What are the Meanings of Economic Policy?

Economic policy is probably the most important component of the political decisions of a government within the framework of the existing economic system. In the end, the added value within a state depends on the economic policy decisions and their implementation, and thus the prosperity of the population. The government itself only specifies the framework conditions; the implementation is carried out by government agencies and actors from business and private households.

  • Economic policy is made up of different sub-areas, for example labor market policy or trade policy.
  • Demand-oriented economic policy sees the state as an active participant who also invests itself.
  • The task of economic policy to achieve macroeconomic equilibrium is almost impossible to solve.

Two economic policy directions: supply and demand

A country’s economic policy can be either a demand-oriented economic policy or a supply-oriented variant. According to abbreviationfinder, NEP stands for New Economic Policy.

In the context of demand-oriented economic policy, the focus is on the continuous demand for goods. The state can stimulate this demand through various instruments. These funds include:

  • Countercyclical tax policy: increase government spending when the economy weakens
  • Reduction in expenditure when there is excessive demand
  • Restrictive or expansionary monetary policy

The supply-oriented economic policy sees the return expectations of investors in focus. The instruments of supply-oriented economic policy take place in the framework, not in direct intervention. The instruments include:

  • Wage policy
  • Contain inflation
  • Tax breaks or increases
  • Working time modalities

The economic policy goals

The ultimate goal, creating the maximum possible prosperity for the largest possible population, is made up of various individual goals, which in turn are intended to achieve “maximizing economic welfare”:

  • Allocation goal: protection and promotion of competition, supply by the state with public goods, compliance with environmental protection
  • Stability goal: high level of employment, stable inflation rate
  • Growth target: Increase in per capita income, optimization of the supply of collective goods, balance in foreign trade
  • Structural objective: Flexible adaptation of the offer, leveling regional wage, residential and leisure values
  • Distribution goal / distribution goal: fair distribution of income and wealth according to the performance principle, social justice in the distribution of income and wealth

Economic policy

The economic policy is ultimately the active implementation of the procedures laid down in the framework for economic policy. Of course, there is also some overlap. The economic policy is based on the well-known magic square. This specifies the objectives of economic policy and is based on the following determinants:

  • Price stability
  • Full employment
  • Economic growth
  • Foreign trade

Magical because not all goals can be brought under one roof. Economic growth means full employment, two goals have been met. Full employment, on the other hand, leads to excess demand, since a lot of money is available for consumption. In turn, increased demand leads to rising prices. This means that price stability is no longer given. Full employment and price stability compete with each other.

The four points in the magic square are considered to be the main pillars of economic policy. They were laid down in the Stability Act in 1967. If a government succeeds in achieving a balance between all four positions, one speaks of an overall economic equilibrium.

Labor market policy as a component

Full employment usually comes into play as a result of economic growth. If there is no full employment, the state must pursue labor market policy within the framework of economic and cyclical policy. In order to stimulate economic growth, he can intervene as an actor himself in the sense of a demand-oriented economic policy. At the same time, he must be active in the labor market. The following instruments are available to him for this purpose:

  • Advice and placement of jobseekers
  • Activation and professional integration
  • Advice and support in choosing a career and vocational training
  • Offers for professional development
  • Promotion of employment
  • Employment Retention Benefits
  • Promotion of the participation of disabled people in working life

Financial policy – constantly being put to the acid test

Financial policy as a component of economic policy is in a constant stressful situation. On the one hand, the finance minister is called upon to have the budget under control, on the other hand, the individual departments are demanding their share. The demand-oriented economic policy, which sees the state itself as an active player in the awarding of contracts, is a red rag for advocates of a consolidated state budget. A state that invests does not save. Unless the investments, and this is a sub-goal, lead to increased tax revenue, which at least partially compensates for the expenditure. The financial policy has the possibility of indebtedness, but only up to the upper limit laid down in the Basic Law. The regulation can be found in Article 115 of the Basic Law. On the one hand, the debt must not exceed the sum of the investments. On the other hand, it may not exceed 60 percent of the gross domestic product.

Trade policy – building block from domestic and foreign trade

Trade policy as part of economic policy encompasses both internal and external trade. At first glance, it is nice for every country when exports exceed imports – the foreign trade balance is positive. At the international level, however, this often leads to resentment between the individual states, which in turn want to strengthen their domestic economy. To control foreign trade, the nation states often resort to tariffs to artificially increase the price of foreign goods.

The tariffs to protect the domestic economy are offset by export subsidies, which are intended to promote exports to third countries. Trade policy means, on the one hand, promoting one’s own economy, especially in international trade, but at the same time a form of protectionism towards other countries.