(b) Discuss if a low and stable rate of
unemployment is what governments should only aim for. [15]
Should
governments only aim for a low and stable rate of unemployment? First, what is unemployment? First, this paper defines unemployment. A low and
stable rate of unemployment refers to a situation where workers who are willing
and able to work are largely able to find employment, in contradistinction to a
situation of unemployment. This is indeed one of the macroeconomic objectives
of governments. However, governments also have other objectives, such as
sustained economic growth, price stability, and a healthy Balance of Payments
(BOP). This essay argues whether a low and stable rate of unemployment is the only macroeconomic
objective that governments should aim for would depend on the economic
conditions and status of the economy.
Increases in AD in a Developing Economy
This
paper argues that a low and stable rate of unemployment could be the primary
aim if the economy is a developing economy, as it would achieve other
macroeconomic objectives relevant to developing economies. By assumption, a
developing economy can be characterised by having spare capacity and massive
unemployment. A developing economy is characterised this way as there is more
spare capacity in such economies because they have huge populations. A low and
stable rate of unemployment means more employed workers being able to spend
more on consumption (C). Firms can take this steady increase in C as an
indication for more investment (I). The rise in C, I and (X – M) would lead to
a rise of the AD of the economy, and the economy would reach full employment
eventually.
Other
macroeconomic objectives can be achieved because of a focus on low unemployment.
The General Price Level (GPL) can be considered virtually unchanged due to the
spare capacity of the developing economy. Inflation is defined as a persistent
and sustained increase in the general price level, and while inflation can be
dangerous, mild inflation can be seen as useful as it stimulates economic
growth and production. Production would increase, leading to more workers being
employed. This would trigger an increase in the AD due to the probable increase
in the components of C, I, G and (X – M). As a result, the economy is able to
achieve sustained economic growth. This leads to governments being able to
collect a steady stream of taxes from the economy. The tax revenue collected
can potentially be used for basic needs of housing, healthcare, and education,
among other things. This helps to increase the standard of living for the
economy. Hence, all these effects collectively would lead to full employment,
with stable inflation, and economic growth, which are all good objectives for
the developing economy, but if pursued to its logical end, inflation could
result once the developing economy enters developed status or if it hits the
full employment level.
Increases in AD in a Developed Economy
However,
a low and stable rate of unemployment should not be what governments should only aim
for if the economy is a developed economy. A developed economy can be described
as having its AD near or at the full employment level (Yf); developed economies
are characterised as such as there is less spare capacity there, because, due
to their low and stable rate of unemployment, developed economies are usually operating
near to full employment (Yf) or even at full employment. The effects of a low
and stable rate of unemployment would translate into an increase in the AD.
Assuming an unchanged AS, an increase in the AD is undesirable. This is because
the increase of AD results in an increase in the GPL. In such economies, such
inflation would cause overheating in the economy as the GPL increases while real
national output remains the same. An increase of the AD beyond a certain point would
result in hyperinflation affecting the objective of price stability. Hyperinflation
would cause increases in the prices of products, leading to the loss of the value
of money.
Hyperinflation
would also affect the aim of having a satisfactory balance of payments (BOP),
for instance, a BOP surplus where there are more exports than imports. With higher
prices, the export price competitiveness of the economy would fall as domestic
goods are now more expensive relative to other economies. There would also be an
increase in the amount of imports (M) as foreign goods are now cheaper. This
would lead to more imports than exports. Though one can argue that the fall in
the net exports (X – M) could be a corrective mechanism to bring AD down, it
would not be applicable as developed economies tend to import more than export,
generally due to their high incomes and wealth. Hence, if a low and stable rate
of unemployment is the only aim of such economies, it would compromise other
macroeconomic aims of price stability and having a healthy BOP. Therefore, a
low and stable rate of unemployment should not be the only macroeconomic
objective that governments of such economies should aim for.
Conclusions
In
conclusion, whether a low and stable rate of unemployment should be what
governments should only aim for would depend on the conditions of the economy
in question, with developing countries possibly focusing more on employment.
There are also other macroeconomic objectives that governments should also aim
for, such as low inflation, economic growth, and a healthy BOP, and there seem
to be trade-offs when focusing solely on one macroeconomic goal. A delicate
balancing act should and must be maintained. In the final analysis, governments
should aim for a set of macroeconomic aims rather than only having one aim.
Junior College (JC) Economics Essays: Tutor's Comments - This Economics paper is part (b) of a two part question on unemployment in Singapore. It was written and contributed by TJL, an Economics teacher I knew from PGDE (JC) and National Institute of Education (NIE) times, and who is an excellent, motivated, and hardworking Economics tutor. However, having said that, as part of Socratic questioning and learning for the benefit of students - TEACHER'S QUESTION: putting yourself into the shoes of an Economics tutor, how would you improve on this essay? Reflect on the essay's structure, and reflect on how you would make this essay better, stronger, tighter, and more evaluative in the conclusion. Think about it. Think about it some more. Do remember to read Economics essays with a critical, probing, and intellectual mind, because you want to think of ways of how you can learn, study, and revise Economics, as well as improve on your essay writing skills and approaches to Economics examinations. Thanks for reading and cheers!
