Every country has its own order of economic priorities. The ranking may appear similar to some extent especially in the top most priority. There are many objectives of an economic policy, but price stability is considered an essential part of the basic framework within which the social and economic policy is conducted (Horst U., Jouko J.H., Augusto L. & Thomas M.1990:46).
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The economic priorities can be ranked in the order of importance from the most important to the least important as follows:
- Price stability
- Full employment
- Quality of life or environment
- Fair income distribution
- Rapid economic growth
- Exchange rate stability/ Balance of payment Stability
The first priority of Price stability is very essential for any given economy. Price stability controls the inflation levels of any country. It eliminates both deflation and inflation.
If prices fluctuate from time to time, the level of investments within the economy reduces. Most investors are not willing to take any risks if they find the prices fluctuating. The producers may not supply many products to the market due to price fluctuations. The suppliers may hoard goods and this reduces the number of products available in the market.
The business activity decreases in the economy and therefore reduces the Gross Domestic Product (GDP) of the economy. If prices of raw materials increase, the producers and manufacturers have to reduce the amount of raw material purchased or increase the prices charged to the consumers.
This means that the low income families may not afford to buy such products and therefore becomes an issue. Only the rich can afford to buy such products at exorbitant prices.
The government should stabilize the prices by use of the monetary policy or price controls. In case of high demand for products in the market, the prices usually increase. The government should therefore reduce the money supply in the economy. Through the Central Bank, it can increase the interest rate charged to the banks which in turn makes the banks to charge very high interest rates to the borrowers.
This discourages many borrowers and therefore reduces the money supply in the economy. In the long run the demand level of goods and services decreases and then the prices begin to reduce towards the equilibrium level.
Open market operation can be used by the government through the Central Bank.It may sell securities or bonds to the public so as to collect money from the economy which can be held by the Central Bank until the prices have stabilized.
This monetary policy tool is useful if the prices are very high to reduce the aggregate demand of products in the economy. The government should issue bonds with higher coupon rates to attract the public to invest in them.
The cash reserves should be increased to discourage banks from issuing too much cash to the borrowers. Any bank that does not maintain the requirements should be subjected to heavy penalties. The amount issued by the Central Bank to the banks should also be reduced. As a result, the money supply in the economy is reduced.
Non monetary policies can also be applied to stabilize prices. Price control refers to the government setting of the highest price or the lowest price that a given product can be sold in the market. A price ceiling is the highest price set by the government beyond which no product can be sold. The maximum price ensures that consumers are not overcharged in terms of the prices for various products.
Luxury goods have no price controls. Prices for consumable products should be controlled to ensure that every person affords to buy them. On the other hand, if prices are very low, the government should protect the producers by setting the minimum price that the product should be sold in the market. This ensures that the producers are encouraged to continue production to boost the GDP of the economy.
If production is reduced, the GDP also decreases. However, price control may also have devastating effects once it is withdrawn from the market by the government. If previously there was a maximum price limit, the prices are likely to shoot upwards. The control should be reasonable and not exaggerated.
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Some countries have not ranked price stability as the top priority in their economic policies. The ranking may therefore vary from one country to another. Horst et al (1990:46) observes in his book that in some countries, full employment as an economic objective has been given priority from time to time other than price stability. Price stability is essential for any economic policy to be successful.
Full employment is the second in the ranking. It refers to the situation in which the economic resources of a given country are fully utilized. There are many resources that are not put to use yet they are likely to facilitate growth of the economy. The country should have this as a priority so as to create many jobs for its citizens.
This enables the citizens to have sufficient income necessary for buying the basic goods and services for their families. The country should invest more funds in the projects that promise very high returns. For example, if there are some minerals that need to be exploited in a given region within the economy, it creates employment for the communities nearby.
The miners can be employed from the adjacent community and therefore create employment fairly across all the regions. The investment may require huge funds but in the long run the benefits are very good. Minerals and other products can be exported to earn foreign exchange for the economy thus boosting its income.
Education and training should be geared towards providing the students with the immediate requirements in the jobs. The curriculum and the syllabus have to focus on the nature of jobs that the students are to join after the studies. The government should encourage full exploitation of the resources by giving grants and other assistance like subsidies and tax exemption for those who produce goods for export purposes.
Any potential investors in the industries at the rural areas should be subsidized so that industries are developed throughout the economy. If the resources are fully utilized for production in the industries, the products made contribute so much to the GDP of the economy. The country may no longer require importing any products that it can produce locally.
For any economy to increase its GDP, it should fully exploit all the natural resources available across all the regions. Full employment cannot be achieved if any resources are left idle instead of being used for meaningful purposes.
Realistically, full employment may not be achieved for there is no perfect economy in existence. However, every economy should try to work hard and use all the available tools and resources to create employment for the people.
Horst U., Jouko J.H., Augusto L. & Thomas M.1990.The European monetary system: developments and perspectives. Washington, D.C.: International Monetary Fund, p.46.