Conflict between economic objectives (1 Viewer)

[astab]

Dixon's textbook says that microeconomic policies can worsen economic growth, employment and external stability in the short-term. How is this so and why does the economy recover in the long-term?

While these objectives aren't pertinent to the syllabus area in topic 4, would you agree that there is an incompatibility between the terms of trade and international competitiveness. As the price of exports rise, Australia's terms of trade rises, meaning trade balances improve and Australia's current account deficit drops. However, higher export prices mean goods are more expensive for Australia's trading partners and they'll look for other alternatives. So does a higher ToT mean Australia's exporters suffer?

Many thanks.

 

[Phaze]

Firstly, the reason microeconomic policy can do this is because it often leads to the restructuring of an industry. This may often lead to the industry going through a tough period where they let go of employees and may need extra financial support but the objective of the microeconomic reform would have been to eventually allow the company to become more efficient than it was before.

For the second bit of your post. It really comes down to the demand of the good and the specific good. Trading partners may have a high demand that they're willing to pay the increased price. Also terms of trade can also improve due to a lowering in the cost of manufacturing as opposed to just a price increase. In which case exporters won't suffer but benefit. Sorry if my response is a bit jaded [emoji14]

 

[astab]

Thank you so much. It makes a lot more sense now.

 

[seremify007]

There will always be some conflict between economic objectives (in the short term) and as a result it's quite a balancing act. The bigger picture thing to keep in mind is what are the objectives of those who are driving these decisions. Is it short term growth, is it long term growth, is it growth only in a particular sector or is it economy-wide/far-reaching? Typically the economic objective is broader and sustainable growth so that as many people can benefit from the growth rather than just a few becoming very rich or creating huge inequality/multi-speed economy type scenarios.

 

[elkedag]

A higher ToT doesn't necessarily mean a loss of international competitiveness. It could reflect higher export prices due to higher commodity demand and commodity prices.