1.1 The Objectives Of Government Economic Policy Flashcards
What is the aim of the macroeconomic objectives of the government?
-these aim to provide macro stability.
What are the four main macroeconomic objectives?
-Economic growth
-Minimising unemployment
-Price Stability
-Stable balance of payments on current account
Macroeconomic objectives-Economic Growth
-In the UK, the long run trend of economic growth is about 2.5%.
-Governments aim to have sustainable economic growth for the long run.
-In emerging markets and developing economies, governments might aim to increase economic development before economic growth, which will improve living standards, increase life expectancy and improve literacy rates.
Macroeconomic objectives-Minimising Unemployment
-Governments aim to have as near to full employment as possible.
-They account for frictional unemployment by aiming for an unemployment rate of around 3%.
-The labour force should also be employed in productive work.
Macroeconomic objectives-Price Stability
-In the UK, the government inflation target is 2%, measured with CPI.
-This aims to provide price stability for firms and consumers, and will help them make decisions for the long run.
-If the inflation rate falls 1% outside this target, the Governor of the Bank of England has to write a letter to the Chancellor of the Exchequer to explain why this happened and what the Bank intends to do about it.
Macroeconomic objectives-Stable Balance Of Payments On Current Account
-Governments aim for the current account to be satisfactory, so there is not a large deficit.
-This is usually near to equilibrium.
-A balance of payments equilibrium on the current account means the country can sustainably finance the current account, which is important for long term growth.
Macroeconomic objectives-Balanced budget deficit
-This ensures the government keeps control of state borrowing, so the national debt does not escalate.
-This allows governments to borrow cheaply in the future should they need to, and makes repayment easier.
Macroeconomic objectives-Greater income inequality
-Income and wealth should be distributed equitably, so the gap between the rich and poor is not extreme.
- It is generally associated with a fairer society.
-The importance of each objective changes over time.
Potential conflicts and trade-offs between the macroeconomic
objectives (generally in the short run):
Economic growth vs inflation:
-A growing economy is likely to experience inflationary pressures on the average price level.
-This is especially true when there is a positive output gap and AD increases faster than AS.
Potential conflicts and trade-offs between the macroeconomic
objectives (generally in the short run):
Economic growth vs the current account:
-During periods of economic growth, consumers have high levels of spending.
-In the UK, consumers have a high marginal propensity to import, so there is likely to be more spending on imports.
-This leads to a worsening of the current account deficit.
-However, export-led growth, such as that of China and Germany, means a country can run a current account surplus and have high levels of economic growth.
Potential conflicts and trade-offs between the macroeconomic
objectives (generally in the short run):
Economic growth vs the government budget deficit
-Reducing a budget deficit requires less expenditure and more tax revenue.
-This would lead to a fall in AD, however there will be less economic growth
Potential conflicts and trade-offs between the macroeconomic
objectives (generally in the short run):
Economic growth vs the environment:
-High rates of economic growth are likely to result in high levels of negative externalities, such as pollution and the usage of non-renewable resources.
-This is because of more manufacturing, which is associated with higher levels of carbon dioxide emissions.
Potential conflicts and trade-offs between the macroeconomic
objectives (generally in the short run):
Unemployment vs inflation
-In the short run, there is a trade-off between the level of unemployment and the inflation rate.
-This is illustrated with a Phillips curve.
-As economic growth increases, unemployment falls due to more jobs being created.
-However, this causes wages to increase, which can lead to more consumer spending and an increase in the average price level.
-The extent of this trade off can be limited if supply side policies are used to reduce structural unemployment, which will not increase average wages.
