Page 78 - Introduction to Business

52 PART 1 The Nature of Contemporary Business

Major Goals of Economic Management

LEARNING OBJECTIVE 1
Define the major goals of effective economic management.
The ultimate objective of sound economic management is to achieve
• High levels of output coupled with rapid rate of real GDP growth
• High levels of employment with unemployment close to the involuntary rate
• Low rates of inflation with free markets
• Stable exchange rates with relatively free trade
Any country that can consistently achieve most of these objectives is bound to
have a solid economy with a booming business environment. While most countries
try to achieve these goals, corruption and the lack of political will or institutions to
implement appropriate policies are factors that lead to poor economic perform-
ance and a weak business environment. Business will flourish in countries where
economic policy goals are well defined and achievable.

Output. The best measure of economic success in a country is the generation of
high levels of output (GDP), coupled with rapid, sustainable real GDP growth. Achiev-
ing this goal implies rising individual income and consumption levels. Consumption
in countries with high per capita income will boost the demand for goods and services
and opportunities for business. In developing countries with high rates of real GDP
growth, the number of middle-class consumers will tend to grow. Middle-class con-
sumers are generally the key market segment targeted by business for the sale of goods
and services. In addition, they are the major taxpayers in most countries. For example,
China’s middle class is estimated to be about 400 million, and India’s 300 million, mar-
ket segments that are of great importance to foreign multinational corporations.

Employment. Countries try to generate as many jobs as possible to keep the
economy buoyant yet stable. However, the jobs that are created must pay well and
be relatively easy to obtain. Society is better off with high employment, since the
crime rate will remain low and unemployment benefit payments will remain small.
In addition, the employed will pay taxes, which could go toward the provision of bet-
ter public services. High employment levels will lead to a large demand for goods
and services and excellent business opportunities. The labor force in any country
includes the employed as well as the unemployed, but it excludes involuntary
unemployment, that is, those who are unemployed and are not actively looking for
work. Ever since the Great Depression of the 1930s, when U.S. unemployment aver-
aged around 30 percent, the United States’ economic policies have focused on keep-
ing unemployment as low as possible while tolerating higher inflation.

Inflation. Another important economic policy objective is price stability; that is,
inflation The rate of price level increase countries like to see that prices do not increase or fall too rapidly. Inflation is the
in an economy from one period to rate of price level increase in an economy from one period to another (monthly,
another (monthly, quarterly, or annually)
quarterly, or annually). Countries that manage their economies well generally have
annual inflation in the 0 to 2 percent per year range. It is important to remember
that while unemployment affects only those out of work, inflation affects everyone
in an economy. Ever since the hyperinflation of the late 1930s and early 1940s in
Germany, its government has followed a low-inflation economic policy. For this
reason, unlike the United States, Germany has been willing to accept a higher rate
of unemployment for low inflation.

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