1.1- Objectives Of Government Economic Policy Flashcards
Macroeconomic objectives
Bigfeet
What does bigfeet stand for
Balance of payments equilibrium on the current account
Inflation (low and stable)
Growth in GDP
Full employment
Equity
Environmental quality
Tax and government spending balanced
Balance of payments in the current account
Exports = imports
What happens when inport>exports
Uk citizens indebted to foreigners
Inflation
-measures in CPI- consumer price index
-Uk target 2%- responsibility of bank of england
-erodes vaue of money
Gradual inflation is a sign of?
Economic growth
V high inflation
-extremely dif to predict prices
-less businesses invest- diff predict prices
-poverty- fixed wages but prices increase
-unemployment- businesses seek to save money through cuttig down work force
Growth in GDP
-economic growth
-more goods and services are being produced
-increases standard of living of citixens
-increase employment
-increase tax revenue
Full employment
-everyone who wants a job can find one
-avoids high welfare benefit, crime nd social deprivation
Equity
-fairness in society
-equal opportunity for all
-exploition and discrimintion avoided
-waste of economic resources
Environmental quality
-pollution/global warming minimised
-resources protected
-living standards maintained
-sustainable development is the aim
Tax and government spending balanced why important
-avoid high levels of gov borrowing
-displace potentially more porductive private sector borrowing and investment
-lower economic growth
-hope to repay borrowing when economy better
-higher tax
Balance of payments account
Record of all financial dealings over period of time between one country and all others
Current account
-measures all payments for trade in imports and exports
+ all income payments including dividens earnt from shares in other countries
Financial account
Measures all financial transactions in financial assets and liability
-shares in british country owned by someone in another country
Visable trade
-trade in physical goods eg. Raw materials
-sold to forigners- export
-inward flow of money +
Invisable trade
-services traded internationally
-eg. Financial services- banking and insurance
Transport ervices- shipping, transport and tourism
-uk exports more than imports- surplus
Credit
Inflow of money
+
Debit
Deflation
-average price level is falling
-can be due to falling cost of product
-if caused by fall in aggregate demand
-recession which can be damaging
CPI
Consumer price index
Measure the change in price of the Average basket of goods purchased by the average family
GDP
Gross domestic product
Total output of goods and services produced within the boundaries of an economy
GNP
Gross national product
GDP + net property income from abroad
earning from citizens abroad
GNP OR GDP higher
GDP
Companies owned abroad but based in uk is hgher than vice versa
GDP per capita
GDP/total population
-bettwer indicator but no gaurentee distributed evenly amongst population
ILO measure
Labour force survey
-official measure of unemployment
-all those seeking a job irespective if claiming universal credit
-inc. those supported by working partner/ good redundancy package/early retirement
so not on UI
Unemployment
-people seeking employment cant find a job
-technically inefficient- waste of human resources
-economic cost-ui
-lost tax revenues
-social cost- high rate crime, poor health, family breakdown
Index numbers
-good for comparison
-choose a year=100
Index number calculation
A/x x100= index for year a
A- year comparing
X- base year value
Acronym for factors which can improve international competitiveness
DELICIIE
DELICIIE
Deregulation
Educated and skilled workforce
Low taxes
Infrastructure and telecom network
Competitve markets
Investment
Inflation
Exchange rates
How does deregulation help with international competitiveness
-firms not overburdend with rules and regulations
-make costly to run bsinesses
Why low taxes good for international competitiveness
As high taxes increases cost to run a business
So low taxes may attract foreign businesses
How good infrastructure and telecom networks help international competitiveness
-goods and people can be transported quickly
-workers can communicate effectively
Competitve markets how help with international competitveness
Forces compete to be more efficient and responsive to consumer needs
How can investment help with international competitiveness
-research and development
-encourages innovation and new technologies
How can high inflation negatively impact international competitiveness
-rates increase in uk more than other contrues
Exports seem uncompetitve than otehrs
How can a stable excahnge rate help with international competitiveness
Eratic fluctuations can discourage foreigners from buying goods and services
Trade off with rising GDP, low unemployment, low stabe inflation
-economy grow
-more goods and services produced
-unemployemnt fal
-rising income and aggregate demand
-rising inflation (more demand than supply)
Trade off with rising gdp and balance of payments equilibrium
-economy grows and consumers have more income
-spend more income on imported goods and services
Trade off with equity and rising gdp
-redistribution of income through high taxation and regulations
-prevent exploitation and welfare state
-reduction of entreprenure incentive
-promote economic growth- profit making
Trade off with rising GDP and environmental quality
-risig GDP and rising output of goods
-increase CO2 emissions/ waste ect
Trade off with low taxation and high quality public services
-voters dont want high taxes
-but want high quality public services
-can do so with borrowing
-undermines economic growth- as have to pay back
-poor public services- eg. Poor education
-undermines longer term growth
Short-run economic growth
Growth of real output resulting from using idle resources, including labour
Does not push out ppf curve
Full employment-Beverige definition
-3% or less of labour force are unemployed
Full employemnt- free-market definition
The number of workers wanting to work equals the number of workers whom employers wish to hire
Disinflation
The rate of inflation is falling but still positive
Indexation
-automatic adjustment of items such as pesnions and welfare benefits to changes in the price level, through the use of a price index
Balance of trade defecit
The money value of a country’s imports exceeds the money value of its exports
Balance of trade surplus
The money value of a country’s exports exceeds the money value of ts imports
Portfolio overseas investment
Purchase of financiial assets(such as shares in overseas companies o securities issued by foreign govs) rather than physical or directy productive assets
Direct capital flows
Money flowing into a country due to purchase of company overseas (for example) or for profits repatriated from said company
Budget deficit
Gov spending greater than gov revenue
Policy conflict
-occurs when two policy objectives cannot both be achieved at the same time- better in one, worse in other
Keynesian economist
-keynes (economist)
-followed his policies 1945-79
-govs should manage economy
-esp through use of fiscal policy
Pro-free market economists
Dislike gov interevntion
Monetary policy
-use of interest rates and other monetary instruments to try to achieve the gov’s policy objectives
-used by bank of england and gov
Fiscal policy
-use by the government of gov spending and taxation to try to achieve the gov’s policy objectives
Performance indicators
-provide info to judge sucess or failure of a particular type of gov policy eg. Monetary/fiscal policy
Lead indicators
-future state economy
-surveys of consumer and business confidence- feel good/bad
-stats for house-building starts and no. Peolpe booked expensive summer/skiing holidays monyth in advane
Lag indicators
-past and possibly current economic performance
-extent to which policy objectives have suceeded
-unemployment, gwoth figures
Producer price indicies (ppi)
-measures changes in input and output prices of goods bought (eg. Fuel and raw materials) and sold (goods produced) by uk manufacturers
National income
measures the monetary value of the flow of output of goods and services produced in an economy over a period of time.
Earning of a country’s citizens overseas-earnings of foreiners in the uk
Rate of growth of national income- what can it measure
-rate of economic growth
-changes to living standards
-changes to distribution of income between groups in the population
How to calculate national income
GNP- depreciation
Depreciation
-devaluing of assets over time due to wear and tear
-eg. Cars, machinery
Grooss national product
-negative in UK
-GDP+net property income form abroad
Net property income from abroad
Earnings of a countries ctizens oversees (eg. Uk citizen gaining dividens from company abroad) - earnings of foreigners in that country (including earnings of businesses)
GDP measuring with expendaiture method
C + I +G + (X-M)
C- household spending on goods and services
I- capital investment spending
G- gov spending
X- exports
M-imports
Income method for GDP
Sum ofincomes earned through production of goods and services
Incomes (wages and saleries) + profits (private sector businesses) + rent income (ownership of land)
Factors excluded from income method
-transfer payments- eg. UI
-private money transfers- between individuals
-shadow economy-not registered w/ tax authority (organised crime)
-informal economy-eg. Subsistance farming and bartering
Value added
-value added from each main economy sector
Main economy sectors
-primary
-secondary
-tertiary
Primary economy sector
-raw materials and agriculture
-north sea and farming
Secondary economy sector
-manufacturing
-producing goods eg. Packaged food
Tertiary economy sector
-services
-eg. Tourism
Investment
Spending by firms on capital
Why service sector increased
-less employed in manufacturing
-increased disposable income
-as economy grows so do real incoems
-so can spend more on eg. Entertainment
Why manufacturing sector reduced
-more capital intensive
-structural economic cange
-labour intesive manufacturing moved abroad
-where labour chaper
-eg. China
-further reducing jobs in uk
Economic growth
-real increase in output of gdp
-increase in production of goods and services
Short-run economic growth
-increased real outputs of GDP from using idle resources eg. Unemployed labour and capital
-taking up slack in economy
-inside ppf curve
-decreasing unemployment
Long run economic growth
-increase in economic potential level of real output
-shift ppf to right
-increase in quantity or quality of factors of production
Increase in quanity/quality of capital
-produce more machinery
-r+d robotics
Increase in quanity/quality of land
-r+d agriculture- fertilisers and gmo
-netherlands push out sea w. Dykes
-hong kong built island for airport
Increase in quanity/quality for labour
-increase in net immigration
-education and training
-increase in birth rate (delayed) eg. In poland provide financiaal incentives
How to imporve quantity/quality of enterprise
Incentives such as low taxes
Gdp limitations in measuring ilving standards
-not clude non-monetised informal sectors
-inflation and statistical error
-improvements in quality
-value of leisure
-negative extermalities
-distribute of GDP
-composition of GDP-what is produced
-difficult to compare GDP between diff countries
Purchasing power parity
-exchange ates take into account how much a typical basket of goods in one country can compare to another
-not including/measuring non-monetised informal sectors
-high levels organized crime- not inclluded gdp
-eg.italy and russia
-bu negatively impact living standards as crime and corrupion relate to violence
-voluntary sector-charity work
-may improve living standards
-informal economy
-diy and homegrown food and bartering
-may improve living stndards
Inflation and statistcal error
-due to vast no. Transactions included
-more difficult to measure living standards
-must be deflated-take account inflation-produce real GDP
Improvements in quality
-not imporvements in quality measured only changes in price
-eg. Mobile phones improved storage and camera
-improved for consumer even if same price
Value of leisure
-not economically productive
-not contributing to gdp
-but is essential to people’s wellbeing and living standards
eg. Mental health
Negative externalities
-on environment-as produce more goods increase GDP
-more natural resources, release more CO2 emmissions
decrease living standards as pollution increase
Distribution of gdp
‘Rich get richer’- increase wealth gap
-eg. Gdp per capita- not representative
Composition of GDP
-what is produced
-what is spent by gov
-eg. Usa spend lots on defence and prisons and space exploration
doesn’t have directly positive impact on living standard of us citizens
Difficul to compare GDP between diff countries
-due to constantly changing exchange rates
-dollar used
Alternatives to gdp for measuring living standards
-human development index (HDI)
standard of living , life expectancy (years), educational attainment (adult literacy rates and enrolment ratio in schools and colleges)
-human poverty index (HPI)
-annually published by UN
-measure domestic progress
-misery index
Problems with alternatives to gdp
-estimated
-living standards may vary
-subject to statistical error
-out of date quickly
Fiscal deficit
when a government spends more than it receives in tax revenue in a given time period. So, governments must borrow. Governments will aim to reduce this amount of borrowing
Sustainability
the ability to meet the needs and wants of the current generation, without compromising the ability of future generations to meet their needs and wants”.
Arbitrage
The ability to buy goods in cheaper countries and sell them in other countries for profit
Policy objective
A target or goal that policy markers aim to hit
Macreconomic indicator
Provides info from recent econ perfomrance for judgeing the sucesses or failure of a particular type of gov policy egg fiscal policiy or macro econ policy
Lead indicators
Provide info about the future state of econ
Surveys business anc ocnumser confidence and investment intentions
Stats house buidling starts and advanced bookiinng holidays
Lag indicators
Provide info about past and possibly current econ performance and the extent to which poilicy obkectieves such as econ growth and control of inflation have been achieved
Date on all macro ecno performance- level gdp employment
Limitations of national living data to compare different in living standards betwene countries
Relative importance of non monetised econ
Excange rates
Traded and non traded goods
Curent account bop
Consistent defiict since 1982
Crowding in effect
Cuts in government spending of private sector activity
As a fall in component on ad others fill the gap
Show on ppf with public sector and private sctor on either axis
Yet limited evdence as after osbourne cuts to gov spending between 2010 and 2015 appeared to be no significant rise in priate sector output
Financial crowding out
Increased borrowing by gov push up interest rates- needed to attravct golders of bonds issued by gov to finance extra spepnding
Higher interest rates reudce private sector borrowing ans sepdning
Cut gov spending may be better method of reducing bydget deifict
Tax rises may be equitable
Clloser to lorenz curve perfect equality line
But increase tax rates higher earners encougrae those with higher incomes to engage in tax avoidance easures- laffer curve
Make tax susems more complex usualy more expensive render the tax system less economical- though this cost may be small compared to with rev increase generates
Best way to reduce budget defiict
Tax rises that have less impact on poor households but notlarge enogh create disicnetivee
Gov spending cuts not affect poor severly but also on areas where crowding in more likely to occur
Gov spending cuts less immediate impact (cuts in capital spending
0 seen desuurabek byt not essential- esp vanity projects on infratsrtucture proects, though no minister likely toa dmit a project is anything more than a necessary addition to nations infrastructure stock
