Chapter 5.1: Three Main Macroeconomic Goals

5.1 The Three Main Macroeconomic Goals

^{Learning Objectives}

By the end of this section, you will be able to:

Identify the three main macroeconomic goals and understand how each goal relates to each other

3 Main Macroeconomic Goals

1. Economic Growth (=increase in GDP)

2. Low Unemployment (= high employment and job creation)

3. Low inflation (= price stability)

How do the goals relate to each other?

Increases in GDP lead to lower unemployment.

Lower unemployment leads to overall increases in income

Higher income leads to increased consumer spending

Increased consumer spending causes a pressure on prices also known as inflation

As you can see, the goals of economic growth, low unemployment, and low inflation contradict each other. While we would like to live in an economy with high economic growth, low unemployment and low inflation, a rapid rate of economic growth is very often is associated with increase in inflation. Therefore, the goal of the economy, is a sustained increase in GDP. Not too fast and not too slow.

The opposite is also true.

Decreases in GDP lead to higher unemployment

Higher unemployment leads to overall decreases in income

Decreased income leads to decreased consumer spending

Decreased consumer spending causes inflation rates to fall

So what would an ideal economy look like?

An ideal economy is one that GDP grows just the correct amount. It looks different for each economy, depending how develop each economy is. For example, while the US cannot tolerate a GDP growth of 6% per year, in China 6% is considered too slow.

Chapter 5.1 was created by Karen David and is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.