Which one is more important economic objective: Price Stability, or Reducing Unemployment?

Which one is more important economic objective: Price Stability, or Reducing Unemployment?

Price stability is usually interpreted to mean a low and stable rate of inflation maintained over an extended period of time. Price stability doesn’t mean that price index is constant. Price stability means that inflation is sufficiently low and stable so as not to influence the economic decisions of households and firms. When inflation is low and reasonably stable, people don’t waste resources attempting to protect ‘emselves from inflation. They save and invest with confidence that the value of money will be stable over time.

Price stability seems to be more important than other economic aims, because in any economy price has the first position. Price creates demand. A commodity or service with no price has no demand at all. For example, the air we breathe is the most important element for our life, but it has no demand because it comes without a price tag. It may be difficult to realize the priority to either price stability or low unemployment. But price being the main factor in the economy certainly has the higher position among the various economic aims.

In market economy, consumers and firms base their consumption and investment decisions on information derived from prices, including asset prices and returns. Efficient allocation of economic resources depends on the clarity of signals coming from the price system. Uncertainty about the price level makes it difficult for firms and households to determine whether changes in individual prices reflect fundamental shifts in supply and demand, or merely changes in overall inflation. Elimination of this uncertainty through price stability helps economic growth. Price stability contributes to financial stability in a similar fashion. Unstable price level can lead to bad forecasts of real returns to investment projects. Therefore, price stability is the most powerful tool the Central Bank has, to promote economic growth, high employment and financial stability.

Furthermore, to realize the importance of price stability, it is the instability in price that knocked the US economy off its feet in 1930s (Great Depression), 1970s (Great Inflation), and 2008 (Depression).

Note: This article is supposed to address the academic report for the “Third Semester” of BBA course, Business Communication, under Tribhuvan University. Use discretionally.

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