The aims of a macroeconomic policy

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It is said that the main aims of macroeconomic policy are to achieve sustainable economic growth, a low rate of inflation, low unemployment and a balance of payments equilibrium.

For ONE country of your choice (name the country)

a) Consider to what extent these aims have been achieved over the last 10 years

b) Choose ONE of the aims and discuss the policies which the Government might use to achieve this aim over the next 10 years

c) Recently it has been suggested that "increasing the happiness of the population of the country" should replace these 4 aims as the key objective of government policy.

Discuss the difficulties the Government might encounter in trying to achieve this objective.

ANSWER: PART 'A' of Question 2


Most national governments share similar macro-economic objectives:

• Low and stable price in¬‚ation.

• A high and stable level of employment

• Economic growth and prosperity

• A favorable balance of international payments.

1) The Economy of Pakistan:

The economy of Pakistan is the 25th largest economy in the world in terms of purchasing power, and the 45th largest in absolute dollar terms. Pakistan has a semi-industrialized economy, which mainly encompasses textiles, chemicals, food processing, agriculture and other industries. The economy has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment, and a costly, ongoing confrontation with neighboring India. However, IMF-approved government policies, bolstered by foreign investment and renewed access to global markets, have generated solid macroeconomic recovery in the last decade. Substantial macroeconomic reforms since 2000, most notably at privatizing the banking sector have helped the economy.

2) Inflation:

Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005 before easing to 7.9% in 2006. In 2008, following the surge in global petrol prices inflation in Pakistan has reached as high as 25.0%.

Due to inflation and economic crisis worldwide, Pakistan's economy reached a state of Balance of Payment crisis. The inflation rate in Pakistan was last reported at 12.69 percent in June of 2010. From 2003 until 2010, the average inflation rate in Pakistan was 10.15 percent reaching an historical high of 25.33 percent in August of 2008 and a record low of 1.41 percent in July of 2003. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. By 2010, the inflation rate has increased a lot as compared to in 200.

3) Unemployment:

Unemployment is one of the biggest problems of Pakistan. That person is unemployed who has ability to do work and is willing to do work but is unable to get job opportunity. The high population growth in the past few decades has ensured that a very large number of young people are now entering the labor market. Even though it is among the seven most populous Asian nations, Pakistan has a lower population density than Bangladesh, Japan, India, and the Philippines. In the past, excessive red tape made firing from jobs, and consequently made hiring difficult.

4) Payment equilibrium:

Pakistan's payments problems have been chronic since the 1970s, with the cost of oil imports primarily responsible for the trade imbalance. The growth of exports and of remittances from Pakistanis working abroad helped Pakistan to keep the payments deficit in check. Pakistan's balance of payments showed a deficit in its current account balance. Over last 10 years Pakistan has suffered a lot due to political disputes and other issues. A great number of difference in balance of payment (BOP) can be seen in these last 10 years.

ANSWER: Part 'B' of question 2

Future Economic policies of Pakistan:

Pakistan's economy is at a conjunctures moment in its history. Deep rooted problems in the structure of the economy and in the institutions of governance have slowed down economic growth, and created the dangers of an intensified financial crisis, high rates of inflation, unemployment and food shortages. At the same time, the changing balance of global economic power and the emergence of new economic growth centers in a number of Asian countries around Pakistan have opened up unprecedented prospects of shifting Pakistan into a new trajectory of economic growth, provided Pakistan takes the necessary policy initiatives for plugging into the emerging economic power houses of China, Japan, the East Asian countries and South Asia.

It is one of the uncontroversial debates that economic growth and development objectives can not be achieved without improving skills, energies and potentials of the people. It matters a lot in development process that the people of a country young or old, living alone or in extended families, how do population changes? Will the population be productive in future or not? It can be said that objectives of the development of any country are in the hands of its people.

The direction in which Pakistan's economy moves at this crossroads depends upon the speed with which changes are brought about in the policy environment and in the institutional structure of both agriculture and industry for responding to the opportunities available in the emerging economies of Asia.

Agricultural growth in the past relied on increasing cultivable land and extending the irrigation system while new policies include that agricultural growth will have to be based on increasing the efficiency of land use and of irrigation, both of which will require the establishment of new institutions at the village level to improve agricultural practices, and application efficiency of irrigation.

The policy makers face the challenge of inducing and facilitating the building of new institutions for pulling the economy out of its current crisis that threatens both state and society in Pakistan.

ANSWER: Part 'C' of Question 2

Increasing the happiness of the population of the country:

It is suggested that increasing the happiness of the population of the country should replace the other four aims of the country. But the question is how it is possible? And what are difficulties which government has to encounter? Raising the incomes of all does not increase the happiness of all, because the positive effect of higher income on subjective well-being is offset by the negative effect of higher living level norms brought about by the growth in incomes generally.

There is need to develop international cross- sections of the happiness-income relationship that are free of cultural biases. In all of this work, attention should be given to possible causal factors additional to the level of real per capital income, the focus of the present study. Clearly, major political events (war, political turmoil, revolution) may influence happiness in negative way.

Government might have to face objections from other political parties. Some extremist who don't want happiness in country might create problems against that policies.