Lesson Notes
Price Stability
Price stability means that the price level in the economy is not changing significantly
over time. This implies that households are paying more or less the same amount for
the products they are buying.
Reasons why governments aim for price stability
1. It ensures greater economic activities- consumers will be more willing to
spend in the economy. At the same time businesses will be more likely to
undertake investment. In other words, there will be greater business
confidence.
2. People will not act in a way that will cause prices to rise in the future.
Remember(panic buying)
3. Workers will not ask for wage increases to adjust with inflated prices.
Criteria that governments set for price stability
Most governments in the world will aim an inflation rate of 2%. A mild rate of
inflation will encourage producers to increase production. This is because higher
prices will lead to higher profits. A mild rate of inflation will not affect households to
a greater extent.
Balance of payment stability
The balance of payment of a country is its record of revenue received from selling
export and expenditure on imports. Most government want to achieve a stable BOP
where the value of exports= the value of imports. (Earnings on exports= Expenditure
on imports)
Reasons why governments aim for BOP stability
If expenditure on imports exceeds revenue from exports for a long period of time,
the country will be living beyond its means and may get into debts.
On the other hand, if exports exceed imports, the citizens will not be enjoying a
variety of products.
Criteria that governments set for BOP stability
The government will not aim for export revenue to equal import expenditure. The
government will not be concerned If there is a surplus of export revenue over import
expenditure or a deficit in export revenue provided that the surplus or deficit is a
small amount or it will last for a short period of time.
It is to be noted that import expenditure may be high but it may be importing a huge
quantity of raw materials or capital goods which may increase its production
capacity. This will create a surplus of goods in the market which can therefore be
exported and generates more revenue.
Redistribution of income
The government may also aim at reducing the gap between the rich and the poor.
This can be done through taxation. A progressive taxation method can be used by the
government to be able to do so. This means that the rich pay more taxes compared
to the poor.
Reasons why governments aim for redistribution of income
1. When there is redistribution of income in an economy, the gap between the
rich and the poor will be reduced.
2. To prevent poverty which is undesirable and may represent a waste of
resources as these people will be less productive.
Criteria that governments set for redistribution of income
The government will try its best to create a more equal distribution of income within
the population. This can be done through the use of taxation transfer payments
(pensions), free public services such as: education and health care.
Possible conflicts between macroeconomic aims
Conflicts between macroeconomic aims occur when in attempting to achieve one aim
another aim is being sacrificed.
1. Full employment v/s price stability