2011 Mr Lee All Rights Reserved.

Page 1

CONFLICTS OF MACROECONOMIC OBJECTIVES


Strong, stable &
sustained economic
growth

Low inflation rate or
domestic price stability

Low unemployment rate

Long-term BOP
equilibrium or
favourable/satisfactory
BOP position

Strong, stable and
sustained economic
growth
-

Can lead to DD-pull
inflation if economy is near
full-employment level


Pursuit of economic growth
via economic restructuring
can worsen structural
unemployment in the
short-run

Economic growth import
requirements & worsens
BOT, current account &
BOP positions, if growth is
domestically-driven


Low inflation rate or
domestic price stability

Can lead to slowdown of
economic growth if
contractionary AD policies
are used

-

Pursuit of low inflation via
contractionary AD policies
reduces derived demand
for factors of production,
including labour


No conflict with BOP goal

Low unemployment rate
Full employment at all
costs may lead to
misallocation of manpower
resources, creating less
efficiency, productivity,
less than full economic
growth potential

Pursuit of low
unemployment via
expansionary AD policies
can lead to demand-pull
inflation

-
In pursuing low
unemployment goal,
expansionary AD or even
AS policies may raise
import requirements,
worsening the external
balance position

Long-term BOP
equilibrium or favourable
or satisfactory BOP
position

Under flexible exchange
rate system, resultant
currency appreciation
reduce export price &
investment
competitiveness, limiting
AD & economic growth


Achieving BOT, current
account & BOP surpluses
via depreciation of
domestic currency may
invite imported inflation

Resultant currency
appreciation leads to lower
export price & investment
competitiveness leading to
less jobs created
-

Annex A
Effects
Primary
Objectives
2011 Mr Lee All Rights Reserved. Page 2

NON-CONFLICTS / COMPLEMENTARITY OF MACROECONOMIC OBJECTIVES


Strong, stable &
sustained economic
growth

Low inflation rate or
domestic price stability

Low unemployment rate

Long-term BOP
equilibrium or
favourable/satisfactory
BOP position

Strong, stable and
sustained economic
growth
-
Will not DD-pull inflation
if there is excess capacity
in economy or LRAS
AD-driven growth can
reduce cyclical
unemployment

If economic growth is
mainly export-driven, then
BOT, current account &
BOP positions can improve

Low inflation rate or
domestic price stability
Sustains real GDP/GNP
growth or non-inflationary
economic growth

-
No conflict or Phillips curve
trade-off in the long run
Promotes export price and
investment
competitiveness, boosting
current & capital accounts
of BOP
Low unemployment rate
More labour resources
utilised to achieve
economic growth
Over long-term, no conflict
between inflation &
unemployment goals since
AD & LRAS can be
expanded
-
More employment in the
export-oriented sector may
help boost export volume
& thus export earnings,
improving BOT, current
account and BOP positions
Long-term BOP
equilibrium or favourable
or satisfactory BOP
position
If this includes improving
(X-M) or BOT position,
resultant increase in AD
raises economic growth
If favourable BOP is due to
foreign investment inflow,
resultant increase in LRAS
can moderate demand-pull
inflationary pressures
Favourable BOP, if
achieved by increasing
exports (X) & foreign
investments (I), raises AD
& derived demand for
factors of production,
including labour
-

Effects
Primary
Objectives