Why are the Economic Objectives Difficult to Achieve?

Why are the economic objectives difficult to achieve?

The Government has four basic economic objectives. They are: Low Inflation (price stability) Full Employment High Economic Growth, and External Stability and two other issues that relate to economic policy and these 4 basic objectives. They are: Environmental sustainability The Distribution of Income and Wealth.
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Why are the economic objectives difficult to achieve?

While these are the objectives, it is very difficult to achieve all of these objectives at the same time. This is because policies to achieve some objectives may worsen others. Some of the conflicting objectives include:

Inflation V Full employment

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Inflation V Full Employment

In the short run there 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

40

I N F L A T I O N

35 30

25
20 15

10
5 0

1983
5 10 15

-5 0
-10

2011

Unemployment Rate %
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The Phillips Curve

In the long run, the Phillips Curve becomes a vertical line. This is the natural rate of unemployment or the NAIRU. Any increase in demand that will reduce unemployment temporarily, will increase inflation and eventually lead to job losses and

Long run PC I N F L A T I O N
40 35 30 25 20 15 10 5 0 -5 0 -10 -15

1983
5 10 15

2011

Unemployment Rate %
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The Phillips Curve

The NAIRU can change as a result of changes in : inflationary expectations the supply of labour and the participation rate the skill level and mobility of labour the demand for labour An increase in the NAIRU will shift the long run and short run phillips curves to the right. A decrease in the NAIRU will shift the curve left.

Long run PC1 PC2 I N F L A T I O N

40 35 30 25 20 15 10 5 0 -5 0 -10 5 10 15

Year 2
Year 1

Unemployment Rate %
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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 increase demand. The increase in spending may lead to increased inflation and increased demand for imported goods, which will worsen 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, some policies to increase productivity, eg new technology and downsizing of firms, may increase unemployment.

Why are the economic objectives difficult to achieve?

Economic Growth and income and wealth inequality:
While economic growth may bring improved standards of living for all, it tends to favour resource owners and the highly skilled workers. Workers may be sacked to cut costs. Income inequality often increases.

Why are the economic objectives difficult to achieve?

Economic Growth and the Environment: The quest for greater profits may create pollution and waste of resources. Higher economic growth rates require more resources.
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Why are the economic objectives difficult to achieve?

Time Lags :There are a number of lags in implementing economic policy and its effectiveness. The inside or administration lags involve gathering the information on the state of the economy, making decisions based on the information and implementing the policy decisions.

When will my policies work?

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Why are the economic objectives difficult to achieve?

The outside lags involve the initial change in autonomous expenditure, the subsequent rounds of induced spending changes and finally the price adjustment lag, as businesses set new prices. The duration of the time lags in the Australian economy are up to 18 months. In this time the economic circumstances can change greatly, so policies can be wrong, 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 policies to make them popular rather than long run growth policies. High Court decisions can also impact on investment in
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Why are the economic objectives difficult to achieve?

The World Economy The state of the world economy has a major impact on the Australian economy. World interest rates, world prices for commodities, the state of the US and Asian economies all influence the Australian economy. If demand in the USA falls this has a flow - on effect to most economies in the world.
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What can the Government do to achieve its economic objectives?

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What can the Government do to achieve its economic objectives?

The economy is not simple. There are five sectors operating for different reasons with different goals. The economy is always moving towards new equilibriums, as withdrawals and injections change. It is not easy to get the right balance of objectives. Some economists argue that the government should not even try, but rather to let the free market sort it out. But at what price???
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What can the Government do to achieve its economic objectives?

The government has six main economic policies that they can use to try to achieve these objectives. They are: Fiscal Policy (The Budget) Monetary Policy (Interest Rates) Prices and Incomes Policy (Wage policies) Trade policy Labour Market Policies Microeconomic Reform (Structural Change Policies)
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