused by an increase in aggregate demand. If there is spare capacity in the economy then an increase in aggregate demand will cause a higher level of real GDP. For example, an increase in aggregate demand caused by a decrease in the interest rates will reduce the cost of borrowing and so encourage spending and investment. Firms will invest more in machinery and other equipment, buildings etc and this increased investment will create economic growth as the economy will be able to produce more output in total so GDP will goes up.
The unemployed are people who are registered as able, available and willing to work at the going wage rate but who cannot find work despite an active search for work. It is important to keep unemployment levels as low as possible. High unemployment is expensive for the Government and there are several costs associated with any unemployed worker so it is really a waste of human resources as well as a drain on government revenues. Governments can adopt policies aimed at increasing aggregate demand in order to reduce unemployment. Because the increase in the demand for output will lead to the demand for labour at each wage rate will grow and consequently cause an increase in total employment and therefore a reduction in unemployment. The government can attempt to influence the level of Aggregate demand through Fiscal policy and Monetary policy. If unemployment is relatively high then either interest rates can be lowered to expand demand (Monetary Policy) or, alternatively, the government could lower taxes and boost government spending (Fiscal policy). These measures will expand demand and lead to a fall in unemployment. For instance, when interest rates are low it is cheaper to borrow, which leads to higher consumer expenditure and higher investment in machines and buildings by firms. The overall increased demand helps creates jobs and helps reduce unemployment.
Inflation refers to the rising in general prices levels. Money loses some of its value because its purchasing power falls. There are three main causes of inflation which are demand-pull, cost-push and money or the quantity theory of money. Demand-pull inflation is caused by continuing rises in the aggregate demand, it occurs when the growth in aggregate demand is so strong that aggregate supply cannot respond quickly enough. Cost-push inflation caused by costs rising for firms which are in turn passed on to consumers. Increases in the money supply will also lead to inflationary pressure. If there were more money in circulation, then part of this extra money balances will be spent on goods and services which will boost aggregate demand. This in turn will lead to inflation. Therefore in order to keep inflation low and stable in short-term, governments have to attempt to deflate fiscal policy and carry out monetary policies by controlling the amount of money flowing around the economy and reducing the growth in aggregate demand. However, it may have to consider carefully when government attempt to reduce aggregate demand because lower aggregate demand can lower inflation but may lead to lower economic growth and higher unemployment.
The balance payments account of a country is the record of all the transaction between the residents of that country and the rest of the world. At the end of the period the current account of the balance of payment can either have a trade deficit or a trade surplus in its accounts. A trade deficit would suggest that the exports are less than imports and a surplus would indicate that the country is exporting more than it imports. Balance of payments deficit is a situation in which debits exceed credits which leads to a shortfall of foreign currencies and causes problems. Exchange rate fall is another problem because it pushes up the price of import and may fuel inflation. To achieve the goals of avoiding balance of payments and exchange rate problems in short-run, governments might try to increase the interest rate by decrease aggregate demand or carry out fiscal deflation. An increase in interest rates will affect both the capital account and the current account of the balance of payments in a way that will reduce the excess supply of money on foreign exchange markets. High interest rates reduce the demand for imports and more importantly lead to capital inflow. However, increasing interest rate will lead to a decrease in aggregate demand and thus may has negative effects to other objectives and so will required to be considered.
In the short-run, the objectives of macroeconomic are all vary with the course of the business cycle. Business cycle, or economic cycle is a recurring sequential pattern of aggregate economic activity, reflecting the fluctuation of economic performance. Each business cycle can be divided into four phrases. The first phrase is a peak. A peak is reached when the economy has produced the greatest amount of output. In this period, the overall business activity is rising with a more rapid rate, it is associated with a quick rise in aggregate demand and typically, businesses respond by increasing production and employment. And a common feature of a boom is that the demand for imports increases which lead to a wider trade deficit. Therefore, in this stage unemployment is generally at or near its lowest level and economic growth is high. However, this period may face with a risk of a pick-up in inflation, both demand-pull and cost-push inflation can occur if AD exceeds potential GDP and the current account of the balance of payments is moving into deficit
The second phrase is a slowdown or recession which occurs when real GDP continues to expand but at a reduced pace and aggregate demand decreases. Consequently, unemployment begins to rise and economic growth start to have an up-ward trend however the effects on the balance of payment become better and the inflationary pressure on prices fades.
The low point of the cycle occurs next. This is known as a trough or a depression period. It is a large recession with the prices, interest rates and wages are all in their lowest, national income and expenditure decline. Therefore, unemployment tends to be at its peak and economic growth is in its low point. There may have a downward pressure on prices and leads to deflation. Low interest rates will also result in a lower exchange rate making exports become more desirable and imports less desirable because of the increased cost. This will tend to a lead to a current account surplus.
The last phrase is the recovery where the economy starts emerging from recession. Business activities become more active and consumer will purchase more. Aggregate demand and prices will rise. As the results, unemployment will begin to decline and economic growth will increase but conversely inflation will start to grow and the balance of payment will again tend to fall into deficits.
In conclusion, unemployment, inflation, economic growth and balance of payments have close relationships with aggregate demand as well as with each other and the success in achieving each of the objectives fluctuate with the course of the business cycle in the short-run. Therefore it is required governments to take into consideration carefully when making any decision in order to achieve or control any of these macroeconomic objectives.
References:
Andrew, Dunnett, (1997), The Macroeconomic Environment, London, Longman.
John, Alison (2009), Economics (seventh edition)
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