Objectives and Importance of Macroeconomic Analysis and Policy

Macroeconomic analysis is not merely an academic exercise — its purpose is to understand how the whole economy behaves so that governments and central banks can steer it toward outcomes that benefit society. The main OBJECTIVES that macroeconomic policy tries to achieve are usually summarised under four heads.

1. Economic growth. A steady increase in an economy's real aggregate output over time raises average incomes and living standards, and creates the resources needed to reduce poverty and fund public services. Growth is achieved by expanding the economy's productive capacity — through more investment, better technology, and a more skilled workforce. Sustained, broad-based growth is arguably the single most important long-run macroeconomic objective, especially for a developing economy.

2. Price stability. A reasonably stable general price level — avoiding both high inflation and deflation — protects the value of money, the savings of ordinary people, and the incomes of those on fixed pay. High inflation erodes purchasing power and hurts the poor most; deflation can depress spending and output. Keeping inflation low and steady is a central goal of monetary policy, managed by the central bank.

3. Full employment. This means ensuring that everyone who is willing and able to work at the going wage rate can find a job — that is, eliminating involuntary unemployment. Unemployment wastes the economy's most valuable resource (its people), causes hardship, and means output is below what the economy is capable of producing. Raising aggregate demand to bring the economy toward full employment was Keynes's central policy concern.

4. External balance (balance of payments equilibrium). For an open economy trading with the rest of the world, a broadly balanced external position — where the value of what the country pays out to other countries does not persistently exceed what it earns from them — keeps the exchange rate stable and avoids an unsustainable build-up of foreign debt. Managing the balance of payments is an important macroeconomic objective for any economy engaged in international trade.

Policy instruments. To pursue these objectives, governments and central banks use two broad sets of tools. FISCAL POLICY is the government's use of its spending and taxation — for example, raising government spending or cutting taxes to boost aggregate demand and employment when the economy is slack. MONETARY POLICY is the central bank's management of the money supply and interest rates — for example, raising interest rates to cool down inflation, or lowering them to stimulate spending. These policies are studied in detail in later chapters; here it is enough to see that they are the means by which the objectives above are pursued. …