Economic growth and Price stability—basic information

Of the many macro economic objectives that the government pursues two most important are:                                         Economic growth and Price stability.

Economic Growth: Is highly essential as it helps the nation to achieve its political and economic objectives. Growth has to be widespread and even in all the areas, agricultural productivity and industrial development go hand in hand. Economic growth enables a country to specialize in certain areas, like for e.g.: manufacturing of a product or growing a certain crop. And specialization in turn can increase the exports of the country. India is one of the largest producers of milk today, one reason behind this is the presence of fine quality milch buffaloes, although this is related more to climate and food rather than growth, we can still examine the end result of this. The farmer gets 60% of the retail price unlike other agricultural goods where he gets only 20%. Because India is able to specialize in milk it is able to give a substantial share to the farmer and at the same time is able to export it to different parts of the world. Along with milk India also exports milk powder. Hence specialization helps the economy internally and also to achieve its target in foreign trade.
When exports are going as per plan the country earns valuable foreign exchange which is used for investment purposes and expansion in trading activities. Therefore along with specialization, economic growth can also help manufacturers create a wide variety of goods and services for the domestic market and hence the consumer gets to choose from a variety of goods. Stable level of employment is also ensured with growth, a certain percentage of unemployment is bound to exist in the economy but growth ensures unemployment remains at an acceptable level.

Price Stability: Is also one of the important objectives of government policy, since, availability of goods and services at a reasonable prices is absolutely essential for the common man. In its policy to pursue growth if the government does not take sufficient measures to control prices the end result is, prices of basic food stuffs is sky rocketing. “Inflation is always and everywhere a phenomena” says Friedman, but it is very important that rate of inflation should not exceed beyond what the government has planned. In the agricultural sector where prices keep fluctuating on account of irregular supply, there is a conflict which gets created between producers and consumers on what should be the ideal price because consumers want it as low as possible whereas producers would want to gain maximum revenue from the product. At such times the government intervenes with a policy known as “price stability” where a price is set which is reasonable for the producer and the consumer. Another very important aspect affecting prices is the money supply in the economy. Let’s assume that the central bank increases the money supply in the economy this would imply that more money will circulate between people and their purchasing capacity will go up. With an increase in demand producers and manufacturers increase the price gradually and the end result is a high rate of inflation. Now if the money supply is reduced by thre central goverbnment then of course demand will eventually fall and later on even prices but it should be known that if money supply is reduced drastically it slows down the economic growth since very little money is circulating, hence less investment is made and demand falls low and so does supply, at the end of it all we have “stagflation” a combination of stagnated growth and inflation.