What are the three main goals of economies?

By Uroosa Kanwal4 min read · Posted Mar 27, 2024

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An economy exists to balance resource allocation among individuals in a society, which happens when production and consumption are in sync to utilize scarce resources most effectively and efficiently.

Governments of countries run their respective economies and decide and establish economic goals based on circumstances, societal values, long-term values and political priorities. Once set, the government monitors the performance to evaluate and determine if adjustments are needed to meet those goals.

This article discusses the top three economic goals every country is concerned with, namely:

  • Economic growth
  • Price stability
  • High employment

What is economic growth?

Economic growth refers to the ability to produce more goods and services, typically represented by a country's Gross Domestic Product (GDP) increase. Economic growth often leads to increased incomes, translating into a higher quality of life.

Increased resources, better resources, and improved technology bring about economic growth. More resources may be available in the form of an increased labor force due to a rise in population, an increase in capital availability due to investment surges, or an increase in natural resources due to discoveries like better mining or farming techniques. Better resources imply a trained and skilled workforce or upgrades in the management of resources. Technology improvements include breakthrough processes that increase productivity and output per input unit. All three factors affect the growth of a country, often maximizing it.

Why is economic growth important?

As stated above, economic growth fosters elevated lifestyles. But it does more than just put more money into individual pockets.

  1. Growing economies create more job opportunities, improving livelihoods and social stability.

  2. Economic growth generates higher tax revenue through elevated economic activity and personal income. The revenue is reinvested into infrastructure, social programs, and public services.

  3. Growth also stimulates research and innovation, which drive productivity, creating a cycle that guarantees further economic development.

  4. Economic growth boosts exports and attracts foreign investment, enhancing geopolitical influence.

What is price stability?

Price stability is achieved when there are no significant fluctuations in the prices of general consumer goods. This doesn't mean there is zero inflation. On the contrary, a predictable price with low inflation is the grounds for price stability.

Price stability is measured by a statistical tool called the Price Index- a weighted average of selected goods and services. The weights represent the relative importance of each item in the basket.

What does price stability mean to an economy?

Stable prices lead to regular consumer consumption patterns. It also leads to:

  1. Easy business planning and investment in long-term projects. Businesses know they can make big decisions without worrying about significant price changes.

  2. Confidence in investment and savings owing to value retention. As consumers preserve their purchasing power, they can focus on long-term goals.

  3. Low or predictable inflation rate.

  4. Global competitiveness where exports become lucrative and contribute to a favorable trade balance.

What is high employment?

High employment is where a significant portion of the available labor force is utilized most efficiently. High employment is not an absolute figure. Instead, it can be assessed by the unemployment rate. The unemployment rate is calculated by dividing the number of unemployed individuals by the total labor force. A low relative unemployment rate indicates high employment.

Why do we need high employment in an economy?

High employment indicates:

  1. The economy is prospering as more people are earning. The differential income is spent on goods and services, eventually contributing to the GDP.

  2. Low poverty rates as more people can earn and support families. This also reduces reliance on social welfare programs and improves the country's living standards.

  3. More opportunities for human capital development as people gain access to opportunities for skill development. This contributes to the productivity and competitiveness of the country, supporting macroeconomic stability.

  4. Increased tax collection for the government helps them spend on public services and infrastructure.

While having high employment rates is ideal, it is essential to note that quality of employment is also important. Having insecure, low-paying jobs without advancement opportunities may not lead to long-term economic stability. Such employment opportunities contribute to income inequalities and financial insecurities, often trapping individuals in cycles of poverty. By addressing the quantity and quality of jobs, countries can sustain economic growth and enhance overall well-being.

Conclusion

In today's world, any economy wishing to prosper builds its policies around the economic goals of high employment, economic growth and price stability. Challenges like inflationary pressures, income inequality, and resource constraints can limit the pace and sustainability of the goals. Also, often focusing on one or two goals can require rethinking the third. For example, stimulating growth and employment may cause inflation, which disrupts price stability.

Central banks, businesses, governments and other stakeholders coordinate their approach to address these constraints, thus implementing sound economic policies.

References

Benefits of economic growth

Price Stability

Price stability: How to define, measure and maintain stable prices

Price stability: why is it important for you?

The Meaning and Measurement of Full Employment

PERSISTENCE OF HIGH UNEMPLOYMENT: WHAT RISKS? WHAT POLICIES?

Full Employment: Definition, Types, and Examples

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