All governments around the world have economic objectives for the nation’s economy to achieve by using specific economic policies.
An economy is a system that attempts to solve the problem of scarcity. Therefore, the main function of an economy is to allocate scarce resources among limited needs and unlimited wants of customers.
The government controls the country’s economy through introducing new economic policies or changing the current ones, e.g. TAX and government spending, as well as interest rates and the exchange rate in the country.
These policies will have serious impact on daily business activity. Different businesses will be affected differently depending on the sector of the economy they operate in, products they are selling, the industry they are in, or even the size of the business.
Businesses are also affected by the overall economic environment of the country. The economic environment refers to the state of the economy in which all businesses operate.
Understanding these six economic objectives and the following three economic policies to achieve them is very important to managers who need to make decisions for their businesses to take the advantage of positive policy changes.
6 government economic objectives
All governments around the world set targets for the economy and these are referred to as macroeconomic objectives because they affect the whole country. Pursuing the following six economic objectives by the policymakers will have a significant impact on the success and profitability of businesses.
1. High economic growth. Achieve the annual percentage increase in a country’s total level of output known as Gross Domestic Product (GDP). More details in Government Economic Objectives: High Economic Growth.
2. Low unemployment. Maintain low rate of unemployed people. More details in Government Economic Objectives: Low Unemployment.
3. Low inflation. Control price inflation. More details in Government Economic Objectives: Low Inflation.
4. A healthy balance of payment. Maintain stability of international trade balance. Balance of payment is a long-term balance between IMPORTS (the value of goods and services bought from other countries) and EXPORTS (the value of the goods and services that the country sells to other countries). More details in Government Economic Objectives: Healthy Balance of Payment.
5. Currency stability. Prevent huge uncontrollable swings in exchange rates, the value of the domestic currency comparing, with other currencies. More details in Government Economic Objectives: Exchange Rate Stability.
6. Inequality reduction. Reduce extreme inequalities in the society by wealth transfers of personal wealth from the rich to the poor, mainly through TAXation. More details in Government Economic Objectives: Inequality Reduction.
Example 1: According to Caixin, The Communist Party of China pledged in a 2019 plenary meeting to make more substantial progress in achieving common prosperity by 2035 through significant expansion of middle-income groups and reducing the gap between urban and rural regional development.
The condition of a country’s economy can directly affect businesses in the country – either help them achieve success or cause failure.
The rate of economic growth will have impact on how much businesses produce. The unemployment levels will have impact on the availability and cost of workforce. The rate of price inflation will have impact on the prices of raw materials and the prices of final products that the customers will need to pay. The exchange rate will determine the affordability of imports and exports.
Unfortunately, these objectives conflict with one another. When trying to achieve one of these six targets above, the government could actually make the other ones less achievable.
Example 2: If inflation is too high (Objective 3), then fiscal policies might be introduced to reduce government spending (Policy 3). But, lower government spending will lead to lower demand and result in lower economic growth (Objective 1), which will then increase unemployment (Objective 2).
3 government economic policies
To achieve each of those six major economic objectives, the government will consider introducing new economic policies or modifying the existing ones. When regulating the economy, every government should try to provide companies with healthy business environment where every business can prosper.
The three following macroeconomy policies impact the whole country, therefore all businesses that operate in that particular country will be affected to some extent:
1. Fiscal Policies. TAX and government spending.
2. Monetary Policy. The interest rate changes decided by the country’s central bank.
3. Supply Side Policies. These include privatization, training and education for workforce, deregulation (increasing competitiveness), adjusting domestic policy and foreign policy.
In short, the governments make political decisions in order to influence the country’s economy.
Summary
The above three government policies used to achieve the six fundamental goals will therefore present opportunities and threats for businesses. It is because the state of the country’s economy can contribute directly to the success or failure of the business.
Marketers need to consider the past, current and future state of the economy in the short-term, medium-term and long-term. This is especially applicable when it comes to planning for business growth or doing international marketing.
If business expansion plans happen just before a long economic recession, and the expansion is paid for from the bank loans, then the business may go bankrupt as poor sales and poor profitability may not be enough to cover the cost of borrowing.
On another hand, if the company is able to spot and exploit market opportunities in a fast-growing economy, creation and launch of new product can lead to high sales and profits.
Therefore, the country’s economic performance can either constrain a business, or enable a business to take advantage of great new opportunities. It is up to the managers to make appropriate decisions that will benefit the business.
