Five Macroeconomics Objectives from Conventional

Perspective

ECO 211

Assignment 1

Name

: Shahrul Aiman Badrol Hisham

Matrix No

: 2013875332

Group

: JAC1104C

Lecturer

: Sir Mustafa

Due Date

: 15 February 2015

Question:

Explain five (5) Macroeconomic objectives from conventional

perspective

Full Employment
The first Macroeconomic objective from conventional perspective is to achieve
full employment in all available factors of production like labour, land, capital and
entrepreneurship. Full employment is a situation where all available resource is
utilized fully. The objective does not necessarily need full employment in a country;
instead low unemployment rate is also accepted as the objective of
Macroeconomics. Full employment is needed to increase the output of goods and
services which will then increase the Gross Domestic Product (GDP) of the country.
Unemployment means that there are available resources that are not being
utilized effectively and efficiently. Unemployment rate is used to show the percentage
of the labour force currently unemployed. Unemployment has several bad
consequences such as economic loss and morale loss among society.
Employment is usually divided into 2 sectors; goods and services. The
number of workers in each sector is crucial to the economy. For a country that is
more focused toward production like China and India, the number of workers in the
production of goods is immensely high. In contrast, for countries like the U.K which
are focusing more on the service sector, the number of employees in services is 4
times higher than workers in the manufacturing sector.

Price Stability
Another macroeconomic goal is to maintain price stability or control rate of
inflation in the country. The main objective is to keep the inflation rate ideally at 0%
or as low as possible. Inflation is usually defined as rise in the general level of prices.
Inflation generally reduces the value of money over time. This in turn will reduce the
buying power of consumers in an active market. It is in the interest of every nation to
keep the inflation rate as low as possible.
Inflation will affect the economy both positively and negatively. The negative
effects of inflation include an increase in the opportunity cost of holding money.
Inflation over time will reduce value of money so it may discourage investments and
savings among citizens. If the inflation rate is increasing rapidly, shortage of goods
might happen as sellers and consumers alike will begin hoarding goods out of
concern that the price will increase soon. The sellers will want to increase their
profits and the consumers will want to avoid buying the item at a higher price. This is
a highly unethical behaviour for a business to have. However inflation also has some
positive effects to the economy by ensuring that central banks can adjust interest

rate to reduce recession and encourage investments in non-monetary capital

projects.
Malaysia has been affected by inflation many times in the course of its life. As
at 31 December 2014, the inflation rate in Malaysia was recorded at 2.7 percent. The
inflation rate is lower than the average inflation rate from 1973 until 2014 which was
recorded at 3.7 percent. This means that the year 2014 is a good year for Malaysian
economics. Inflation rate in Malaysia reached an all time high of 23.9 percent in
March of 1974 which led to an absurd increase in price of goods and the value of
Ringgit Malaysia dropped very low. The inflation rate is expected to increase to 4
percent in April 2015 when Goods and Services Tax (GST) is introduced to replace
the current Sales and Services Tax (SST).

Economic Growth
To achieve economic growth, the economy has to be operating at maximum
capacity i.e. full employment. Economic growth typically refers to the growth of
potential output i.e. production at full employment. Economic growth tends to be
measured in terms of rate of change in real GDP. The term real usually means that
it is inflation-adjusted, in other words, inflation effect has been eliminated from the
price of goods.
Economic growth is a long term process. A nation has to invest a lot into
human and physical capital, and also technological advances which will lead to
increased productivity. The growth rate is not constant every year; rather it will have
its ups and downs over short term periods. This is called the business cycle. In a
business cycle, there are four phases; peak, recession, trough and recovery. The
economy will generally go through all the phases and repeat the cycle over and over
again. Even small increase in growth rate will have large effects.
Economic growth rate can be measure by evaluating the full production output
per capita over the years. If there is an increase in national income per capita, then
there is an increase in the growth rate. This means that the citizens are gaining more
income which will lead to increased happiness. An increase in economic growth rate
can also reduce and eliminate poverty in a country. The highest recorded growth rate
in Malaysia between 2000 and 2014 is 10.3 percent in the year 2010.

Equitable Distribution of Income

Another goal of macroeconomic is to reduce the gap between higher income
and the lower income groups. This is to ensure that everyone has the same standard
of living and no poverty exists in the country. Disparities in income will create social
friction between the rich and the poor and bring about many problems such as thefts

and abuse. A more equitable distribution of income may also help accelerate
economic growth and promote economic development.
If the poor gets more income to spend from redistribution of income, it leads to
an increase in aggregate demand in the economy. This is turn will lead to more
production of goods and services to fulfil demand and this will create job
opportunities for the citizens. The government will also have an easier time
administrating the country if the citizens are happier. People who feel like they dont
get enough reward for their work will rebel against the government and will create
social unrest. Furthermore, the poor will be able to benefit from healthcare and
education with a more equitable distribution of income. However there is also a
negative effect of this goal; it will lower the incentive to work hard, take risks and
innovate.
Some of the solutions available to achieve equitable distribution of income is
to introduce a progressive tax system so that higher income group has an increased
tax rate compared to the lower income group. The extra money from taxation can be
used as subsidy to the poor and needy people. In the long run however, the
government should aim to improve access to education, creation of jobs and reduce
corruption.

To achieve Equilibrium in Foreign Sector

When the cash inflow of a country is equal to the cash outflow, it means that
the country has achieved a balanced Balance of Payment (BOP). The transactions
that affect the BOP are usually imports and exports and also include financial capital
and financial transfers. BOP of a country is the record of all monetary transactions
between the country and the rest of the world. If a country is importing more than its
exports, then the trade balance BOP will be in deficit. The opposite happens when
the country exports more than they are importing.
One of the ways to correct a deficit or a surplus BOP is by readjusting the
internal prices and demand. These changes are optional for the surplus country but
compulsory for the deficit country as to avoid further decrease in value of their
currency.
When a country sells more than it buys, it will experience a net inflow of
money. This will lead to a favourable or surplus BOP. To achieve equilibrium, the
country has to increase the money supply by printing more bank notes which will
lead to inflation and an increase in prices. This will make the goods of the country to
become less competitive thus reducing demand, and reducing the BOP surplus back
to zero.
A deficit BOP will occur when a country buys more than it sells. This will
automatically have a deflationary effect to the country. The prices of goods by the

country will be reduced and thus become more competitive in the market. The
demand for goods by the country will increase and thus correcting the imbalance
back to equilibrium.