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https://sites.google.com/site/wealthcreationclub/sdl/assignment-concepts/exchange-rate-and-macroeconomic-objectivesThe goals of an economy is often expressed by various authors (Mohr and Fourie, p56) as:

·                  Full employment

·                  Economic growth

·                  Price stability

·                  Balance of payments stability

·                  Equitable distribution of income.

 I would propose that these goals be more normative – for example instead of “price stability” one should consider  “no or little inflation”; in stead of “balance of payments stability” it should be “ a reduced foreign debt burden”; in stead of an“equitable distribution of income” the macroeconomic objective should rather focus on raising the income levels of the poor through policies that support economic growth. These policies would relate to the economic freedom of a country. In this respect it is useful to define what is meant by the concept “economic freedom” since this term to is being redefined by Julius Malema and others with collectivist tendencies. An appropriate definition is found in the 1996 Annual Report  of the Frasier Institute’s “Economic Freedom of the World” It reads: “Individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others.” It continues by saying that “ An index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions.

 The exchange rate regime of a country should therefore also not impose unrealistic restrictions on the movement of money that will inhibit the free flow of capital into a country and the free flow of  capital and dividends out of a country.

So, we might add  the following areas which have a direct impact on the achievement of the macroeconomic goals:

1.  Business regulations (Regulation of business, labor and capital  markets)
2. Labour market regulations
3. Credit market regulations
4. Freedom to trade (Trade regulation and tariffs)
5. Sound Money
6. Legal and property rights (Private property and the rule of law)
7. Size of government and taxation

 It is also important to realise that the exchange rate regime (fixed or floating) and exchange rate levels also reflect the economic health of a country.

 For example – if the country does not have sound money (ie high inflation) the exchange rate with other countries will deteriorate in the sense that imports will become more and more expensive in the local currency; and though exporters will gain in local currency, that gain will be not as meaningful since their costs would have also increased locally. The key lies in a stable currency so that business can make long range decisions within  a relatively stable exchange framework.

 Bibliography:

 Mohr, P., Fourie, L. and associates: Economics for South African Students. Fourth edition. Van Schaik Publishers. 2008.

James Gwartney and Robert Lawson et al. 1996 Annual Report: Economic Freedom of the World. Frasier Institue. http://www.freetheworld.com/ Accessed September 2012.