Government Macroeconomic Intervention: Conflicts Between Aims

Governments around the world frequently intervene in the economy to try and achieve specific macroeconomic goals. However, these goals are not always mutually supportive, and governments often face difficult trade-offs when trying to achieve multiple objectives simultaneously. This section will explore the potential conflicts between two key macroeconomic aims: full employment and balance of payments stability.

Full Employment vs. Balance of Payments

Full Employment: This refers to a situation where the maximum number of people who want to work are able to find jobs. A key indicator is a low unemployment rate. Governments often aim for full employment because it leads to higher incomes, increased consumer spending, and reduced social problems associated with unemployment.

Balance of Payments (BoP): The BoP is a record of all economic transactions between a country and the rest of the world over a period of time. It consists of two main parts: the current account and the capital account. The current account includes trade in goods and services, income from investments, and current transfers. A current account deficit means a country is importing more goods and services than it is exporting. A current account surplus means the opposite. A capital account surplus means more money is flowing into the country than out (e.g., foreign investment). A capital account deficit means more money is flowing out.

The conflict arises because policies designed to promote full employment can sometimes worsen a country's balance of payments, and vice versa.

Policies to Achieve Full Employment and Their Impact on the Balance of Payments

Governments can use various policies to try and achieve full employment. However, these policies often have unintended consequences for the balance of payments.

• Expansionary Fiscal Policy: This involves increasing government spending or cutting taxes. This boosts aggregate demand, leading to increased output and lower unemployment. However, it can also lead to a current account deficit if the increased demand is met by imports.

  Example: Increased government spending on infrastructure projects.

• Expansionary Monetary Policy: This involves lowering interest rates or increasing the money supply. This encourages borrowing and investment, leading to increased output and lower unemployment. However, it can also lead to a current account deficit if lower interest rates encourage imports.

  Example: Lowering the bank rate.

Policies to Achieve Balance of Payments Stability and Their Impact on Employment

Governments can also use policies to improve the balance of payments. However, these policies can sometimes lead to higher unemployment.

• Restrictive Fiscal Policy: This involves decreasing government spending or raising taxes. This reduces aggregate demand, which can help to improve the current account by reducing imports. However, it can also lead to higher unemployment.

  Example: Cutting government spending on public services.

• Restrictive Monetary Policy: This involves raising interest rates or decreasing the money supply. This discourages borrowing and investment, which can help to improve the current account by reducing imports. However, it can also lead to lower economic growth and higher unemployment.

  Example: Raising the bank rate.

• Devaluation of the Currency: This makes a country's exports cheaper and imports more expensive. This can improve the current account by increasing exports and decreasing imports. However, it can also lead to inflation.

  Example: The Bank of England deliberately weakening the pound sterling.

Table Summarizing the Conflicts

Conclusion

Governments face a constant challenge in balancing the often conflicting goals of full employment and balance of payments stability. There is no easy solution, and the optimal policy choice often involves making difficult trade-offs. The specific circumstances of a country, including its economic structure and global economic environment, will influence the most appropriate policy response. Understanding these conflicts is crucial for analyzing macroeconomic policy decisions.