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and interrelated outes in mind。 These are not so much secondary objectives；
but like inflation are more the effect of mismanagement； bad timing
210 The Thirty…Day MBA
or major events in a big economy with which much business is conducted。
The most important of these concerns include the following。
Employment vs unemployment
Government’s stated goal in this respect is to maintain the economy at full
employment。 That has the benefit of keeping most citizens happy； while
contributing tax to the general good。 However； if everyone is in a job the
only way a new or growing business can recruit additional staff is to poach
from other organizations； usually by offering higher wages。 That in turn
feeds into inflation； as wage prices； a major ponent of costs； are rising
without there necessarily being an increase in output。 Also； high employment
can lead to the ‘jobs for life’ a。。itude prevalent in Japan for so long
that contributed to its market inefficiencies。
In practice； governments actually set their policies to achieve an acceptable
level of unemployment。 In the UK and United States that is around 5
per cent of the labour force； while in continental Europe between 9 and 10
per cent has bee the norm。 High unemployment reduces a country’s
overall GDP through having unproductive workers。 If the unemployed
also get state welfare； as is the case particularly in continental Europe and
to a lesser extent the UK； it increases the cost for the country as a whole。
So maintaining an acceptable rather than full employment is the realistic
purpose of economic policy and governments have a number of factors and
figures to keep tabs on to achieve that goal：
。 Cyclical unemployment： This is the rate of unemployment a。。ributable
to a stage in the economic cycle。 Typically； during a downturn unemployment
will be higher than the normal target rate and lower in the
upswing。
。 Seasonal unemployment： This occurs at certain times in the year； for
example； in winter； construction and casual farm workers are more
likely to be laid off。
。 Frictional unemployment： This is the result of an economy or geographic
area within an economy moving from one type of productive
activity to another。 The shi。。 from employment in coal and steel mining
to other forms of employment； usually in the service sector； is one such
shi。。 that Western economies have experienced。
。 Structural unemployment： This is caused by workers not having the
skills and businesses not having the technology to meet new demands
being made on an economy。
。 Vacancy rate： This measures the number of unfilled jobs at any one
time。 A high level of unemployment can be partially offset against
lots of vacancies； as people take time to move from one job to another；
particularly if that requires moving home。
Economics 211
One further measure a government can take to influence unemployment
is to import labour； either through immigration or by accepting seasonal
workers from overseas。
The exchange rate
The rate at which different currencies are traded is their exchange rate； with
a high rate being viewed as a sign of economic virility。 So…called strong
rates of exchange mean that citizens and businesses find foreign goods
and services relatively cheap。 Unfortunately； it also means that foreigners
find their goods and services expensive and will buy less and seek new
suppliers in countries with more favourable exchange rates。
Most countries have their own currency； but not all governments pursue
the same exchange rate policies and each such policy involves different
costs and risks：
。 Managed and ‘not fully convertible’ is when the government exercises
political and economic control over the exchange rate and the amount of
its currency that can be moved in or out of the country。 China and India
are among many countries that fall into this category。 Such constraints
can mean that a currency drops sharply in value periodically as the
government of the day tries to hold back international pressures。
。 Pegged： For the majority of countries which have been anxiously
seeking ways to promote economic stability and their own prosperity；
the most favourable way has been to peg the local currency to a major
convertible currency； such as the euro or US dollar。 This means that
while the local currency may move up and down against all other world
currencies； it will remain or at least a。。empt to remain stable against the
one it is pegged against。 In total； 22 states and territories have a national
currency that is directly pegged to the euro； including 14 West African
countries； 3 French Pacific territories； 2 African island countries and 3
Balkan countries。
。 Dollarized： This is a slight misnomer as the term is used to describe a
country that abandons its own currency and adopts the exclusive use
of the US dollar or another major international currency； such as the
euro。 The euro； for example； is the official currency in 15 states and
territories outside the European Union。 In such cases the country in
question takes on the risks and costs associated with the ‘host’ currency。
Many of the economies opting for this approach already informally use
the foreign currency in private and public transactions。
。 Floating and ‘fully convertible’： These currencies fluctuate as the
country in question succeeds or fails。 Russia； for example； li。。ed currency
controls in July 2006 as a sign of economic confidence； making the
rouble fully convertible。 Now it is more a。。ractive to invest in Russia；
212 The Thirty…Day MBA
while Russian businesses can freely； without worry； without any special
permit or burden； participate in investments overseas。 Barely 8 years
earlier the country defaulted on its massive domestic debt； devalued
its currency and wiped out Russians’ savings。 Russia’s macroeconomic
situation had to bee stable to allow this to happen； which has been
achieved on the back of large gold reserves； a balanced budget and
foreign investment that exceeded capital outflows largely on the basis
of oil and gas exploration activity。
Balance of payments
The balance of payments is the difference between all payments ing
into a country and those going out。 A surplus of payments ing in over
those going out is said to be favourable and the opposite is unfavourable。
The balance of payments is divided into two accounts： the current account；
such as payments for imports； exports； services and transfers of money；
and capital account payments for physical and financial assets。
The balance of trade； which is itself a major part of the overall balance
of payments； is the difference between the value of goods and services exported
out of a country and those imported into the country。 When imports
exceed exports a country’s GDP is reduced by that amount （see GDP
earlier in this chapter）。 Imports and exports are themselves influenced by a
country’s petitive position； which can be eroded by too high an inflation
rate； for example； or by having too strong a currency； which encourages
overseas purchases of goods and services； in