| Objective | Meaning / typical target | Why it matters |
|---|---|---|
| Low and stable inflation | Price stability, e.g. RBI target of 4% CPI inflation (band 2–6%); UK and ECB 2% | Protects purchasing power and savings; reduces uncertainty; supports competitiveness and investment |
| Balance of payments stability | A sustainable current account position (e.g. a deficit that can be financed without a crisis); stable exchange rate | Avoids currency crises, loss of reserves and unsustainable foreign borrowing |
| Low unemployment | Unemployment close to the natural rate; full employment | Higher output and incomes; less poverty; avoids the social costs of unemployment |
| Economic growth | Sustained increase in real GDP, close to the trend (potential) rate | Higher living standards; more tax revenue; more jobs |
| Development | Improvement in living standards and human welfare: health, education, poverty reduction, freedom of choice (e.g. higher HDI) | Growth is a means; development is the broader goal |
| Sustainability | Growth that does not damage the environment or deplete resources for future generations (e.g. net- zero emissions by 2070 in India) | Protects future living standards; reduces climate risk |
| Redistribution of income and wealth | A fairer distribution; lower inequality (lower Gini coefficient) and less poverty | Equity; social cohesion; higher aggregate consumption |
Question: Explain the main macroeconomic policy objectives of a government and assess which objective should be given the highest priority by a developing economy. [20]
Learning objectives assessed: 10.1.1
[AO1 + AO2 Knowledge, understanding & analysis] Governments pursue several macroeconomic objectives: low and stable inflation (for example the RBI's 4% target), low unemployment, sustained economic growth (a rise in real GDP close to the trend rate), balance of payments stability (a current account position that can be financed sustainably), economic development (improvements in health, education and living standards), sustainability (protecting resources and the environment for future generations) and redistribution of income and wealth.
[AO1 + AO2 Knowledge, understanding & analysis] These objectives are linked. Growth raises incomes, creates jobs and provides tax revenue for health and education, supporting development and poverty reduction. Low and stable inflation protects purchasing power, especially of the poor, and creates certainty for investment, supporting growth. A stable balance of payments avoids currency crises that can wipe out years of growth.
[AO3 Evaluation] For a developing economy, there is a strong case for prioritising economic growth. Many people live in or near poverty, and sustained growth has been the main reason for large falls in absolute poverty in countries such as India, China and Vietnam. Growth also creates jobs for a young, rapidly expanding labour force and generates the revenue needed for development spending.
[AO3 Evaluation] However, growth is not enough on its own. Growth that is not inclusive can leave many behind, so development and redistribution matter. High inflation hurts poor households mo