Economic growth is the increase in goods & Services produced by
an economy or nation, considered for a specific period of time.
The rise in the country’s output of goods and services is steady and
constant and may be caused by an improvement in the quality of
education, improvements in technology or in any way if there is a
value addition in goods and services which is produced by every
sector of the economy.
It can be measured as a percentage increase in real gross domestic
product. Where a gross domestic product (GDP) is adjusted by
inflation. GDP is the market value of final goods & services which is
produced in an economy or nation.
Economic Development is the process focusing on both
qualitative and quantitative growth of the economy. It
measures all the aspects which include people in a country become
wealthier, healthier, better educated, and have greater access to
good quality housing. Economic Development can create more
opportunities in the sectors of education, healthcare, employment
and the conservation of the environment. It indicates an increase in
the per capita income of every citizen. The standard of living
includes various things like safe drinking water, improve sanitation
systems, medical facilities, the spread of primary education to
improve literacy rate, eradication of poverty, balanced transport
networks, increase in employment opportunities etc. Quality of
living standard is the major indicator of economic development.
Therefore, an increase in economic development is more necessary
for an economy to achieve the status of a Developed Nation.
It can be measured by the Human Development Index, which
considers the literacy rates & life expectancy which affect
productivity and could lead to Economic Growth.
Both Economic Growth vs Economic Development are popular
choices in the market; let us discuss some of the major Difference
Between Economic Growth and Economic Development:
Economic Growth is the increase in the real output of the country
in a particular span of time. Whereas, Economic Development is
the increase in the level of production in an economy along
enrichment of living standards and the advancement of
technology.
Economic growth does not consider the Income from the Informal
Economy. The Informal economy is unrecorded economic activity.
Whereas, Economic Development takes consideration of all
activities, whether formal or informal and eases people with low
standards of living a suitable shelter and with proper employment.
Economic Growth does not reflect the depletion of natural
resources. Depletion of resources such as pollution, congestion &
disease. Governments are under pressure due to the
environmental issues, majorly the problem is due to Global
warming. However, Economic Development is concerned with
Sustainability, which means meeting the needs of the present
without compromising.
Economic growth is the subset of economic development.
Economic growth indicates the expansion of the Gross Domestic
Product (GDP) of the country and the concept of Economic Growth
is basically related to the developed countries. Economic
Development is a broader concept than the Economic Growth.
Economic Development refers to the increase of the Real National
Income of the economic and socio-economic structure of any
country over a long period of time. Economic Development is
related to underdeveloped or developing countries of the world.
Unlike economic development, Economic growth is an automatic
process. Meanwhile, economic development is the outcome of
planned and result-oriented activities.
Economic Growth refers to the rise in the value of all the products
produced in the economy. It indicates the yearly increase in the
country’s GDP or GNP, in percentage terms. It alludes to a
considerable rise in the per-capita national product, over a period,
i.e. the growth rate of increase in total output should be greater
than the population growth rate.
Economic growth is necessary but not enough to achieve
economic development.
They both Economic Growth vs Economic Development have
different indicators for their measurement. Economic Growth can
be measured through an increase in the GDP, per capita income,
etc. However, Economic Development can be measured through
Improvement in the life expectancy rate, infant mortality rate,
literacy rate, and poverty rates.

In summary
 Economic growth means an increase in real national income /
national output.
 Economic development means an improvement in the quality of
life and living standards, e.g. measures of literacy, life-
expectancy and health care.
 Ceteris paribus, we would expect economic growth to enable
more economic development. Higher real GDP enables more to
be spent on health care and education.
 However, the link is not guaranteed. The proceeds of economic
growth could be wasted or retained by a small wealthy elite. 
Economic growth measures an increase in Real GDP (real
output). GDP is a measure of the national income / national
output and national expenditure. It basically measures the total
volume of goods and services produced in an economy.
Economic development
Development looks at a wider range of statistics than just GDP 
per capita. Development is concerned with how people are
actually affected. It looks at their actual living standards and the 
freedom they have to enjoy a good standard of living.
Measures of economic development will look at:
 Real income per head – GDP per capita
 Levels of literacy and education standards
 Levels of healthcare e.g. number of doctors per 1000 population
 Quality and availability of housing
 Levels of environmental standards
 Life expectancy.
Measures of economic development
Measuring economic development is not as precise as
measuring GDP because it depends on what factors are included
in the measure.
There are several different measures of economic development,
such as the Human development index (HDI)
Factors affecting economic growth in
developing countries
Levels of infrastructure – e.g. transport and communication
 Levels of corruption, e.g what percentage of tax rates are
actually collected and spent on public services.
 Educational standards and labour productivity. Basic levels of
literacy and education can determine the productivity of the
workforce.
 Levels of inward investment. For example, China has invested in
many African countries to help export raw materials, that its
economy needs.
Labour mobility. Is labour able to move from relatively
unproductive agriculture to more productive manufacturing?
The flow of foreign aid and investment. Targeted aid, can help
improve infrastructure and living standards.
 Level of savings and investment. Higher savings can fund more
investment, helping economic growth.
Economic growth without development
It is possible to have economic growth without development
. i.e. an increase in GDP, but most people don’t see any actual
improvements in living standards.
1. Economic growth may only benefit a small % of the population.
For example, if a country produces more oil, it will see an
increase in GDP. However, it is possible, that this oil is only
owned by one firm, and therefore, the average worker doesn’t
really benefit.
2. Corruption. A country may see higher GDP, but the benefits of
growth may be syphoned into the bank accounts of politicians
3. Environmental problems. Producing toxic chemicals will lead to
an increase in real GDP. However, without proper regulation, it
can also lead to environmental and health problems. This is an
example of where growth leads to a decline in living standards
for many.
4. Congestion. Economic growth can cause an increase in
congestion. This means people will spend longer in traffic jams.
GDP may increase but they have lower living standards because
they spend more time in traffic jams.
5. Production not consumed. If a state-owned industry increases
output, this is reflected in an increase in GDP. However, if the
output is not used by anyone then it causes no actual increase in
living standards.
6. Military spending. A country may increase GDP by spending
more on military goods. However, if this is at the expense of
health care and education it can lead to lower living standards.
Growth refers to the increase in size and number whereas development
refers to an improvement of circumstances. This is the main
difference between growth and development.
What Does Growth Mean
Growth typically refers to an increase in size or number. This increase
is often measurable. For example, a tree can grow. Its growth can be
measured from its height. Similarly, an organization can also grow
by adding more staff or other organizations to it. Profit of a company
can also grow. For more examples, look at the following sentences.
Everyone was amazed at the growth of the company.
Jake had a growth spurt when he was 15 years old – he grew taller than
all his older brothers.
The growth of the plants and trees are affected by the weather.
There is a 16% growth in this year’s profits.
He looked like a ruffian, with several day’s growth of beard.
The fertility of the land and rainfall affect the growth of the crops.
The finance minister refused to comment on the economic growth of the
country.
Development mainly refers to progress and improvement. It often
encompasses a growth as well as an improvement of circumstances.
Development is a qualitative measure. Thus, when something develops,
the quality of that thing also improves. If a tree develops, its changes
will not only be the size – it will stay healthy, bear fruits and continue
growing. The same applies to a child or a company. Thus, development
refers to the overall changes and the progressive changes of a thing.
The following examples will help you to understand the meaning of this
noun more clearly.
A balanced diet and exercise are imperative for the development of
muscles.
The president was very interested in the economic development of the
country.
The illustrations in the book show the development of a baby inside a
mother’s womb.
Personal development is the primary aim of education, not wealth or
status.
Brain drain is the greatest obstacle to the development of the country.
The economic development of this company astonished many financial
analysts.
The development of a child’s mind is fascinating to observe.
Difference Between Growth and
Development
Meaning
Growth: Growth refers to the increase in size and number.
Development: Development refers to an improvement in
circumstances.
Measure
Growth: Growth has a quantitative measure.
Development: Development has a qualitative measure.
Interrelation
Growth: Growth basically refers to the increase in size and number.
Development: Development encompasses overall changes including
growth and other progressive changes.
Basic Problems Of An Economy
If there is a central economic problem that is present
across all countries, without any exception, then it is
the problem of scarcity. This problem arises because
the resources of all types are limited and have
alternative uses. If the resources were unlimited or if
a resource only had one single use, then the
economic problem would probably not arise.
However, be it natural productive resources or man-
made capital/consumer goods or money or time,
scarcity of resources is the central problem. This
central problem gives rise to four basic problems of
an economy. In this article, we will look at these
basic problems in detail.
The Four Basic Problems of an Economy
As discussed in the paragraph above, the central
economic problem of scarcity of resources is broken
down into four basic problems of an economy. Let’s
look at each of them separately.
Basic Problems of an Economy – #1 – What to
Produce?
What does a society do when the resources are
limited? It decides which goods/service it wants to
produce. Further, it also determines the quantity
required. For example, should we produce more guns
or more butter? Do we opt for capital goods like
machines, equipment, etc. or consumer goods like
cell phones, etc.? While it sounds elementary, society
must decide the type and quantity of every single
good/service to be produced.
Basic Problems of an Economy – #2 – How to
Produce?
The production of a good is possible by various
methods. For example, you can produce cotton cloth
using handlooms, power looms or automatic looms.
While handlooms require more labour, automatic
looms need higher power and capital investment.
Hence, society must choose between the techniques
to produce the commodity. Similarly, for all goods
and/or services, similar decisions are necessary.
Further, the choice depends on the availability of
different factors of production and their prices.
Usually, a society opts for a technique that optimally
utilizes its available resources.
Basic Problems of an Economy – #3 – For whom to
Produce?
Think about it – can a society satisfy each and
every human wants? Certainly not. Therefore, it has
to decide on who gets what share of the total output
of goods and services produced. In other words,
society decides on the distribution of the goods and
services among the members of society.
Basic Problems of an Economy – #4 – What provision
should be made for economic growth?
Can a society use all its resources for current
consumption? Yes, it can. However, it is not likely to
do so. The reason is simple. If a society uses all its
resources for current consumption, then its
production capacity would never increase.
Therefore, the standard of living and the income of a
member of the society will remain constant.
Subsequently, in the future, the standard of living
will decline. Hence, society must decide on the part
of the resources that it wants to save for future
progress.
The Basic Problem - Scarcity
Scarcity, or limited resources, is one of the most basic economic problems we
face. We run into scarcity because while resources are limited, we are a society
with unlimited wants. Therefore, we have to choose. We have to make trade-offs.
We have to efficiently allocate resources. We have to do those things because
resources are limited and cannot meet our own unlimited demands.
Without scarcity, the science of economics would not exist. Economics is the
study of production, distribution, and consumption of goods and services. If
society did not have to make choices about what to produce, distribute, and
consume, the study of those actions would be relatively boring. Society would
produce, distribute, and consume an infinite amount of everything to satisfy the
unlimited wants and needs of humans. Everyone would get everything they
wanted, and it would all be free. But we all know that is not the case. The
decisions and trade-offs society makes due to scarcity is what economists study.
Why are certain decisions made and what is the next best alternative that was
forgone?
Each country has its own issues associated with
various factors that halt its development and
growth.
Hence, countries tend to keep certain goals and
target to achieve a particular level of growth within
a year. Such goals are referred to as
Macroeconomics objectives. Following are the
economic goals of a country in general;
1. Economic Growth
Economic growth refers to general increase in real
output. Every country utilizes its scarce resource
effectively and efficiently to produce maximum
goods and services in order to fulfill the needs of its
masses. It is the upmost priority of every country to
produce goods and services of such nature which
meets the standards of quality.
Additionally, It is the biggest challenge for every
country to fulfill the needs of its growing population to the situation when there is no
and then also export its products to the rest of the
world.
Real growth means the increase in the production of
goods and services which is only possible when
existing resources are being allocated efficiently.
Those countries which could not achieve the
economic growth are because of two factors.
1. The resources might be used inefficiently, or
2. Factors of production might be lying unemployed.
3. The factor which promotes economic growth
includes the following;
4. Improvement in technology
5. Increase in natural resources
6. Increase in the labor force
7. Increase in human capital
The following graph shows the growth. When the
available resources are utilized wisely than the
output of machines increases as a result of which
the combination for goods and services (P, Q, and
R) on production possibility frontier (PPF) is shifted
towards the right (from PPF1 to PPF2) without any
opportunity cost which shows growth.
2. Full Employment:
Full employment does not mean that no one is
jobless in a country; rather full employment refers
voluntary unemployment in the country. There is
 always a certain level of unemployment in the
country due to economic instabilities and
imperfections. Such level of unemployment is called
the natural rate of unemployment. But the
government tries its best to reduce the level of
unemployment in a country as much as it can. It is
one of the most important responsibilities of the
government of a country to create job opportunities
for its people.
Read:
 Unemployment rate
 Types of unemployment
3. Price Stability or Controlling
Inflation:
Inflation means a general increase in price level.
Increase in price level results in an unequal and
unfavorable distribution of wealth in an economy.
Due to inflation the growth rate also decreases. It
reduces purchasing power and it also causes a
deficit in the balance of payment which effects the
international repute of the country. Therefore, the
government of a country takes a serious and
effective step to overcome inflation and to keep the
prices of commodities stable.
4. The balance of payment:
A balance of payment is the statistical record of
economic transactions with the rest of the world.
Economic transactions refer to international trade
that includes the import and export of goods and
services. Where imports increase the exports the
balance of payment becomes unfavorable. If the
value of imports is greater than the value of exports,
then the balance of payment is in deficit. On
contrary, if the value of export is greater than the
value of imports than the balance of payment is in
surplus. A balance of payment deficit in
disadvantageous to the country. It affects the
credibility, repute, and ranking of the country. In
order to keep the balance of payment favorable, the
government imposed duties on imports and
provides subsidies on exports.
5. Economic Security:
Economic security refers to a feeling of freedom and
safety. The people of a country feel themselves safe
no matter wherever they are in their homeland. It is
the responsibility of the government of a country to
provide security of life and belongings of their
people. That is why government establishes defense
including police for the protection and security of
the natives.
6. Economic Freedom:
Economic freedom is a freedom for people to make
choice and decisions without any kind of external
pressures. People are free to buy, sell and own.
People are free to own property and make profits
from them. People have the freedom to do business
and expand or contract it. Economics freedom is
provided to people to promote economic activities
in an economy to make economic condition better
day by day.
7. Economic Efficiency:
Efficiency is measured with respect to a time frame.
One is efficient if he does maximum work in less
time. Economic efficiency is the best utilization and
allocation of available resources. An economy is
economically efficient when there is maximum
benefits are available for the people. Economic
efficiency is achieved when available resources are
used wisely in such a way maximum goods and
services are being produced. An economically
efficient country is more favorable internationally.
Other countries rely on such country’s quality
productions and services.
8. Economic Equity:
Economic equity is one of the economic goals of a
country to treat everyone equally and fairly and do
justice. It is the duty of government to keep balance
and equity among different classes of society. The
government should form and establish such
economic policies which help them in minimizing
the class discrimination in the society. The country
with less discrimination flourishes with better
speed. In order to achieve the goal of economic
equity there should be fair and just distribution of
income. The wealth should be accumulated or
concentrated in certain hands. Every sector of an
economy must be audited on regular basis so that
cash flows could be regulated. Economic equity is
very integral part because it helps the business
chains to keep functioning smoothly.
9. Economic Stability:
Every country is required to pay maximum attention
towards keeping the prices of goods and services
stable. The government should formulate such
policies which prevent price fluctuations and they
the markets in balance and consistency. Economic
stability also includes full employment level in the
country, which no one is jobless unless he himself
does not want to be employed. An economically
stable country is the one which is heading towards
growth and prosperity, slowly and steadily.
1. 3. Economic Freedom • This goal is about the amount of choice
people have in where they work and live, the type of career they
have, what they do with their income and what they buy or sell.
Economic freedom is restricted in some cases to protect the rights
of others, for example there are laws prohibiting the production,
sale and purchase of illegal drugs.
2. 4. Economic Equity • This goal centers on fairness. People's
beliefs around what is right or wrong determine how this goal is
achieved. • Issues that involve Economic Equity certainly deal with
redistribution of income.
3. 5. Economic Efficiency • An economic principle holding that
businesses and individuals should fulfill as many of society’s
needs as possible while maximizing the provided resources. •
When a society achieves economic efficiency, goods and services
 are produced without a lot of waste and those goods and services
are what the consumers want and or need the most.
4. 6. Economic Security • Keeping people safe from economic risk is
the basis of this goal. United States Government programs such
as welfare, Social Security and food stamps are all examples of
ways America tries to achieve this goal. Producers and consumers
desire to be protected from risks over which they have little or no
control such as illness, bank failures and man-made or natural
disasters.
5. 7. Economic Stability • This goal involves three aspects: sustained
growth without large swings in output or consumption; stable rate
of employment; and a stable level of prices without dramatic
inflation or deflation. Most nations with economic freedom allow for
some unemployment and inflation.
6. 8. Economic Growth • Economic growth is the sustained increase
in the production of goods and services. It is measured by Gross
Domestic Product (the total value of all final goods and services
produced in a nation in a year). A nation's standard of living can
only improve if GDP increases. To achieve economic growth a
country must invest in education, technology and capital goods.
This goal is closely related to a country's long term ability to use
resources to achieve the other goals.
The Basic Economic Problem The existence of scarcity creates the basic
economic problem faced by every society, rich or poor: how to make the best
use of limited productive resources to satisfy human needs and wants. To
solve this basic problem, every society must answer these three basic
questions: 1. What goods and services will be produced? For example, an
economy must decide whether they should produce kitchen appliances or
weapons, build and fix roads or buy textbooks for schools. 2. How will goods
and services be produced? For example, should we use copper or plastic to
make pipes? Should machines be used to make clothing or should workers
make it by hand? Should the power plant be built close to the ocean or
inland? Which fertilizer is best for growing strawberries? There are millions of
decisions that need to be made to figure out how to produce goods and
services. 3. Who will consume the goods and services? Once the goods and
services are produced, who will get to consume them? Will people consume
them on a first-come, first-served basis? Should goods be allocated or given
out by height, weight, religion, age, gender race, looks, strength, health or
wealth? How should the goods and services be distributed among the
people? Economic Goals and Societal Values Societies or communities
answer the economic questions in different ways. Societies look at economic
goals and make decisions based on what is most valued. Some economic
goals that are considered are: 2 Economic Efficiency Making the most of
resources without waste is an economic goal. Economic Freedom Being able
to make choices about which goods and services to produce and distribute
without government interference or intervention is an economic goal. This
freedom allows entrepreneurs to take risks and make choices to start various
businesses. Economic security Knowing that goods and services will be
available when needed. Having a safety net that protects individuals in a time
of economic disaster. Economic Equity A fair distribution of wealth. Economic
Growth and innovation Using new ideas and ways of creating goods and
services leads to growth and a higher standard of living or way of life for all.
Economic Systems An economic system is the method used by a society to
produce and distribute goods and services. Several fundamental types of
economic systems exist to answer the three questions of what, how, and for
whom to produce: traditional, command, market, and mixed. Traditional
Economies: In a traditional economy, economic decisions are based on
custom and historical precedent. For example, in tribal cultures or in cultures
characterized by a caste system, people in particular social strata or holding
certain positions often perform the same type of work as their parents and
grandparents, regardless of ability or potential. Command Economies: In a
command economy, governmental planning groups make the basic economic
decisions. They determine such things as which goods and services to
produce, their prices, and wage rates. Cuba and North Korea are examples of
command economies. 3 Market Economies: In a market economy, economic
decisions are guided by the changes in prices that occur as individual buyers
and sellers interact in the market place. As such, this type of economy is
often referred to as a price system. Other names for the market system are
free enterprise, capitalism, and laissez-faire. The economies of the United
States, Singapore, and Japan are identified as market economies since prices
play a significant role in guiding economic activity. Mixed Economies: There
are no pure command or market economies. To some degree, all modern
economies exhibit characteristics of both systems and are, therefore, often
referred to as mixed economies. For example, in the United States the
government makes many important economic decisions, even though the
price system is still predominant. Even in strict command economies, private
individuals frequently engage in market activities, particularly in small towns
and villages. The key point to remember is that every individual and every
society must contend with the problem of scarcity. Every society, regardless
of its political structure, must develop an economic system to determine how
to use its limited productive resources to answer the three basic economic
questions of what, how, and for whom to produce.
Macroeconomic goals are three of the five economic goals of
a mixed economy that are most important to the study
of macroeconomics. They are full employment, stability,
and economic growth.
Full Employment
Full employment is achieved when all
available resources (labor, capital, land, and entrepreneurship) are
used to produce goods and services. This goal is commonly
indicated by the employment of labor resources (measured by
the unemployment rate). However, all resources in the economy--
labor, capital, land, and entrepreneurship--are important to this
goal. The economy benefits from full employment because
resources produce the goods that satisfy the wants and needs that
lessens the scarcity problem. If the resources are not employed,
then they are not producing and satisfaction is not achieved.
Stability
Stability is achieved by avoiding or limiting fluctuations
in production, employment, and prices. Stability seeks to avoid
the recessionary declines and inflationary expansions of business
cycles. This goal is indicated by month-to-month and year-to-year
changes in various economic measures, such as the inflation rate,
the unemployment rate, and the growth rate of production. If these
remain unchanged, then stability is at hand. Maintaining stability is
beneficial because it means uncertainty and disruptions in the
economy are avoided. It means consumers and businesses can
safely pursue long-term consumption and production plans. Policies
makers are usually most concerned with price stability and the
inflation rate.
Economic Growth
Economic growth is achieved by increasing the economy's ability to
produce goods and services. This goal is best indicated by
measuring the growth rate of production. If the economy produces
more goods this year than last, then it is growing. Economic growth
is also indicated by increases in the quantities of the resources--
labor, capital, land, and entrepreneurship--used to produce goods.
With economic growth, society gets more goods that can be used to
satisfy more wants and needs--people are better off; living
standards rise; and scarcity is less of a problem.
Tradeoffs
The three macroeconomic goals of full employment, stability, and
economic growth are widely considered to be beneficial and worth
pursuing. Each goal, achieved by itself, improves the overall well-
being of society. Greater employment is typically better than less.
Stable prices are better than inflation. Economic growth is better
than stagnation.
However, the pursuit of one goal often restricts attainment of
others. For example, policies that promote economic growth might
create unemployment or policies that improve stability might limit
economic growth. Macroeconomic goals are also often in conflict
with the microeconomic goals of efficiency and equity.
Consider a few hypothetical situations, depicted by the hypothetical
Republic of Northwest Queoldiolia, in which the pursuit of one goal
limits achieving another goal.
 Full Employment and Stability: The Central Bank of
Northwest Queoldiolia seeks to promote lower rates of
unemployment through expansionary monetary policy. The
economy expands, unemployment falls, and full employment
is achieved, but inflation emerges from the over stimulated
economy.
1. Maintain positive economic growth (e.g. target growth of around 2.5% which
 Economic Growth and Full Employment: Seeking to keep
2.
pace with economic growth in neighboring Southeast
3.
Queoldiolia, the President of Northwest Queoldiolia enacts an
4.
intense program of scientific research and development. The
program bears ample fruit, creating scores of new
technological innovations that lead to high rates of economic
5.
growth, but implementation of the innovations disrupts the 6.
economy throwing millions of people who lack the necessary
skills or training needed by the new technologies out of work.
Policies and Politics  Reduce inequality
 protect environment
The pursuit of these three macroeconomic goals is inherently an act
of normative economics. In fact, the "norm" part of term normative
economics is synonymous with the word "goal." Normative
economics is essential to the pursuit of economic goals.
In a mixed economy, the pursuit of these goals is largely directed
by governments. This, of course, brings into play the wonderful
world of politics and never-ending debates over which of these three
macroeconomic goals is most worth pursuing with economic
policies.
As the discussion turns to politics and policies, two viewpoints tend
to emerge--liberal and conservative. Generalities are, of course,
fraught with exceptions. However, with that caution in mind, note
that each of the two political views have historically placed greater
emphasis on the attainment of some goals over others.
Liberals have tended to seek full employment over stability and
economic growth. Conservatives, in contrast, have sought economic
growth and stability, especially price stability, more so than full
employment.
Main Macro Economic Objectives
is UK’s long run trend rate)
Maintain low inflation (UK’s target is CPI 2% +/-1)
Maintain full employment
Maintain satisfactory balance of payments (e.g. limit deficit on current
account balance of payment)
Maintain stable exchange rate
Keep government borrowing low.
Other possible targets
In the post war period, I think it was fair to say, the primary goal was
full employment. From the backdrop of the Great Depression, policy
makers wished to avoid the blight of very high unemployment levels.
Broadly speaking, western governments used demand side policies to
try to attain full employment, even if this led to higher inflation.
Between 1940 and the mid 1970s, governments were generally
successful in keeping inflation low.
Unemployment v Inflation 1949-2010

 Targeting low inflation
 Keynesian vs Monetarist Theories
% annual change in growth and inflation
In the 1970s, cost push inflation factors, made it harder to keep
unemployment low without causing high rates of inflation. The old
Phillips curve trade-offs seemed to be giving a worse trade-off.
In the early 80s, both UK and US government’s gave greater
importance to inflation. In fact the UK tried to keep inflation low
through targeting the Money Supply. By seeking to control money
supply and inflation, unemployment rose to 3 million. Many
economists criticised the excess importance of controlling inflation,
when unemployment was so high.
In 1990, the UK temporarily joined the ERM and sought to target the
exchange rate as a way of controlling inflation. This was seen as a
failure as the UK was forced to ignominiously withdraw. It was after
1992, that the UK government set a direct inflation target. In 1997, the
Bank of England was given independence to set interest rates and target
the inflation rate of 2%.
However, bear in mind, the Bank of England’s remit isn’t just about
inflation. They also have to consider wider macroeconomic objectives
such as growth. Hence why they cut interest rates even with inflation of
5%
Macroeconomic policy[edit]
Macroeconomic policy is usually implemented through two sets of
tools: fiscal and monetary policy. Both forms of policy are used
to stabilize the economy, which can mean boosting the economy to the
level of GDP consistent with full employment.[23] Macroeconomic policy
focuses on limiting the effects of the business cycle to achieve the
economic goals of price stability, full employment, and growth.[24]
Monetary policy[edit]
Further information: Monetary policy
Central banks implement monetary policy by controlling the money
supply through several mechanisms. Typically, central banks take
action by issuing money to buy bonds (or other assets), which boosts
the supply of money and lowers interest rates, or, in the case of
contractionary monetary policy, banks sell bonds and take money out
of circulation. Usually policy is not implemented by directly targeting the
supply of money.
Central banks continuously shift the money supply to maintain a
targeted fixed interest rate. Some of them allow the interest rate to
fluctuate and focus on targeting inflation rates instead. Central banks
generally try to achieve high output without letting loose monetary
policy that create large amounts of inflation.
Conventional monetary policy can be ineffective in situations such as
a liquidity trap. When interest rates and inflation are near zero, the
central bank cannot loosen monetary policy through conventional
means.
An example of intervention strategy under different conditions
Central banks can use unconventional monetary policy such
as quantitative easing to help increase output. Instead of buying
government bonds, central banks can implement quantitative easing by
buying not only government bonds, but also other assets such as
corporate bonds, stocks, and other securities. This allows lower
interest rates for a broader class of assets beyond government bonds.
In another example of unconventional monetary policy, the United
States Federal Reserve recently made an attempt at such a policy
with Operation Twist. Unable to lower current interest rates, the
Federal Reserve lowered long-term interest rates by buying long-term
bonds and selling short-term bonds to create a flat yield curve.
Fiscal policy[edit]
Further information: Fiscal policy
Fiscal policy is the use of government's revenue and expenditure as
instruments to influence the economy. Examples of such tools
are expenditure, taxes, debt.
For example, if the economy is producing less than potential output,
government spending can be used to employ idle resources and boost
output. Government spending does not have to make up for the entire
output gap. There is a multiplier effect that boosts the impact of
government spending. For instance, when the government pays for a
bridge, the project not only adds the value of the bridge to output, but
also allows the bridge workers to increase their consumption and
investment, which helps to close the output gap.
The effects of fiscal policy can be limited by crowding out. When the
government takes on spending projects, it limits the amount of
resources available for the private sector to use. Crowding out occurs
when government spending simply replaces private sector output
instead of adding additional output to the economy. Crowding out also
occurs when government spending raises interest rates, which limits
investment. Defenders of fiscal stimulus argue that crowding out is not
a concern when the economy is depressed, plenty of resources are left
idle, and interest rates are low.[25][26]
Fiscal policy can be implemented through automatic stabilizers.
Automatic stabilizers do not suffer from the policy lags of discretionary
fiscal policy. Automatic stabilizers use conventional fiscal mechanisms
but take effect as soon as the economy takes a downturn: spending on
unemployment benefits automatically increases when unemployment
rises and, in a progressive income tax system, the effective tax rate
automatically falls when incomes decline.
Comparison[edit]
Economists usually favor monetary over fiscal policy because it has
two major advantages. First, monetary policy is generally implemented
by independent central banks instead of the political institutions that
control fiscal policy. Independent central banks are less likely to make
decisions based on political motives.[23] Second, monetary policy
suffers shorter inside lags and outside lags than fiscal policy. Central
banks can quickly make and implement decisions while discretionary
fiscal policy may take time to pass and even longer to carry out.[23]
The three main types of government
macroeconomic policies are fiscal policy, monetary
policy and supply-side policies. Other government
policies including industrial, competition and
environmental policies. Price controls, exercised by
government, also affect private sector producers.
1. Fiscal Policy:
Fiscal policy refers to changes in government
expenditure and taxation. Government expenditure,
also called public expenditure, and taxation occur at
two main levels – national and local. Governments
spend money on a variety of items including
benefits (for the retired, unemployed and disabled),
education, health care, transport, defense and
interest on national debt.
A government sets out the amount it plans to spend
and raise in tax revenue in a budget statement. A
budget deficit is when the government’s expenditure
is higher than its revenue. In this case, the
government will have to borrow to finance some of
its expenditure.
In contrast, a budget surplus occurs when
government revenue is greater than government
expenditure. A balanced budget, which occurs less
frequently, is when government expenditure and
revenue are equal. A government may deliberately
alter its expenditure or tax revenue to influence
economic activity.
If a government wants to raise aggregate demand in
order to increase economic growth and
employment, it will increase its expenditure and/or
cut taxation by lowering tax rates, reducing the
items taxed or raising tax thresholds. For example, a
government may cut income tax rates.
This will raise people’s disposable income, which
will enable them to spend more. Higher
consumption is also likely to raise investment. Fig. 1
shows the effect of a reflationary fiscal policy (also
called an expansionary fiscal policy).
A government may implement a deflationary fiscal
policy (also called a contractionary fiscal policy) to
reduce inflationary pressure. A cut in government
expenditure on, for instance, education would
reduce aggregate demand. Such a reduction may
lower the rise in the general price level.
2. Monetary Policy:
Monetary policy includes changes in the money
supply, the rate of interest and the exchange rate,
although some economists treat changes in the
exchange rate as a separate policy. The main
monetary policy measure, currently used in most
countries, is changes in the rate of interest.
A rise in the rate of interest helps implement a
deflationary monetary policy. It will be likely to
reduce aggregate demand by lowering consumption
and investment. Households will spend less due to
availability of less discretionary income, expensive
borrowing and greater incentive to save.
Firms will invest less as they will expect
consumption to be lower. Also the opportunity cost
of investment will have risen and borrowing will
have become expensive. A higher interest rate may
also reduce aggregate demand by lowering net
exports.
Changes in the money supply, as with changes in
interest rates, are implemented by Central Banks on
behalf of governments. If the money supply is
increased by the Bank printing more money, buying
back government bonds or encouraging commercial
banks to lend more, the aggregate demand
increases. On the other hand, a decrease in the
money supply reduces aggregate demand.
3. Supply-side Policies:
Supply-side policies are policies designed to
increase aggregate supply and hence increase
productive potential. Such policies seek to increase
the quantity and quality of resources and raise the
efficiency of markets. These include improving
education and training, cutting direct taxes and
benefits, reforming trade unions and privatization.
Improving education and training is designed to
raise labour productivity.
The intention behind cutting direct taxes and
benefits is to make work more attractive, relative to
living on benefits. If successful, this will make the
unemployed search for work more actively and will
raise the labour force by encouraging more people
(including for instance married women and the
disabled) to seek employment. Reforming trade
unions may make labour more productive and
privatization may increase productive capacity, if
private sector firms invest more and work more
efficiently than state owned enterprises.
MACROECONOMIC GOALS
Five Macroeconomic Goals
1. Non-Inflationary Growth
In other words, this is stable and sustainable economic growth and
development that is “real” (non-inflationary) over the long-term.
Economic growth in an economy is an outward shift in its Production
Possibility Curve (PPC). Another way to define growth is the increase in a
country’s total output or Gross Domestic Product (GDP). The objective of
the central bank and government would be an increase in economic growth
without a rise in the rate of inflation.
2. Low Inflation
Inflation is the sustained increase in the price level. The rate of inflation is
the change in inflation over a period. Central banks would like to keep the
growth of the rate at which prices increase at low rates. As inflation rises,
every dollar you own buys a smaller percentage of a good or service. For
example, the U.S. Federal Reserve targets the inflation rate at roughly 2%.
3. Low Unemployment or Full Employment
Full employment occurs when the labor force (this counts as people who
are actively seeking jobs or are already employed) is fully employed in
productive work. A person is considered to be unemployed if he doesn’t
 currently doesn’t have a job and is actively searching for one. Having a 
lower rate of unemployment means that the economy is more productive. 
This objective means that as many people who want to be employed are
employed, so the economy is running at or near full productivity.
4. Equilibrium in Balance of Payments
Equilibrium in Balance of Payments means that a country’s exports or
imports should not be much larger than its imports or exports. Having a
large balance of payments deficit or surplus is not beneficial for the
economy.
5. Fair Distribution of Income
A fair or equitable distribution of income means that the gap between the
rich and the poor is not too large. Fair or equitable doesn’t mean equal, but
fair is a relative concept. What could be fair to one person, may not be fair
to another. The government doesn’t want all the wealth concentrated with
a small group of people.
Macro Economic Targets
Main Macro Economic Objectives
1. Maintain positive economic growth (e.g. target growth of around 2.5% which
is UK’s long run trend rate)
2. Maintain low inflation (UK’s target is CPI 2% +/-1)
3. Maintain full employment
4. Maintain satisfactory balance of payments (e.g. limit deficit on current
account balance of payment)
5. Maintain stable exchange rate
6. Keep government borrowing low.
Other possible targets
Reduce inequality
protect environment
In the post war period, I think it was fair to say, the primary goal was
full employment. From the backdrop of the Great Depression, policy
makers wished to avoid the blight of very high unemployment levels.
Broadly speaking, western governments used demand side policies to
try to attain full employment, even if this led to higher inflation.
Between 1940 and the mid 1970s, governments were generally
successful in keeping inflation low.
In the 1970s, cost push inflation factors, made it harder to keep
unemployment low without causing high rates of inflation. The old
Phillips curve trade-offs seemed to be giving a worse trade-off.
In the early 80s, both UK and US government’s gave greater
importance to inflation. In fact the UK tried to keep inflation low
through targeting the Money Supply. By seeking to control money
supply and inflation, unemployment rose to 3 million. Many
economists criticised the excess importance of controlling inflation,
when unemployment was so high.
In 1990, the UK temporarily joined the ERM and sought to target the
exchange rate as a way of controlling inflation. This was seen as a
failure as the UK was forced to ignominiously withdraw. It was after
1992, that the UK government set a direct inflation target. In 1997, the
Bank of England was given independence to set interest rates and target
the inflation rate of 2%.
 Targeting low inflation
 Keynesian vs Monetarist Theories
However, bear in mind, the Bank of England’s remit isn’t just about
inflation. They also have to consider wider macroeconomic objectives
such as growth. Hence why they cut interest rates even with inflation of
5%
Exchange rate policy

Exchange rate policy is concerned with how the value of the domestic
currency, relative to other currencies, is determined. Australia has had a
floating exchange rate since December 1983. The value of the Australian
dollar is determined by market forces.

In response to the mining boom, the Australian dollar appreciated, which

helped moderate inflationary pressures and ensure the economy received
the price signals needed to facilitate the flow of resources to the mining
sector. The appreciation of the dollar also helped spread the benefits of the
mining boom by increasing the purchasing power of Australian
households. However, the high exchange rate had a contractionary effect
on a number of sectors of the economy (such as manufacturing).

The Australian dollar has recently depreciated. This should improve the
international competitiveness of Australia’s export and import-competing
industries.