Wir james stodder - complementary credit networks and macro-economic stability
Conflicts-Complementary of Macro Objectives
2
© 2011 Mr Lee All Rights Reserved. Page 1 CONFLICTS OF MACROECONOMIC OBJECTIVES Strong, stable & sustained economic growth Low inflation rate or domestic price stability Low unemployment rate Long-term BOP equilibrium or favourable/satisfactory BOP position Strong, stable and sustained economic growth - Can lead to DD-pull inflation if economy is near full-employment level Pursuit of economic growth via economic restructuring can worsen structural unemployment in the short-run Economic growth ↑ import requirements & worsens BOT, current account & BOP positions, if growth is domestically-driven Low inflation rate or domestic price stability Can lead to slowdown of economic growth if contractionary AD policies are used - Pursuit of low inflation via contractionary AD policies reduces derived demand for factors of production, including labour No conflict with BOP goal Low unemployment rate Full employment at all costs may lead to misallocation of manpower resources, creating less efficiency, productivity, less than full economic growth potential Pursuit of low unemployment via expansionary AD policies can lead to demand-pull inflation - In pursuing low unemployment goal, expansionary AD or even AS policies may raise import requirements, worsening the external balance position Long-term BOP equilibrium or favourable or satisfactory BOP position Under flexible exchange rate system, resultant currency appreciation → reduce export price & investment competitiveness, limiting AD & economic growth Achieving BOT, current account & BOP surpluses via depreciation of domestic currency may invite imported inflation Resultant currency appreciation leads to lower export price & investment competitiveness leading to less jobs created - Annex A Effects Primary Objectives
Transcript of Conflicts-Complementary of Macro Objectives
© 2011 Mr Lee All Rights Reserved. Page 1
CONFLICTS OF MACROECONOMIC OBJECTIVES
Strong, stable &
sustained economic growth
Low inflation rate or
domestic price stability
Low unemployment rate
Long-term BOP equilibrium or
favourable/satisfactory BOP position
Strong, stable and sustained economic growth
-
Can lead to DD-pull
inflation if economy is near full-employment level
Pursuit of economic growth via economic restructuring
can worsen structural unemployment in the
short-run
Economic growth ↑ import requirements & worsens BOT, current account &
BOP positions, if growth is domestically-driven
Low inflation rate or domestic price stability
Can lead to slowdown of
economic growth if contractionary AD policies
are used
-
Pursuit of low inflation via contractionary AD policies reduces derived demand for factors of production,
including labour
No conflict with BOP goal
Low unemployment rate
Full employment at all costs may lead to
misallocation of manpower resources, creating less efficiency, productivity, less than full economic
growth potential
Pursuit of low
unemployment via expansionary AD policies can lead to demand-pull
inflation
-
In pursuing low unemployment goal,
expansionary AD or even AS policies may raise import requirements,
worsening the external balance position
Long-term BOP equilibrium or favourable or satisfactory BOP position
Under flexible exchange
rate system, resultant currency appreciation →
reduce export price & investment
competitiveness, limiting AD & economic growth
Achieving BOT, current
account & BOP surpluses via depreciation of
domestic currency may invite imported inflation
Resultant currency
appreciation leads to lower export price & investment competitiveness leading to
less jobs created -
Annex A
Effects
Primary
Objectives
© 2011 Mr Lee All Rights Reserved. Page 2
NON-CONFLICTS / COMPLEMENTARITY OF MACROECONOMIC OBJECTIVES
Strong, stable &
sustained economic growth
Low inflation rate or
domestic price stability
Low unemployment rate
Long-term BOP equilibrium or
favourable/satisfactory BOP position
Strong, stable and sustained economic
growth -
Will not ↑ DD-pull inflation if there is excess capacity
in economy or LRAS ↑
AD-driven growth can reduce cyclical unemployment
If economic growth is
mainly export-driven, then BOT, current account &
BOP positions can improve
Low inflation rate or domestic price stability
Sustains real GDP/GNP growth or non-inflationary
economic growth
-
No conflict or Phillips curve trade-off in the long run
Promotes export price and investment
competitiveness, boosting current & capital accounts
of BOP
Low unemployment rate More labour resources
utilised to achieve economic growth
Over long-term, no conflict between inflation &
unemployment goals since AD & LRAS can be
expanded
-
More employment in the export-oriented sector may help boost export volume & thus export earnings, improving BOT, current
account and BOP positions
Long-term BOP equilibrium or favourable
or satisfactory BOP position
If this includes improving (X-M) or BOT position,
resultant increase in AD raises economic growth
If favourable BOP is due to foreign investment inflow, resultant increase in LRAS can moderate demand-pull
inflationary pressures
Favourable BOP, if achieved by increasing exports (X) & foreign
investments (I), raises AD & derived demand for factors of production,
including labour
-
Effects
Primary
Objectives
