4.2.1.1 the objectives of government economic policy Flashcards
what are macroeconomic objectives?
- government’s aims for the macroeconomy
- aim to provide macro stability
what are the 4 main macroeconomic objectives used to measure national economic performance?
1) economic growth
2) minimising unemployment
3) price stability (inflation)
4) stable balance of payments on current account
what is economic growth?
what’s the key measure of it?
- “rate of change of a country’s output”
- output = national income
- over a period of time -> usually a year
- key measure = gross domestic product (GDP)
-> the sum of a country’s output over a year - pursuit of sustainable economic growth, in terms of actual and potential productivity is a crucial goal of macroeconomic performance
what are some key benefits of economic growth?
- job creation
- rising incomes
- improved standard of living
- improved international competitiveness
- improved confidence for:
-> consumer to spend
-> businesses to invest - lower government spending on benefits
- tax revenues likely to increases
-> allowing government to re-invest in infrastructure / spend on public services
what is unemployment?
- unemployment = actively seeking work but unable to find a job
- unemployment is a waste of resources and an indicator of poor economic performance
- economies with strong economic growth are likely to have low unemployment
why is full employment not achievable?
what is the default target?
- there will always be people moving between jobs / seeking work post education
- low unemployment is the default target
what are the benefits of low unemployment?
- higher consumption
- improved standards of living
- higher tax revenue
- lower government spending on unemployment related welfare
- improved productivity
- reduced poverty (absolute and relative)
- social benefits (reduced crime / improved wellbeing)
what is low inflation?
- the ‘rate of change of average prices in an economy’
- measured by the Consumer Price Index (CPI)
affects the value:
- of £s in your pocket
- workers wage demands
- consumer confidence
- high / rising in inflation damages the real value of money and erodes spending power
- inflation target is independent of the UK government
- to give more transparency and credibility
- following periods of high inflation in the 1970s and 80s
target also includes:
- price stability
- inflation to be maintained with range of + or - 1% of the target
- bank of england is responsible to manage inflation
what is stable balance of payments?
- measures the UK’s economic activites with other countries
- if exports > important = surplus on balance of payments
- if imports > exports = deficit on balance of payments
- deficits have been funded (often by borrowing)
- a surplus / equilibrium on the current account is the desired objective
how much does a balanced balance of payments matter?
part 1
- UK has been running significant defect on the current account in terms of our trade in goods for a long time
-> offset to a degree by a surplus in our trade in services - overall, UK has had a sustained and persistent deficit on the balance of payments
-> this has received relatively little attention from successive governments (in comparison to other targets)
how much does a balanced balance of payments matter?
part 2
1) high level of imported goods might be seen as a negative
-> BUT it provides consumers with a wider choice of goods
-> may be higher quality and lower prices
-> this all enhances consumers standards of living and welfare
2) firms may benefit from cheaper / higher quality imported components / raw materials
- may reduce costs
- enhancing profits
- lowering prices further for customers
3) overall, many economists believe a defect on the balance of trade isn’t necessarily detrimental to the wider economy
ADDITIONAL OBJECTIVES
when is the government budget balanced?
what does it mean when it is?
- government revenue = government expenditure
- budget surplus = revenue is greater than expenditure
- budget deficit = expenditure is greater than revenue
- when balanced it means the government keeps control of state borrowing, so the national debt doesn’t escalate
-> allows governments to borrow cheaply in the future and should they need to, makes repayment easier
what is the conflict / trade off between economic growth and inflation?
- a growing economy is likely to experience inflationary pressures on the average price level
- this is especially true when there’s a positive output gap and AD increases faster than AS
protection of the environment is an additional objective
how does the government aim to do this?
- global warming and climate change high on the political agenda
- government look to develop a sustainable future, particularly for our energy needs
- this might involve supporting businesses through the form of investment grants
another additional objective is greater income equality
what does this mean?
- extreme income inequality is regarded as socially unacceptable
- as a society people believe all citizens should be able to access fair wages for a fair day’s work
- many studies suggest that increasing income equality will lead to higher levels of economic growth, better living standards for all and a happier society
-> due to economic growth (trickle down effect)
