Governments set macro‑economic objectives based on a combination of political, social and economic considerations. The main reasons include:
Political legitimacy: Achieving visible improvements (e.g., low unemployment) helps maintain public support.
Social welfare: Reducing poverty, inequality and hardship improves overall quality of life.
Economic stability: Preventing large fluctuations in output and prices creates a predictable environment for businesses and consumers.
International credibility: Meeting targets such as low inflation can affect exchange rates, foreign investment and the country’s credit rating.
Resource constraints: Limited fiscal and monetary capacity may force a government to prioritise certain aims over others.
2. Common macro‑economic aims
The main aims that most governments pursue are listed below. Each aim can be measured by specific indicators.
Aim
Key Indicator(s)
Typical Target
Full employment
Unemployment rate, under‑employment rate
Usually 4‑6 % (depends on structural factors)
Price stability (low inflation)
Consumer Price Index (CPI), Retail Price Index (RPI)
Inflation 2‑3 % per annum
Economic growth
Real GDP growth rate, per‑capita GDP
3‑5 % real growth per year (long‑run)
Balance of payments equilibrium
Current account deficit/surplus, exchange rate
Current account within ±2 % of GDP
Equitable distribution of income
Gini coefficient, poverty rate
Reduction in Gini coefficient; poverty rate below a set threshold
3. Criteria for meeting each aim
For each aim governments set criteria that indicate whether the aim has been achieved. These criteria are often expressed as quantitative targets, time‑frames and qualitative conditions.
3.1 Full employment
Target unemployment rate (e.g., ≤5 %).
Duration: sustained over at least two consecutive quarters.
Quality of jobs: proportion of part‑time or insecure contracts should not exceed a set limit.
Volatility: standard deviation of monthly inflation should be below 1 % over a 12‑month period.
Time‑frame: target met for at least three consecutive years.
3.3 Economic growth
Target real GDP growth: \$g_{real} \geq 3\%\$ per annum.
Productivity increase: growth in output per hour worked ≥ 1 %.
Inclusivity: growth should be accompanied by a rise in real wages (e.g., ≥ 2 %).
3.4 Balance of payments equilibrium
Current account balance within ±2 % of GDP.
Exchange rate stability: deviation from a target parity ≤ 5 % over 12 months.
Foreign reserves: sufficient to cover at least three months of imports.
3.5 Equitable distribution of income
Gini coefficient reduced by at least 0.02 over five years.
Poverty rate (people below $5.50 a day) reduced to < 15 %.
Progressive tax system: top marginal tax rate ≥ 40 % while maintaining incentives for investment.
4. How criteria influence policy choice
When setting criteria, governments must consider trade‑offs. For example:
Targeting very low unemployment may increase inflation (Phillips curve trade‑off).
Aggressive inflation control through high interest rates can suppress growth.
Maintaining a current‑account surplus may require a strong currency, which can hurt export competitiveness.
Consequently, policy mixes (fiscal, monetary, supply‑side) are designed to balance these criteria.
Suggested diagram: AD‑AS model showing the impact of expansionary fiscal policy on output and price level while illustrating the Phillips‑curve trade‑off between unemployment and inflation.