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Evaluate whether the government should focus on achieving economic growth as its key
macroeconomic objective.

Knowledge (Definitions):
Short-run economic growth is an increase in real GDP, and long-run economic growth is an expansion in the
productive capacity/potential of the economy. The government's main macroeconomic objectives are as follows:
sustained and sustainable economic growth, low and stable inflation, low unemployment, satisfactory balance of
payments (BoP) position (i.e. equilibrium), greater income equality, protection of the environment, and a
balanced government budget.

Application/Analysis:
The two different forms of economic growth are well shown via the use of a diagram:

Price
Level
LRAS LRAS1

P1
P0
AD1
AD
Y0 YFE Y1 YFE1 Real Output

An increase in investment, for example, could result in the effects shown in the graph above. It would firstly
increase AD from AD to AD1 (combined with a multiplier effect), as investment is a component of AD. It would
also increase LRAS from LRAS to LRAS1 as it would lead to an increase in the capital stock, assuming that there
was a rise in net investment. This results in an increase in real output from Y0 to Y1 and an increase in productive
potential from YFE to YFE1
An increase in real output will likely lead to an increase in real income per capita, and so if such were to occur,
this would represent an increase in the living standards of consumers who are now able to enjoy wealth, material
goods, comfort, and necessities with more ease and to a greater degree. The increase in real output would also
further lead to an increase in employment, thus satisfying another macroeconomic objective. This is because
labour is a derived demand, wanted not for its own sake, but for the level of output it can produce and at what
value that output can be sold for, and so higher real output means higher demand for labour and thus higher
employment. When both short-run economic growth and long-run economic growth occur, there is potential for
satisfying the objective of low and stable inflation, made evident by the only small increase in the price level from
P0 to P1, due to the deflationary pressure of increased LRAS. The BoP position could also improve as a result of,
for example, increased capital productivity due to the increased investment which may include the acquisition of
newer technology, thus resulting in improved international competitiveness, leading to increased export
revenue, an improved trade balance and thus a better BoP position

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Higher economic growth could also result in achieving a more balanced government budget. Higher real output
is likely to increase corporation, income, and expenditure tax revenues as a result of higher profits, income, and
spending. The increased productive potential will also increase the maximum level of tax revenue that the
government can attain. This increase in tax revenue means that the government budget is more likely to move
towards a balanced budget or even a budget surplus in the best case. If a budget surplus is achieved, the
government can use the extra tax revenue for investment in research and development (R&D) which may help
to achieve environmental goals such as decreasing greenhouse gas emissions, with the added bonus of further
increases in economic growth due to the fact that government spending is a component of AD.

Evaluation:
It must be noted, however, that whilst there are many reasons to aim for economic growth as a key objective, the
pursuit of such an objective may bring with it many costs depending on the way in which it is achieved
The first reason why the government may not want to pursue economic growth as a key objective is due to its
potential negative effects on income equality, and its dependence on the rate of population growth. Increases in
real GDP won't necessarily lead to increases in real GDP per capita if the population is growing at a faster rate
than real GDP. Even in the instance that real GDP per capita does rise, it only shows that the average level of
income is rising, but says nothing about how that income is being distributed. If the rise in average incomes is
caused by the incomes of high-income earners rising rapidly, then it is possible that there may still be no
improvement in the levels of poverty and/or income equality (failure of a macroeconomic objective). This means
that it is possible that only a small portion of the population will benefit, despite the increase in economic growth,
highlighting a potential flaw of aiming for such a macroeconomic objective as a key one
The second reason why the government may not want to pursue economic growth as a key objective is due to its
potential negative effects on living standards as a whole. Rises in real GDP can occur due to increases in what are
known as 'regrettables'. If, for example, a rise in real GDP has been caused by an increase in the size of the police
force to match the rising crime, people may actually feel worse off despite the increase in real GDP. Economic
growth also may not benefit people as greatly if it has resulted in them working longer hours or under worse
conditions. Furthermore, real GDP also doesn't include positive or negative externalities and so even if pollution
rises, this won't do anything to affect real GDP negatively, in fact, it may even increase it due to the output of the
cleaners who may end up dealing with the pollution, despite the fact that people will experience a lower quality
of life.
Lastly, the final reason why the government may not want to pursue economic growth as a key objective is due
to its potential negative effects on the environment and sustainability. If an economy uses up its non-renewable
resources in the hope of achieving short-run growth, and in doing so, also does not reinvest the tax revenue in
expanding productive capacity, there will be a failure of multiple objectives.
Firstly, the failure of achieving high environmental quality, such as misuse of non-renewable resources, or
overuse of slowly renewable resources (e.g. trees) will lead to the destruction of the environment, possibly
resulting in deforestation and desertification.
Secondly, the effects on inflation are likely to be negative, as not only will the short-run economic growth not be
combined with long-run economic growth, but indeed long-run economic growth may decrease due to a lower
quantity and/or quality of natural resources leading to reduced productive potential. This would mean that the
high levels of AD would quickly become heavily inflationary, thus leading to a failure of the low and stable
inflation macroeconomic objective.
Lastly, is the potential effect on the BoP position, which is likely to suffer as a result of the higher inflation which
will make exports less price competitive and imports more price competitive, resulting in lower net exports, a
worsened trade balance, a larger current account deficit and thus a worsening of the BoP position

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Judgment:
Balancing both sides of the argument, the government should definitely focus on achieving economic growth as
a key objective, assuming that the growth is sustainable. As highlighted in the analysis, economic growth does
indeed carry the potential of achieving almost all of the objectives simultaneously, and so it is clearly crucial to
the long-term success of an economy. It is important, however, that in aiming for economic growth as a key
objective, the government does not lose sight of the slower long-run forms of economic growth in favor of short-
run forms due to short-term political interests. In aiming for economic growth as a key objective it must be done
both sustainably and in a well-managed manner so as to not result in the failure of other macroeconomic
objectives such as environmental quality, income equality, inflation, etc... For such reasons, whether or not the
government should focus on achieving economic growth as its key macroeconomic objective, largely depends on
the manner in which they attempt to achieve it, hence why the earlier judgment was written as such.

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