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Why are the Economic

Objectives Difficult to

Achieve?

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Why are the economic

objectives difficult to achieve?

The Government hasfourbasic economicobjectives. They are:

Low Inflation (price stability) Full Employment

High Economic Growth, and

External Stability

and two other issues that relate to economicpolicy and these 4 basic objectives. They are:

Environmental sustainability

The Distribution of Income and Wealth.2

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Why are the economic

objectives difficult to achieve?

While these are the objectives, it isvery

difficult to achieve all of these objectives

at the same time.

This is because policies to achieve some

objectives may worsen others.

Some of theconflicting objectives include:-

Inflation V Full employment

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Inflation V Full Employment

In theshort runthere is an

inverse relationship

between inflation and full

employment.

An increase in demand that

will reduce unemployment

will lead to higher inflation.

At the same time low growth

and unemployment will

reduce inflation.

This relationship is known

as the Phillips Curve

-10

-5

05

10

15

20

25

30

35

40

0 5 10 15

4

I

N

FL

A

T

I

O

N

Unemployment Rate %

1983

2011

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The Phillips Curve

In thelong run, thePhillips Curvebecomes a verticalline. This is the

natural rate ofunemploymentor theNAIRU.

Any increase in

demand that willreduce unemploymenttemporarily, willincrease inflation and

eventually lead to joblosses and

-15

-10

-50

5

10

15

20

25

30

35

40

0 5 10 15

5

I

N

FL

A

T

I

O

N

Unemployment Rate %

1983

2011

Long run PC

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The Phillips Curve

The NAIRU can changeas a result of changes in :

inflationary expectations

the supply of labourand

the participation rate the skill level and mobility

of labour

the demand for labour

An increase in the NAIRUwill shift the long run andshort run phillips curves totheright.

A decrease in the NAIRU

will shift the curve left.

-10

-5

0

5

10

15

20

25

30

35

40

0 5 10 15

6

I

N

FL

A

T

I

O

N

Unemployment Rate %

Year 2

Year 1

Long runPC1 PC2

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Why are the economic

objectives difficult to achieve?

Full Employment, Economic Growth and

the CAD Policies to increase growth and

employment will generally increasedemand.

The increase in spending may lead to

increased inflation and increased demand

for imported goods, which willworsen the

current account deficit(M > X).

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Why are the economic

objectives difficult to achieve? Economic Growth and Full Employment:

While economic growth is a major source of

employment growth in the long run, somepolicies to increase productivity, eg new

technology and downsizing of firms, may

increase unemployment.

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Why are the economic

objectives difficult to achieve?Economic Growth and income and wealthinequality:

While economic growth may bring improved

standards of living for all, it tends to favourresource ownersand thehighly skilledworkers.

Workers may be sacked to cut costs. Incomeinequality often increases.

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Why are the economic

objectives difficult to achieve?

Economic

Growth and the

Environment:The

quest for greaterprofits may

create pollution

and waste of

resources. Higher economic

growth rates

require more

resources.10

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Why are the economic

objectives difficult to achieve? Time Lags :-

There are a number of lags inimplementing economicpolicy and its effectiveness.

Theinside oradministration lags involvegathering the information

on the state of the economy,makingdecisions based onthe information andimplementing the policy

decisions.11

When will my

policies work?

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Why are the economic

objectives difficult to achieve?

The outside lags involve the initial change inautonomous expenditure, the subsequentrounds ofinduced spending changes andfinally theprice adjustment lag, asbusinesses set new prices.

The duration of the time lags in theAustralian economy are up to18 months.

In this time theeconomic circumstancescan changegreatly, so policies can bewrong,for that period of time.

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Why are the economic

objectives difficult to achieve?

Political Constraints:

The political and legal

system can also limit long

run economic policies.Elections are held every 3

years. Politicians will often

have short run policiesto

make them popular rather than

long run growth policies.

High Court decisions can also

impact on investment in13

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Why are the economic

objectives difficult to achieve?

The World Economy

The state of the worldeconomyhas a major impact

on the Australian economy. World interest rates, world

prices for commodities, thestate of the US and Asian

economies all influence theAustralian economy.

If demand in the USA falls thishas aflow - on effect to most

economies in the world.14

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What can the Government do

to achieve its economicobjectives?

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What can the Government do to

achieve its economic objectives?

The economy is not simple. Therearefive sectorsoperating for differentreasons with differentgoals.

The economy is alwaysmovingtowardsnew equilibriums, aswithdrawals andinjectionschange. It is not easy to get therightbalanceof objectives.

Some economists argue that thegovernment shouldnoteven try, but ratherto let the free market sort it out.But atwhat price???

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What can the Government do to

achieve its economic objectives?

The government hassix main economicpoliciesthat they can use to try to achievethese objectives. They are:

Fiscal Policy (The Budget) Monetary Policy (Interest Rates)

Prices and Incomes Policy (Wage policies)

Trade policy

Labour Market Policies

Microeconomic Reform (StructuralChange Policies)

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