Conflict or Trade-Off in Policy Objectives

The five policy objectives discussed Previously are not always complementary to one another but rather, they conflict. If a government tries to fulfil one 
objective, some other moves away. It has to sacrifice one objective in order to 
attain the other. It is, therefore, not possible to fulfil all these policy objectives 
simultaneously. The different policy objectives are:
 Full Employment and Economic Growth
The majority of economic hold the view that there is no inherent conflict
between full employment and economic growth. Full employment is consistent 
with 4 percent unemployment in the economy, so the relationship between full 
employment and growth. Period of high growth are associated with low level of 
unemployment and period of low growth with rising unemployment.
 Economic Growth and Price Stability
There is conflict between the goals of economic growth and prices stability.
The rise in prices is inherent in the growth process. The demand for goods and 
services rises as a result of steeping up of investment on a large scale and 
consequent increase in incomes, this leads to inflationary rise in prices 
especially when the level of full employment is reached. In the long run, where 
new resources are developed and growth leads to the production of more 
commodities, the inflationary rise in prices will be checked. But the rise in prise 
will be there with the growth of the economy and it will be moderate and 
 Full Employment and Price Stability
One of the objectives of macroeconomics policy in the 1950s was to have full
employment with price stability. But the studies of Philips, Samuelsson, Solow 
and others in the 1960s established a conflict between the two objectives. These 
finding are explained in term of Philip curve. They suggest that full 
employment can be attain by having more inflation and that price stability can 
be achieved by having unemployment to the extent of 5 to 6 per cent.
 Full Employment and Balance of Payment
There is a major policy conflict between full employment and balance of
payment. Full employment is always related to balance of payment deficit. In 
fact, the problem is one of maintaining either internal balance or external 
balance. If there is a balance of payment deficit, then a policy of reducing 
expenditure will reduced import but it will lead to unemployment in the 
country. If the government raises aggregate expenditure in other to increase 
employment, it will increase the demand for imports thereby creating 
disequilibrium in the balance of payments. It is only when the government 
adopts expenditure –switching policies such as devaluation that this conflict can 
be avoided but that too temporarily
 Price Stability and Balance of Payments.
There appears to be no conflict between the objectives of price stability and 
balance of payment in a country. Fiscal and monetary policies aim at
controlling inflation to discourage imports and encourage exports and thus they
help in attain balance of payment equilibrium. However, if the government tries 
to remove unemployment and allow some inflation within the economy, there 
will discourage exports and encourage imports, thereby leading to 
disequilibrium in the balance of payment. But this may not happen if prices also 
rise by the same rate in other countries of the world.
Self Assessment Exercise
i. Enumerate and explain macroeconomic policy objectives
ii. Why is achievement of price stability seldom lead to unemployment?
iii. Examine the relationship between price stability and balance of payment
This unit explores the macroeconomics situation and reflect on the policy frame
work, policy objectives, and targets and conclude that for macroeconomic 
stability, application of both fiscal and monetary policy is the panacea.
5.0 Summary
The unit survey macroeconomic environment which necessitates discussion on
macroeconomics policy framework - policy objectives, instrument, targets and 
strategies. We equally examined the trade off that existed among macroeconomic 
policy objectives because achieving the five goals simultaneously is not 
economically possible considering the policy instruments at the disposal of 
economic manager. The students were made to know that policy is applied in an 
economic discretionally –having to do with the current situation which could be 
expansionary or contractionary.
6.0 Tutor-Marked Assignment
i) What are macroeconomic policy objectives?
ii) Discuss conflicts that exist among various macroeconomic objectives.
iii) Distinguish among macroeconomic policy objectives, instruments and targets 
iv) Write short note on the following;
a. Direct monetary policy instruments 
b. Indirect monetary policy instruments
c. Contractionary fiscal policy
d. Contractionary monetary policy 
e. Expansionary policy
v) Proffer policy recommendation(s) for an economy with chronic inflation and 
adverse balance of payment problems.

Post a Comment